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Still a Good Time to Invest or has the Train Left the Station?

Mar 30, 2020

Rahul Shah, Editor, Profit Hunter

There are two ways of looking at the current stock market rebound.

As of writing this, the Sensex is up 17% from its 52-week lows. Given the number of days it has taken to achieve this, it is a fantastic performance.

Thus, those who missed out investing somewhere near the absolute bottom would be cursing themselves for not pulling the trigger. After all, it is not everyday that you get returns in the high double digits in just a matter of few days.

Another way of looking at the market is how far has it corrected from its 52-week highs.

Well, this number currently stands at a whopping 30%. Yes, even after the 17% rebound, the Sensex is still 30% off its previous high. A 30% correction is nothing to scoff at. Especially when it takes down the Sensex valuations to well below its long-term average.

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Over the last 20 years, Sensex price to earnings ratio has hovered around the 18x mark.

What the 30% percent correction from the top has done is that it has taken it down to its long-term average.

In other words, not only the magnitude of correction from the top is a significant one, it has also taken down valuations to levels where the risk reward ratio has turned firmly in favour of investors.

The chart below will help strengthen my case further.

What Happens When You Buy After 25%-30% Correction and Below 18x PE

Attractive returns were there for the taking for those who bought after a 25%-30% correction on the Sensex and when the PE multiple fell below 18x.

As the chart highlights, these returns averaged 29% CAGR after 2 years, 30% after 3 years and 18% after five years. Given that the Sensex returns over the long terms have averaged 15%, these are fantastic returns in my opinion.

Since the risk reward equation is still favorable, it may not be a bad time to increase exposure to stocks if you haven' done it already.

So, like my subscribers, if you have been sitting on cash to the tune of 60%-70% - yes, I managed to get my subscribers out of stocks much before the corona crisis stuck - you can certainly put to work an additional 10%-15% and increase the stock exposure to 40%-45% or thereabouts.

Please note that trying to find the bottom is an exercise in futility. You'd be much better off investing in a staggered manner and taking more exposure as the index keeps falling.

Good Investing,

Rahul Shah
Rahul Shah
Editor, Profit Hunter
Equitymaster Agora Research Private Limited (Research Analyst)

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