"Markets are at an all-time high".
In last 27-28 years, since I first began investing in the stock markets, I have heard this statement on numerous occasions.
Frankly speaking, it is the most stupid, absurd and pointless statement in the history of human communication.
A genuine stock market investor would NEVER ever say such a thing.
Let me explain.
Suppose a child scores 90 marks out of 100 in an exam.
Next year, he scores 135 out of 150.
Year after that, he scores 180 out of 200.
And after that 225 out of 250.
And then 270 out of 300.
Brilliant, I would say! The child has improved his score from 90 to 270 in 5 years. That's three times more marks.
Ridiculous, you would say! There is absolutely NO CHANGE in his performance. He has consistently scored 90% marks in ALL the 5 years. That's the fact.
Looking only at the numerator i.e. Marks Scored gives the wrong picture. To get the right perspective we have to consider the denominator too i.e. the Total Marks.
This is EXACTLY THE SAME MISTAKE people make when they say that "the stock markets are at an all-time high."
They are looking only at the numerator i.e. the Sensex value.
During 1998-99, the average closing value of Sensex was 3740.
3 years later in 2001-02, it was 3469.
Another 3 years later in 2004-05, it was 6493.
Yet another 3 years later in 2007-08, it was 15644.
Yet another 3 years later in 2010-11, it was 19445.
Yet another 3 years later in 2013-14, it was 22386.
And last year in 2016-17, it was 29620.
Currently, Sensex is at the life-time high of 30,000+.
So, as the years have gone by, the Sensex seems to have reached the levels that are extremely high and dangerous. If you fall off the cliff, you have long way to go down. (Financial) death is certain in the event of a crash.
However, most people fail to take into account the denominator i.e. the Earnings.
In last 30-odd years the Indian Economy too has grown phenomenally. Many more cars are sold today. Many newer models and companies have come into the market. More phones are sold. We have moved from landlines to smartphones. More cement is sold. More houses are built. More refrigerators are sold. More ACs are sold. More companies have been set up. New businesses, that had no existence, have come up. More jobs have been created. People are getting lot more as salaries. So on and so forth...
Consequently, the Earnings of the companies (in other words, the Total Marks) too have multiplied many times over.
Therefore, the correct way to look at the markets would be its PE ratio i.e. Sensex / Earnings.
In 1998-99, the Sensex PE was 12.86.
3 years later in 2001-02, it was 16.55.
Another 3 years later in 2004-05, it was 16.56.
Yet another 3 years later in 2007-08, it was 22.61.
Yet another 3 years later in 2010-11, it was 21.60.
Yet another 3 years later in 2013-14, it was 17.38.
And last year in 2016-17, it was 20.62.
Currently, it is around 22-23.
In other words, the Sensex numerical value is now almost NINE TIMES the number 20 years ago.
However, in comparison, there is practically speaking NO CHANGE in market's valuation — it has moved in a very narrow range throughout the last 2-3 decades (just like the child's 90% marks across all five years).
Hence, the statement ‘markets are at an all-time high’ is stupid, absurd and pointless.
In other words, THERE IS NO STEEP CLIFF from which you can fall off and NEVER recover.
Let’s give one more angle to this whole debate.
Yes, the markets are (numerically) at life-time high.
But high vis-à-vis what?
When you say high, you have to naturally compare it with something.
Here, that something is “past”. The market is at an all-time high vis-à-vis the past.
Our investment, however, is for the future.
Can we say that the markets are at an all-time high vis-à-vis the future too?
Yes!
If you believe that the end of the world is near. End of world trade is near. End of Indian economy is near. End of businesses is near. End of all jobs is near. End of all our needs and desires is near. Yes, the markets are at an all-time high, if that is your belief set.
However, if going by the last 500-1000 years of human history, you are optimistic about human growth. You are optimistic about human development. You are optimistic about the economy. You are optimistic about businesses. You are optimistic about your children. You are optimistic about life in general.
Then, the markets are DEFINITELY NOT at an all-time high.
In the rear-view mirror, the Sensex is at an all-time high at present. But, through the windshield the road ahead looks extremely promising and hence the Sensex is likely to scale many new peaks.
Maybe we will see Sensex of 50,000 or even 1,00,000 in our lifetime.
Maybe our kids will witness Sensex at 2,00,000.
Let’s hope so. At least, I am sure about it.
In last 27-28 years, since I first began investing in the stock markets, I have heard this statement on numerous occasions.
Frankly speaking, it is the most stupid, absurd and pointless statement in the history of human communication.
A genuine stock market investor would NEVER ever say such a thing.
Let me explain.
Suppose a child scores 90 marks out of 100 in an exam.
Next year, he scores 135 out of 150.
Year after that, he scores 180 out of 200.
And after that 225 out of 250.
And then 270 out of 300.
Brilliant, I would say! The child has improved his score from 90 to 270 in 5 years. That's three times more marks.
Ridiculous, you would say! There is absolutely NO CHANGE in his performance. He has consistently scored 90% marks in ALL the 5 years. That's the fact.
Looking only at the numerator i.e. Marks Scored gives the wrong picture. To get the right perspective we have to consider the denominator too i.e. the Total Marks.
This is EXACTLY THE SAME MISTAKE people make when they say that "the stock markets are at an all-time high."
They are looking only at the numerator i.e. the Sensex value.
During 1998-99, the average closing value of Sensex was 3740.
3 years later in 2001-02, it was 3469.
Another 3 years later in 2004-05, it was 6493.
Yet another 3 years later in 2007-08, it was 15644.
Yet another 3 years later in 2010-11, it was 19445.
Yet another 3 years later in 2013-14, it was 22386.
And last year in 2016-17, it was 29620.
Currently, Sensex is at the life-time high of 30,000+.
So, as the years have gone by, the Sensex seems to have reached the levels that are extremely high and dangerous. If you fall off the cliff, you have long way to go down. (Financial) death is certain in the event of a crash.
However, most people fail to take into account the denominator i.e. the Earnings.
 |
| Do you believe, at current market levels, you are standing at the edge of a cliff? |
In last 30-odd years the Indian Economy too has grown phenomenally. Many more cars are sold today. Many newer models and companies have come into the market. More phones are sold. We have moved from landlines to smartphones. More cement is sold. More houses are built. More refrigerators are sold. More ACs are sold. More companies have been set up. New businesses, that had no existence, have come up. More jobs have been created. People are getting lot more as salaries. So on and so forth...
Consequently, the Earnings of the companies (in other words, the Total Marks) too have multiplied many times over.
Therefore, the correct way to look at the markets would be its PE ratio i.e. Sensex / Earnings.
In 1998-99, the Sensex PE was 12.86.
3 years later in 2001-02, it was 16.55.
Another 3 years later in 2004-05, it was 16.56.
Yet another 3 years later in 2007-08, it was 22.61.
Yet another 3 years later in 2010-11, it was 21.60.
Yet another 3 years later in 2013-14, it was 17.38.
And last year in 2016-17, it was 20.62.
Currently, it is around 22-23.
In other words, the Sensex numerical value is now almost NINE TIMES the number 20 years ago.
However, in comparison, there is practically speaking NO CHANGE in market's valuation — it has moved in a very narrow range throughout the last 2-3 decades (just like the child's 90% marks across all five years).
Hence, the statement ‘markets are at an all-time high’ is stupid, absurd and pointless.
In other words, THERE IS NO STEEP CLIFF from which you can fall off and NEVER recover.
Let’s give one more angle to this whole debate.
Yes, the markets are (numerically) at life-time high.
But high vis-à-vis what?
When you say high, you have to naturally compare it with something.
Here, that something is “past”. The market is at an all-time high vis-à-vis the past.
Our investment, however, is for the future.
Can we say that the markets are at an all-time high vis-à-vis the future too?
Yes!
If you believe that the end of the world is near. End of world trade is near. End of Indian economy is near. End of businesses is near. End of all jobs is near. End of all our needs and desires is near. Yes, the markets are at an all-time high, if that is your belief set.
However, if going by the last 500-1000 years of human history, you are optimistic about human growth. You are optimistic about human development. You are optimistic about the economy. You are optimistic about businesses. You are optimistic about your children. You are optimistic about life in general.
Then, the markets are DEFINITELY NOT at an all-time high.
In the rear-view mirror, the Sensex is at an all-time high at present. But, through the windshield the road ahead looks extremely promising and hence the Sensex is likely to scale many new peaks.
Maybe we will see Sensex of 50,000 or even 1,00,000 in our lifetime.
Maybe our kids will witness Sensex at 2,00,000.
Let’s hope so. At least, I am sure about it.
