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(Precious) Words of Wisdom : "Wall Street makes its money on ACTIVITY, you make your money on INACTIVITY." ~ Warren Buffett

Lifetime High Markets. Steep Valuations. Is it risky to invest in equity now?

Every other day the Sensex and Nifty are creating new highs. Undoubtedly, there is extreme euphoria in the stock markets.

However, the underlying economy is still not out of the woods. So, as stock prices rise, the valuations get more and more stretched.

Given this scenario, the common investor is asking the most logical question... should I sell, wait or buy more?

To arrive at the right answer, let me first tackle the valuation aspect and then present before you a different perspective about the markets.

Actually, this valuation business is becoming confusing day by day.

By traditional standards like P/E and P/B ratios, the stocks are quite expensive as compared to the historical averages. So rationality demands that you should be cautious before investing in mutual funds or stocks.

But many experts say that in the new digital economy, old metrics don't work. So they spin out new jargon for the investors.

This is all BOGUS. (I guess they have forgotten the dot-com boom — when 'eyeballs' was touted as the new metric for the new economy — and the disastrous crash that followed.)

They are trying to confuse and mislead you. Well, they have to. Their bread and butter come from selling equity. If they tell you the truth, how will they sell IPOs of even the loss-making companies? Or make people buy stocks? Or incite them to start SIPs in mutual funds?

It has become a passing the parcel game. Because there is a buyer, you can sell even a very expensive stock at still higher prices. I wonder what will happen when the music stops.

Because, the fact of the matter is that one and only one metric matters - CASH OR PROFIT (and by this I mean genuine profits, not the cooked-up books of accounts.)

If someone tells you that profits don't matter, well don't believe him.

Because nothing else, except cash or profit, is going to bring food to your table.
Because nothing else, except cash or profit, is going to send your kids to school/college.
Because nothing else, except cash or profit, is going to make your retirement comfortable.

Because nothing else, except cash or profit, is going to enable companies to grow on a sustainable basis. (How long can they keep burning Other Peoples Money viz. banks, venture capital funds, angel investors, etc.!!!)

So there should be no doubt in anyone's mind that at present the VALUATIONS ARE EXPENSIVE.

So there should be no doubt in anyone's mind that history WILL repeat itself. The law of averages WILL catch up. The markets WILL crash. (No, this is not a prediction. It is just a simple and logical assessment.)

So does that mean that you should sell your stocks and redeem your equity funds?

To answer that question, let me come to the second aspect of this story i.e. the markets.

Nowadays, as you know, there is extreme euphoria in the stock markets.

But, one never knows when this can easily turn into excessive pessimism.

In short, stock markets are like a pendulum. They endlessly move from one end (extreme euphoria) to the other (excessive pessimism). They never stay still at the mean i.e. in line with the fundamentals of the underlying economy. They are almost always IRRATIONAL. They are almost always VOLATILE.

One should appreciate that 'boom and bust cycle' is the inherent nature of the market. You can't wish it away. And you don't need to.

Therefore, as Warren Buffett also says, your investment decisions should not be at the mercy of the markets.

What you need to do is to follow what the spiritual masters preach... look inside.

In other words, SHIFT YOUR FOCUS from the markets to YOURSELF.

First, will you be able to sleep peacefully, if say your portfolio depreciates by say 30-40%? [Important: Note that I have used the word 'depreciates' and not 'loss'. Your portfolio value may be down, but you still haven't LOST money! That will happen only when you SELL.]

Second, do you have enough time to hold on till your portfolio is back into profits? No one knows how long this may take. Maybe a month, six months, one year, five years! In other words you should have the capacity to stay invested for long.

Lastly, is your mutual fund or stock portfolio of high quality? Because, only quality companies will bounce back and make profits for you. Penny stocks, loss-making companies are often doomed for failure and ultimately delisted.

If you analyze yourself on these parameters and take an appropriate call, I can GUARANTEE that you will make money in the equity markets... in fact, good money. [I use the word ‘guarantee’, because Indians seem to be in love with this word.]

Before I sign off, one last point... and an important point.

If you want to make runs, you have to be on the field. You can't do this sitting in the dressing room.

So whether there are dangerous fast bowlers throwing bouncers, or wily spinners with their googlies and doosras, or the conditions are overcast, you have to pad up, wear your protective gear and go out and bat. You can't always wait for the part-time bowlers or sunny conditions. In this regard, you must read this eye-opening article 'Two biggest equity investing myths shattered'.

Yes, you will get hurt. Yes, you will get out many times. But the beauty is that you can go out and bat again and again and again. And, even a few big innings will finally give you a hefty batting average.

In others words, you won't make money 100% of the times. But even a few big gains will be enough to create a hefty bank balance. I don't mind losing 9 out of 10 times, if the 10th one is a multi-bagger. And, trust me, more often than this is what happens. Simply because you can at most lose 100% of your investment, but there is no upside on the gains… which can even be 900% in ten-baggers.

In short, get your strategy right and you will make your lakhs and crores from equity investing... GUARANTEED.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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