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MCM Alert: It's the 'Do Nothing' Time Again - Views on News from Equitymaster
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MCM Alert: It's the 'Do Nothing' Time Again
May 13, 2017

We started Microcap Millionaires (MCM) service in February 2014.

In hindsight, there couldn't have been a better time to step into the world of Microcaps.

The index was attractively priced at close to 17x its trailing twelve months (TTM) price to earnings ratio (PE). It allowed our subscribers to allocate 75% of their MCM corpus towards stocks.

A year later, when we did our first major review (as per the rules of the service, a major review is undertaken every twelve months), the Sensex PE stood at 20x and we had to alter the stock-fixed deposit allocation to 50:50.

By the time the second annual review rolled around, it was again back to 75:25, courtesy the attractive looking PE of 17.4x.

And recently, when we completed the three years of the service, we had to again go back to the 50:50 allocation as the PE had again jumped to 21.6x.

Unchartered Waters

Well, the reason behind this quick recap is that we have now entered unchartered waters. The Sensex PE currently is a steep 23x.

If the Sensex PE needle moves beyond 22x, it enters the significantly overvalued zone from a historical perspective and therefore, it is better one minimizes one's stock allocation to around 25%.

We very well know that the temptation to do exactly the opposite is at its peak right now. It is very difficult to maintain one's head when everyone around is losing theirs.

But this is how stock market fortunes are made. The key to success in investing is buying stocks by the truckloads when times are pessimistic. This is because it is pessimism that produces great prices.

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Oct 17, 2017 (Close)

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