Friday, 26 August 2016
The Market Is Overvalued. What Should You Do?
In February this year, I wrote the blog “The Bear Is on the Prowl. What Should You Do?” (See http://smi4e.blogspot.in/2016/02/the-bear-is-on-prowl-what-should-you-do.html) Interestingly, just a few months hence, market pundits are talking about an overvalued market. According to them, market indices are trading at all-time highs, and index P/Es have swelled. They feel this is the sign that the market could come down from here, perhaps sharply. The average investor is confused as ever.
One thing that becomes quite clear from the narrative above is that the market can quickly change its course even before you realize what's happening. In the blog post mentioned above, I advised that you should not worry about the market and wherever it's headed. The point still remains the same. Even if the market looks overvalued, that's not your problem. It's futile worrying about bad and good markets.
As a stock investor, you just need to worry about the company you are going to invest in, not the market. The company should be able to clear your criteria and that’s that. And no matter what kind of market it is, there are always good investments available. Just because the index is trading above some historical average doesn't mean that you give the deserving company a miss.
Market pundits may disagree. They say that if the market falls, your “good” investment may fall as well. And they are right. In bear markets, almost all stocks fall. But no one knows when the market is going to fall or how much your stock will fall vis-a-vis the market (it may even continue going up while the market is falling). It is often seen that all the while experts are worrying about market levels, the market just keeps going up.
The fear of a market fall is a big impediment to success in the stock market. Fearing a fall in market, many investors remain away from the market and miss the opportunity. Don’t let that happen. The best answer to an “overvalued” market is to do whatever you would have done if it weren't overvalued.