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Wednesday, June 23, 2010

Is Sensex heading for moon & give me tips…

I hate to answer this question. But this is the most often (2nd) asked question to me. Will the Sensex move up further?

My answer to this is whether Sensex goes up or down; one should invest all the times with a long term horizon of at least 5 years. One should not try to time the market rather one should analyze the stocks, identify margin of safety in the stocks and put in the money. If margin of safety is built in the stock then even if market goes down with a prolonged downward journey then also it will not impact the investment. It’s bound to bounce back and you would naturally be earning dividend incomes.

However, after saying this much also I still get the same question asked again. So this time I decided to analyze the market to answer if it’s fully valued, overvalued or undervalued.

I looked at 3 parameters of the BSE Sensex - the Current PE Ratio, Price to Book Value and Dividend Yield %. The present P:E Ratio is 19.96, Price to Book Value is 3.56 and Dividend Yield is 1.15%. These parameters definitely do not indicate that the market is the normal zone. But these parameters are also not indicating excessively overheated situation; however, it’s close to that. It other words markets are almost fully priced. If market goes down then it would simply offer an attractive investment opportunity.

The market has a tendency to be extremely euphoric at times and fearful at other. Because of this not even Brahma can predict where the market will be heading in next 6 months (forget about tomorrow). However, one can definitely & safely predict, including me, that the market will go up in next 5 years’ period. So if we can identify stocks which are undervalued then that’s the best way to protect our investment even if the market takes a prolong downturn journey.

This leads to the most often (1st) asked question to me. What are those stocks where I can put my money?

I hate even more to answer this question. Because it means asking for tips and tips take you to pits. Howsoever I hate this; I have to still answer this question. Which are the stocks in which I should invest my money in?

The answer is to understand the inherent value of the company and then take investment decisions. How to identify the inherent/intrinsic value? I have recently taken up two sessions on this topic where we discussed more than 10 parameters to qualify an investment opportunity. These are the same set of parameters described by masters, Benjamin Graham and Phil Fisher, in their books. These parameters cover various aspects of the company including strength in the balance sheet, governance, future growth prospects, profits and losses, and margin of safety and help you protect your investment in all the times. These parameters are simplified version of investment analysis where analyzing these parameters does not require one to be a rocket scientist but just a 5th grader with an understanding of internet & highly disciplined approach. The data is also available in the public domain free of cost and it does not require more than 2 hours a week to analyze the stocks. So why to ask for tips, make your tips now available to others.

Happy investing.

Share your thoughts.

Niteen S Dharmawat

IMPORTANT DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The information contained herein is based on analysis and up on sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above.

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