Nifty 50 has been consistently trading above a Price to Eanings ratio of 20 right since June except few days. This means that it if I invest Rs.100 in Nifty stocks then it will earn Rs.5 each year and thus earn Rs.100 in 20 YEARS. Thus, it will take 20 years for my stock to recover the price I am paying for it.
Sounds insane? So what justifies such a valuation? Ladies and Gentleman, the answer is Growth. Each year all of these companies will grow and earn higher profits next year and thus I might be able to recover my Rs.100 faster. Also, remember that the stocks will probably preserve or appreciate from their value of Rs.100.
Nonetheless, growth can justify only so much. Nifty closed yesterday (Thursday) with a PE multiple of 21.09 despite the uncertainty regarding RBI policy and other macroeconomic factors around the world. This despite the fact that valuations are far lower in other developing countries including that of China. If you ask me, a storm might just be around the corner. I won't be surprised if I wake up one day and find Sensex at 13000 levels again.
Having said that, one must learn from behavioral finance. As a result, I have, as of now, invested 30% of my portfolio value in stocks while the rest is in cash. More on that later...
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