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The Equitymaster Research Digest

Are You Worried About a Market Crash?
Jun 28, 2017

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Last time, I shared why I believe we are getting closer to Sensex 40,000. This is what I wrote.

  • Our three to four-year view is based on a very simple, logical premise: reversion to the mean. It works like this.

    Profit margins for Sensex companies are at decade lows. Studies have proven that profit margins are the most mean-reverting thing in finance. Therefore, if it's down today, it will be up tomorrow and vice-versa.

    This simple insight led us to forecast earnings growth for the Sensex. Assigning a normalised PE multiple of 18 (the long-term average), we arrived at 40,000.

    But now, it seems we are getting there sooner than expected. 32,000 is close. We are less than 30% away. The Sensex PE is almost 23. The way things are going, the day isn't far when there's complete euphoria all around.

    That would be the time to sell.

Now this doesn't mean we will give a ton of sell recommendations when the Sensex gets to 40,000. It also doesn't mean we expect the market to crash when it gets to that landmark.

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