This time it's different !!!
As the macros turn better and liquidity seems unabated, the markets notching up newer levels every day, one could come up with enough reasons to proclaim the sustenance of this trend. With markets touching dizzying heights and an increased investor frenzy to invest in to equities, I could be termed a ‘perma-bear’ on touching upon a topic of selling the stocks but would like to elucidate some principals on how to reduce the equity exposure and what parameters to be considered for taking these decisions.
It’s true that every stock market crash could be a life changing event and the natural response would be a fear of changed future. In that sense, all the considerations or boundaries earlier drawn would be wiped out with a new reality. So, studying the past to predict the future is futile as one could learn that markets are unpredictable (a right lesson) or assuming that a past cycle would repeat and thus plan the investments (a wrong lesson).
The below is a tabulated comparison of Nifty parameters at a seminar I attended recently, where the Co-CIO of one of the largest fund houses has presented.
| Nifty is not in bubble territory | | |
| | | | |
| Description | 2007 | 2017 | Description |
| P/E * | 22.5 | 22.5 | P/E ratio are at similar levels |
| Earnings Growth** | >20% | ~1% | Earnings 've been muted for last 3 yrs; Good earnings growth in next few years could decrease p/E |
| P/B* | 5.7x | 2.9x | P/B ratio is much lower than in 2007 |
| P/S* | 3.6x | 2.5x | P/S ratio is 30% lower than in 2007 |
| RoE | 29% | 13.60% | RoE are depressed currently & could bounce |
| Dividend Yield | 1.01% | 1.58% | Market offering higher dividend yield |
| Mktcap/GDP | 130% | 82% | Current level is lower and at 10Y avg. level |
| Yield Gap Ratio | 57% | 62% | Current level is lower and at 10Y avg. level |
| IIP growth *** | 15%+ | 3.10% | 2007 was peak of economy while '17 is seeing cyclical recovery=>growth numbers to rebound |
| 8- core Ind growth*** | 6.40% | 4.10% |
| Markets could see short term correction which could be limited and mayn't be deep one |
| * Trailing | ** 3yr avg | ***3mth avg |
“This time it’s different” - A phrase most often used to describe the market conditions especially when elaborating a bull market. We pull out various parameters juxtaposing on each of these details on how this time the market conditions are different. However, this phrase best suits when explaining the market falls. I believe, it’s actually true that the causes for the next fall would be completely different from the last one. All I’m trying to convey here is that one shouldn’t look through the old prism to understand the new spectrum.
So, the most basic question one should ask themselves is why? Why would one want to sell, what’s the basis for a sell? If the sell is because a pre-defined target or time is achieved then it could be good but in bull markets targets are achieved in short times. One finds if the time is being warped as timelines are shrunk. This becomes a predicament for investors while trying to gauze the extent of the further run to time the exit.
One should realize that the stock markets have the tendency to take the stairs while going up and elevators while coming down. When a particular stock is raising continuously, most investors only see that the last few months or quarters of that particular stock. If one would’ve checked its history the performance would reflect the above statement. It could’ve taken years trying to break-out the current levels and could be in the last leg of its rise.
Below is the Bitcoin prices and number of days it took to reach the next $1K milestone.
| Bitcoin Price | days |
| $0 to $1K | 873 |
| $1K to $2K | 907 |
| $2K to $3K | 56 |
| $3K to $4K | 6 |
| $4K to $5K | 45 |
| $5K to $6K | 13 |
| $6K to $7K | 4 |
| $7K to $8K | 15 |
Mind you, at the start of the calendar year (2017), the price was at $997.69 and the historical high is $8,040 on 17 th Nov ’17 though it closed a tad below. The better way to deal with this in a boom period is to continuously assess and reassess the pre-conditions one had written earlier. For every purchase of MF/share/asset we need to have a target price/value with a pre-defined period of holding. As the target is achieved either in price or time, re-assess the situation/position. At each of these target levels, a strategy is to be drawn on whether to hold or to divest/profit-book. And if there’s a possibility of continuity in the asset growth then it’s ideal to hold and add further to the existing holdings. Of course, the process is retained with the definition of the next target price and the time period. The steps are repeated at each goal post. This way, one could continue to bet on the right ones and move away from the wrong ones. The magic of wealth creation is achieved as the vintage increases and wisdom improves. My experience taught me that most investors rue at the missed opportunity though all wouldn’t dare to act when it was presented. This is because one forgets their risk appetite while asset prices grow and that could turn disaster as they try to enter at a wrong time. In a booming market, many profess with a lot of conviction to hold an asset forever as they’ve made money but ideally it should be corrected to holding period of an asset is until the facts change. Caution always prevails and do remember – its bulls and bears who make money while the pigs get slaughtered. Godspeed, Editor, 
| 
Follow us on