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Should you wait for the next 'Sensex sale'? - Views on News from Equitymaster
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  • Aug 30, 2011

    Should you wait for the next 'Sensex sale'?

    How often do mouth watering bluechip stocks come your way? Every couple of months did you say? Well, the sale on blue chip stocks is not as regular as in your favourite departmental store. Especially if you are looking for a really good bargain. But if you manage to do some intelligent shopping in such times, you are guaranteed to make some handsome returns.

    Now investors often mistake 'value investing' with 'timing the market'. The former restricts itself to investing in good stocks when they are very attractively valued. The latter on the other hand requires the investor to buy at historical lows and sell at historical highs. Believe us. Even the successes of the likes of Warren Buffett and Peter Lynch have had little to do with timing the market. But they have managed to pick the right stocks at the right prices for their investors.

    Days when the Sensex stocks were on sale

    If one decides to actually wait for bluechip stocks to be available at deep discounts, how often do the opportunities come across? We had a look at the number of trading days in the past 2 decades when the benchmark BSE-Sensex was trading at price to earnings (P/E) multiple of less than 15 times. Also number of days when the price to book value (P/BV) multiple was less than 2.5 times. It turns out that in just 11 out of past 20 years, such opportunities have presented themselves. With the exception of period of Asian financial crisis (1997-98), dotcom bubble burst (2002) and SARS scare (2003), there were very short periods of market meltdown. Most other times, the stocks recouped their valuations within a much shorter period. That makes it even more difficult for investors to be able to buy during crashes.

    No. of trading days Sensex multiple at...
    Year P/BV < 2.5 x PE < 15 x
    1996 49 89
    1997 23 168
    1998 181 191
    1999 44 78
    2001 138 42
    2002 215 105
    2003 153 131
    2004 0 21
    2005 0 26
    2008 23 57
    2009 34 61
    Data source: BSE

    Should you wait for the next sale?

    A wise investor once said that when it comes to investing, the human organ that matters the most is not the brain but the gut. Very true indeed. It is certainly a good idea to wait before the market valuations get into the zone as described above. But as can be seen, such periods can really be few and far in between. Thus, you really have to be able to have the guts to wait for long period of time.

    This obviously doesn't mean that one should never invest when the overall markets are not cheap. One certainly should. For at all times, there are bound to be stocks that are not doing well despite the good overall valuations. It is just that when the overall markets are cheap, the choice available to the investor in terms of number of attractive opportunities available is a lot more.

    We believe that investing is an ongoing process. Whatever may the trend in the markets, a disciplined approach in value investing can help investors build a solid long term portfolio. But be careful while choosing stocks when the Sensex is not on sale. The chance of making a mistake here is certainly on the higher side.



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