March 21, 2006
I was looking at one of my first few posts
Market now offering 10:1 odds
Investing based on odds ...Does it work ?
And saw that back in 2004, the market odds were 10:1
So what are current odds?
With a PE ratio of around 19, the current odds are around 1.4:1 . These odds are based on the last 6 years data. Its very easy to calculate the odds. Just export the nifty PE data from the their website here. The odds are basically the number of days the nifty closed at a PE of more than 19 to the total number of days.
Now the above calculation is very simplistic and one can argue, backward looking. So if you believe the earnings will continue to grow rapidly, interest rates would remain at the current level and the ROE of the indian industry would remain at the current level (around 24%) or increase, then maybe the odds are better. But frankly the margin of safety does not exist. In may 2004, the odds were 10:1 and the expected returns much higher. That’s not necessarily the case now.
The above does not mean that there no investment opportunities out there. Its just that there is no low hanging fruit now. Back in 2003 or 2004, just putting money into the index was good enough. Any PE or valuation screen was throwing up a huge number of stocks. But now, I am not finding too many companies. I am currently looking at Micro inks and Asahi glass and would be posting my analysis soon.
update 21st : saw this update on moneycontrol - With the Sensex touching 11K today, analysts told Moneycontrol that the benchmark is fairly priced at current levels and apart from fundamentals, liquidity is trying to find value in Sensex stocks.
see this table in the article for the valuation of the top sensex stocks
what is magical about 11k ? read this speech by warren buffett at wharton (question 3) where he talks of valuation in terms of band. So it may be possible to say that 10-11k is fairly valued with a certain set of assumptions. But giving a precise number is trying to bring a level of mathematical certainty to something (valuation in this case) where it may not be possible to do so
Do read this speech by warren buffett. I learnt a lot from it
Posted by Rohit Chauhan Labels: Investment process