Market crash, cry babies and cheap valuations

There seems to be no end to the current stock market crash.

Today, the Indian stock markets as represented by the BSE Sensex and the NSE Nifty-50 crashed by over 10%. Some stocks fell much harder...Unitech fell 50%! If you owned Unitech yesterday, you would be half as rich today on Unitech.

Current market conditions and the crash are truly unprecedented. A great change seems to be afoot. And in times of great change, there are obvious winners and losers. So far, the bears have been winning and the bulls have been losing big time.

Some battered bulls are now crying out for help. These are not the average investors but many are so called experts that you see so many times on business channels. Many such bulls have lost money and continue to lose money. It is obviously hurting. And hence these people are calling for help from all corners.

Some people cry for a ban on short selling.
Others want rate reductions and easier money.
Some want the government to do something, as if it were the job of the government to protect asset prices in some way.
Some want hte government to set up a market stabilisation fund to prop up the markets.
Some want a change in the way futures are settled on settlement day.
Some are angry that there is no level playing field between local investors and FIIs.
Some desperately seek any kind of silver lining in bad news.
People simply want the markets to go up again and for better times to return.

I was amused to see the remarks of one such celebrated fund manager and CIO of Reliance Mutual Fund, Madhu Kela. He seemed to have anguish in his voice complaining that mutual funds are not allowed to go short in any signficant manner while FIIs are allowed to do anything. He added that he would have loved to short the market as well given a choice. I found it quite amusing.

For one, a mutual fund is not a hedge fund. It is designed as a vehicle for the average investor to participate in the stock market. Short selling has a greater risk than long only buying and it requires greater skill. By not allowing short selling in any big way, the average investor is protected against incompetence of the fund manager, if any, to sell short.

Also, if someone finds stocks cheap, he/she should go ahead and buy. Reliance mutual fund is saying on the one hand that stocks are cheap and then stating on the other hand that they are waiting with a lot of money to buy when markets stop falling. By abstaining from buying, is Reliance Mutual fund not also contributing to the fall?

And assume if mutual funds were allowed to short sell as well? Would the markets have not gone down faster as mutual funds would have come around to shorting the markets instead of the buying that some have been doing?

And speaking generally, when the markets were going up, no one was complaining about anything. Everyone was happy when the markets went up 50% in 2-3 months in Sep-Nov 2007. Now that the markets are crashing, these experts are now crying for help and lamenting about how things are biased against them.

They are behaving like cry babies. Where is the personal accountability? Anyone who made a loss, made it because they chose to invest in the markets. They and they alone are responsible for their losses. Period! They lost money because they made a bad choice and were blind to extreme events occuring.

There is no point in cribbing and complaining. There is no point in whining. Yes, there might be genuine issues with the markets and all the problems that these experts talk about might be valid. But these have existed and are not something that have been thrust upon them overnight. They were aware of these issues when the markets were going up, and hence should not complain how these caused them losses.

Markets go up and markets go down. A downcycle is a way of cleaning out all excesses of the previous cycle. Just like a jungle fire, it cleans out all existing vegetation and new life begins. When people want to sell, they will sell regardless of external artificial measures. Interfering with natural processes create dislocations in other areas and create new problems to deal with.

Having said that, till very recently, I was arguing that markets were not cheap yet. Now the picture might have changed. The markets do look attractive now, based on traditional measures.
The BSE Sensex (8701) now trades at a PE of 10.63, Price to Book Value (PBV) of 2.25 and Dividend Yield of 2.12%.
The BSE Midcap index has the same values at 8.02, 1.46 and 2.46%
The BSE SmallCap index has the same values at 5.62, 0.91, 2.78%
Same is the case with NSE indices.

Historically, these are in line (by and large) with previous lows.

But before we jump ahead and buy, we don't know how future earnings would be. We dont know whether earnings will rise, fall or stay stagnant. If they rise, how much they would rise by? And what PE multiples would the markets give the markets? So even though stocks optically look attractive, this could be an illusion as earnings fall short of expectations. But, generally speaking, stocks might be worth buying into starting now...with a caveat that I could be wrong, earnings could disappoint, markets could go down...and hence you should invest in a manner that if you are wrong, you dont lose much.

Looking at the current picture, there is no hurry to buy anyways. The next few years could turn out to be an investor's delight. He would get stocks cheap, perhaps very cheap, and would not be in any hurry to buy. Keep cash handy.

Happy Investing!