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The Equitymaster Research Digest

The Market is Falling... What Happens to Sensex 40,000?
Aug 11, 2017

  • Has the trend reversed?
  • A busy week of the Richa and the Hidden Treasure team

Readers would be aware of our prediction of Sensex 40,000. It was a three to four year view. I explained it in this edition of the Research Digest.

Here's 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.

Simple enough.

But markets don't move in a straight line.

They go up and they go down. No one can predict short-term movements consistently and confidently. These days the market seems to be going down.

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