Before The Bubble Bursts

What Bubble, What Bear…there is no Bear market till 2062 !!! :joy::joy::joy:

Sry guys but i cracked up on that tweet.

I personally believe we are in a phase where “Everyone is waiting for the Market to Crash” whereas “The Market is waiting for everyone’s Patience to crash”. I guess investors should be booking some of their profits and rotate them in infrastructure and agriculture sectors that will have the government backing for the next budget and years to come…

I would take whatever comes out of Ambit with a pinch of salt. They are sort of permabears who seem to always want to rush to conclusions. Here are some of the times they got it wrong in just the last 2 years.

This is Jan 2017 before this massive bull run post demonetisation.

And still not seeing it in Feb

And this in April

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29th Jan 2015 - 29700
23rd Jan 2018 - 36000

3 Years. CAGR - 6.5%

In my opinion, this does not look like returns a “in the bubble market” would give.

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I find Saurabh Mukherjea and Ambit as intellectually dishonest. On one hand, he complains about markets being over valued. On other hand, he goes on and recommend expensive shares like Asian Paints and PVR.

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Ambit people are permanent bears

I am not sure if we can outright label them as wrong for the first couple of articles. I remember reading them when published and they were opposite of what everyone else was saying at that time. Sensex did not hit exactly 22000 but it came down from 29xxx to 22xxx in one year. Thats pretty close.

Everybody is bullish, time for caution.

https://www.oaktreecapital.com/insights/howard-marks-memos

A recent memo by Howard Marks
[caution: its a longish read with second half mainly on new tax laws in US and the data is mainly with respect to the US markets]

While he has generally been bearish this past year, I liked some of the comments made by him in the memo. Quoting a few here:

  • … we see a lot of the reaction that greeted my July memo: “the market’s expensive, but I think it has further to go.” How healthy can it be when investors think an asset or market is rich but they’re holding anyway because they think it might go up some more? Fear of missing out (or “FOMO”) is one of the more powerful reasons for investor aggressiveness, and also one of the most dangerous.

  • Most valuation parameters are either the richest ever (Buffett ratio of stock market capitalization to GDP, price-to-sales ratio, the VIX, bond yields, private equity transaction multiples, real estate capitalization ratios) or among the highest in history (p/e ratios, Shiller cycle-adjusted p/e ratio). In the past, levels like these were followed by downturns. Thus a decision to invest today has to rely on the belief that “it’s different this time.”

  • Is an incorrect decision one that didn’t work out well, or one that was wrong at the time it was made?

  • …entails a decline in risk aversion and produces risky behavior, rising asset prices, diminished prospective returns and increased risk. It’s impossible to say the negatives will win the tug-of-war anytime soon, but that doesn’t mean caution should be discarded . . . especially now.

So if I go by the predicted market fall theory (about 60% increase in last 21 months, as mentioned in the PDF file “Viewpoint”) and take Mar 2016 as the starting point (about 7500) and the peak 11600 few weeks ago, then it is about 50%. Should we take it as a sign for market fall. May not crash but may be correction of about 25%.

If timing the markets was possible, someone would have made Billions doing it.” - Peter Lynch.

Earlier I discussed in the below thread (As a corollary to why only long-term investments make sense) that market timing is impossible. If the investing greats like Warren Buffet and Peter Lynch agree that nobody can time the market, we should stop flattering ourselves trying to predict a crash or a correction.

If one is really afraid of a correction, then buy a NIFTY PE for however long it takes for the correction to happen. But of course, you would be depressing your returns for that time period. However, if you are a long term investor, it makes little to no sense to even consider ‘moving out of the market’ just to avoid a correction.

Dear @dineshssairam,
Bu what if someone’s major position is cash and there’s a dearth of investment opportunities for those looking for value?

Precisely, that is what I mention in the thread too. The only reason an investor should consider holding a ton of cash is if there are no cheap buying opportunities. But really, if you look hard enough, there’s always Value to be found. Even assuming that all the good stocks are overvalued, it has no relation to the Index P/E levels at any cost. It is strictly on an individual level.

Right. At the end of the day valuation of a company is truly subjective. A value buy for one could be an exorbitantly priced stock for the other. Investors can only agree to disagree. A consensus will seldom be built.

Please excuse my ignorance-
Post a massive bull run is there a possibility that markets won’t experience a melt down but begin moving sideways. Little movement in either direction. In that case the investor would end up losing a significant amount paying put premium, right?
So,by moving sideways for a few years the market performance will regress to the mean of 10-11%. We should explore the possibility of a sideways market. Most investors are expecting a bear market post the spectacular run. I somehow feel that sideways movement for some years is also possible. Predicting the future by looking at the past seldom works. Reasons and vehicles for mean regression always differ, in my opinion.
Just a quick calculation:
From market bottom in March,2009 to market peak of 36443 the return is around 17.9 % CAGR.
Now, if market moves sideways and returns nothing for the next 6 years returns will regress to 10.4% CAGR, very close to long term mean. In the meanwhile if earnings have gone up stocks will be available at very reasonable valuations. The outcome is same as a bear market-regression to the mean. But, investors won’t see their stocks being battered very day. It’s inflation that’ll trouble them since the money invested will generate no returns.

And there is no need for a consensus. If Investor A thinks there is a deep-discount buy, he should back up the truck and invest heavily. If Investor B think the same stock is not undervalued, he should not invest in it. That’s that. Trying to measure the over/undervaluation of specific stocks or a possible market correction based on Index P/E levels is impossible, is what I’m trying to say

I’m in agreement with what you’ve mentioned. But, how do we ever know what the markets have discounted and what markets haven’t? What I’m sharing now may be looked down upon and cause frowns but I do think I must share my thoughts.
Have we ever considered composing a portfolio of randomly selected companies? Not taking into consideration either fundamental or technical analysis. Purely random portfolio. In a market composed of seasoned investors, veterans, is there not a possibility that a stock’s current price is indicative of all the information available?
I’m aware that what I’m saying is very similar to the efficient market hypothesis which has been scrapped by celebrated investors. But,it’s one question that has been intriguing me.

You might be interested in reading this:

As a part of the Finance Club in my MBA, we ran a similar experiment with Indian stocks. The results were not similar, because the Monkey Portfolio under-performed the market on many years. Of course, we didn’t repeat the experiment enough number of times for it to be statistically significant.

We concluded by saying that if there is some sort of human intervention to filer out a bunch of ‘decent’ stocks (As in the case with the original experiment-- where they selected random companies from the newspaper. The writers of the newspaper would only write about marginally known stocks. Otherwise they have no reason to cover them), then random selection possibly could beat the market (Say +2%).

But beating the market by a larger boundary (Say +5% or more) via the same method is impossible. This might actually be a good thought experiment to run on my blog, if I get time.

It was a nice read. Thanks for sharing.
It’d probably an interesting experiment to get stocks selected randomly and then apply the conventional fundamental analysis to weed out companies that are weak.