There are two ways to look at any market for an investor. One, which my Punjabi broker for many years now tells me, is, well, roughly, 'In the mating season, everyone is in heat.' Which essentially means, follow the herd.
Buy when everyone else is buying, which is actually at high price; sell when others do when, yes, the market has crashed. Which means, roughly, that if you put in Rs 100 as what you thought was 'investment', now is worthless Rs 50 of mud.
This was last week when I asked — well, kind of forced — my broker to liquidate the tiny amount of investments I had in equity and mutual funds. Mr M (we shall call him that) asked, "Bhaisaab, why now, when the market is at 33,000 points-plus?"
To which, I should have replied, "What goes up, must come down," or some similar rubbish. Instead, I spent a very long time trying to explain why it was absurd for equity prices to keep shooting up, when the profitability of companies fell off a cliff.
Number two, there is an easy measure for this, which takes the price of one share and divides it by the profit (or earnings) by the same stock. This is called the P-E (price-earning) ratio.
If we play a mind-game — which actually is no illusion — a P-E ratio of 25 on Indian blue chips implies a simple thing. And it is this, my friend and fellow investor: it means if you buy any super stock, you wait for 25 years of dividends — your share of profits — to justify the price you paid for it. Why on Earth would you do such a dumb thing? Because brokers who make their living from skimming money off every trade will tell you fairy tales.
The most common — and dumbest — method is to forecast future profits by a wide margin. Look at P-E again. If the price you've paid is Rs 100, which is the P, and the actual dividend or earning (E) is Rs 4 per year on the stock, how will a well-dressed salesman called an 'investment manager' make any money?
By bullshit. It is, of course, disguised and obfuscated in many terms. The first — be very wary of this — is a total lie. It's called forward or future earnings. This is to confuse you, dear investor, that the E is higher than Rs 4 currently, in mythical economics earnings could be… Rs 40 per share. And you own Google. Wow.
Unfortunately, the smart money knows this game and have pulled about $17 billion out of our equities. Their local employees are paid to tell you how, still, the economy is good and stocks are doing super.
To which, your chauffeur will tell you to buy more property. Many folks with too much money on hand have done it. After all, one of the greatest sages of our times Mark Twain gave his investment advice, "Buy land. They aren't making it any more."
But Twain, it turned out, was no finance hotshot. A best-selling writer, he was bankrupt by 59. His stupidest investment, it turned out later, was in a printing press company run by a maniac who wanted every component perfect. So, what happened to the 'invest in land' in practice?
Gujarat is supposedly a 'Model'. Serious economists familiar with the state — the best example is Yoginder Alagh — have completely debunked this model. That is a story for another day.
If India was blossoming under an overblown Gujarat model, the smart money would have flooded in. Truth be told, it's rushing out. And only sarkari institutions like the Employees' Provident Fund Organisation and State-owned insurance companies are propping up a zombie market.
Be very careful of your money and where you put it.
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