Continuing from where we left in the previous blog. In the year 1999, when the American market was establishing new records of high, when Tech stocks were very much in demand; at that time Mr. Buffet’s company Berkshire Hathaway had underperformed in comparison to the S&P 500 Index. And in the year 1999, Mr. Buffet was also investing in the bond market as well. At that time an article was also published against him titled ‘What’s wrong Warren?’ After that in the year 2000, the American market witnessed a huge crash. Mr. Warren Buffet during this crash earned great returns. Mr. Buffet against whom an article was published in the newspaper, that same person was included in the Fortune magazine in the year 2001 and proved to the world how to figure out when the market is expensive and when it is not.
In the year 2001, Mr. Buffet mentioned about an indicator to the world which is Market cap to GDP ratio. According to this indicator when this ratio would be less than 100 the market would not be expensive while if the ratio is beyond 100%, the market would be expensive. When this ratio is around 200% and if you invest there then it is like you are playing with fire. All of this was mentioned by Mr. Buffet himself in the Fortune magazine in the year 2001. If we check the Market cap to GDP ratio of American share market in the year 2001 then we’ll find that the ratio was beyond 150%. And if we check the current Market cap to GDP ratio then it is around 155% at the moment. So according to the Warren Buffet Indicator, the American share market is currently very expensive.
Now if we check the Schiller PE ratio of the American market for the year 1999 and 2000, we’ll find that it had reached around 40. So according to the Price Earning ratio too the American market was expensive. Thus, the intelligent investors are very well aware when to invest in the market and when not to.
Currently, the Shiller PE ratio of the American market is close to 30. We know that PE of 30 means that if we pay Rs. 30, we’ll earn Re. 1. That means the earning yield is just 3%. If we compare this to their Bank returns then we can say that according to the Schiller PE, their market looks inexpensive. But according to the Market cap to GDP ratio, the American market is very expensive.
Talking about the Indian share market, the Indian share market is very expensive according to the PE ratio. Currently, the PE of the Indian share market has gone beyond 30. During January 2020, when Nifty was around the mark of 12,430 at that time its PE was around 28. As of August 2020, the market is even below the above mentioned level i.e. it is around the mark of 11,000 but still the PE is more than 30. How did that happen? That is because there has been a fall in the earnings. So basically, till the market is above 25 PE, it will remain expensive and if it goes beyond 30 it will be even more expensive. So you need to invest less in this expensive market.
Currently according to PE ratio, Nifty has gone beyond 30. So if you wish to track the valuation even further than this then you will have to track Nifty’s Price to Book ratio and Dividend Yield Ratio for that. So when Nifty’s Price to Book ratio will cross the mark of 3.70, market will become expensive. Similarly, when Nifty’s Dividend Yield Ratio will go below 1%, the market will become even more expensive. Hence, if you wish to track Nifty’s Price to Book Ratio, Dividend Yield Ratio or Price Earning Ratio then for that download our app Aryaamoney. In the app you can track all these ratios very easily.
If you wish to open your Demat account with India’s leading broker then for that link is mentioned below. You can give it a look. If you wish to carry-out short-term and medium-term trading while making use of the box technique then you can subscribe to the Smart Investor training program in our app.
Currently the Indian share market valuation is expensive so if you wish to invest here for long-term then you can invest in the companies having sustainable competitive advantage after analyzing the risks.
We would like to disclaimer here that all the advice given in this video is for educational purpose and before making investment it is important for you to carry-out your risk-profiling as well as taking advice from your financial advisor is important. Share market investments are subject to market risk.
Thus, what we learn from this blog is that invest less when market is expensive and invest more when is not expensive. As Mr. Warren Buffet rightly quotes, “Be fearful when others are greedy and be greedy when others are fearful.”
Until next time…
Happy Trading, Happy Investing!!!
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