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Is the stock market at its top?
Fri, 25 Jul Pre-Open

The BSE Sensex just hit an all time high of 26,292 points yesterday.

So is it at the top? Will it fall from here, or go even higher?

Many in the market will love to keep you guessing. Business channels, stock brokers, the talking heads on television, etc, will all try and convince you that this is the most important question to ask right now. After all, how much money your investments in the market make depend on the answer to this question, right?


Why wrong? Because in the short term, markets are completely random. They are driven by a multitude of variables. Many of these may very well be completely irrelevant to the actual fortunes of the businesses you own. Yet they will affect the stock prices of these businesses.

This makes the outcome of where stock prices are headed in the short term just impossible to predict.

Thus do not ask whether this market is at its top or not. The search for the answer to such a question is bound to be extremely perilous for your money. Just like asking the question of whether the market was at its bottom or not during August of last year.

Most investors at that point were confident that the market is headed still lower, and ended up missing many excellent opportunities to make some very shrewd investments.

Thus if your investing decisions are highly reliant on correctly recognizing when the market or a particular stock has topped or bottomed out, you are ought to land up with disappointing investing results.

So what should you be looking at then?

Just two things really: price and value. That's what successful investors look at. They just ask two questions. What is my company worth? And how much can I buy/sell it for today?

So if you decide to sell any of your stocks today, do it because they have touched their fair value, or have become overvalued. Not because of some vague premonition that they have reached their top and cannot go any higher. They may very well go higher after you sell. And that will not in any way mean that your decision to sell was a wrong one to make.

What has been your approach to the Sensex being at an all time high? Do share your views on the Equitymaster club.

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