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12 May 2010

SHOULD I PLUNGE IN?

I am back in the markets after a period of over 6 months. One would think this is a long time, especially in the stock markets.

Of all the cliches, the pithiest that comes to mind is- the more things change, the more they remain the same.

I left the market at a Nifty PE of 23 (Index Yield 4.35%) and a 10 year bond yield of 7.35%. I return at a Nifty PE of 21.77 (Index Yield 4.59%) and a 10 year bond yield of 7.98%.

I wrote about a concept of Index Yield in my post Déjà vu : I've Been There and advised an avoid till the yield favoured the stock investor. Going by that logic, a PE of 21.77 gives an Index Yield of 4.35% i.e, a loss of 3.39% for the stock investor (not accounting for the risk premium) as compared to an investment in the 10 year bond. If you include the risk premium, then the loss is even higher.

In layman terms, I am being paid more (Rs 7.98 per Rs 100) for investing in a safer investment (long term bond) than the riskier investment (stock market -Rs 4.35 per Rs 100).

So I am still holding onto my money. And booking profits.

PS :- Another reason to hold onto your money/ book profit is historical. Every time the Nifty PE goes above 20-21, the market tends to fall. I know there are a lot of opponents of the mean-reversion theory but hey! I don't write the history. I only quote it. My friend Manish Chauhan, in his blog Jago Investor has written about this occurrence. Read about it here

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