Investment Shastra

Sensex@MRP : Your shield against a crisis

Last week, we were invited for a presentation on Value Investing at Tech Mahindra’s campus in Pune. The presentation was to be given by our co-founder Mr. Raymond Moses and one of the very first questions he asked the audience was, “How many of you sold off your stocks in January 2008, when the market was above 20000?”. There was pin drop silence. Everybody started looking at each other. Finally a couple of hands went up. That’s right! Out of an audience of 150, only 2 people had sold off at the peak. And one of them honestly admitted selling off his stocks because he needed the money for buying a flat! Thus, almost all of the people stayed in with the hopes of Sensex reaching further highs. But post the crash after seeing their hard earned money diminish, almost none of them had the cash or the heart to get in at 8000 – the rock bottom.

I am sure most of us would have been in a similar situation. For years Value Investing gurus have told us, “Be fearful when others are greedy and be greedy when others are fearful.” Unfortunately, there is no sure way to know when the market is being greedy or fearful, is there? The result : Retail Investors invariably end up becoming greedy and fearful at exactly the wrong time. So, what do you do to correct this? How do you ensure that you swim against the tide and not with it? Easy : You follow Sensex@MRP.

Over the last week we have talked about what Sensex@MRP exactly is and how we have calculated it. Also, the article published in Outlook Profit gives you more information about the same. One of the biggest advantages that Sensex@MRP gives you is that it can act as your shield and protect you during a crisis. Just to recall, Sensex@MRP is the intrinsic value of Sensex determined primarily by the earnings of the Sensex companies. So the rule here is if Sensex goes above Sensex@MRP, it signals that the market is moving from being rational to being irrational. It means you have to become cautious because if it continues to rise further, this rise is not justified by increase in earnings; it would thus be time to start selling off.

Click on the graph below to see the comparision of Sensex and Sensex@MRP values for the period December 2006 to March 2010 which includes the period of the sub-prime crisis. As seen in the graph the Sensex started rising in 2007 buoyed by ever increasing earnings. However things soon got out of hand and Sensex crossed Sensex@MRP i.e the market had started becoming greedy! Infact the signals of this were available as early as September 2007 – a good 4 months before the markets started crashing. Going by our rule, you should have started selling from this time. Then, within a year or so, we saw the trough of 9700 in October 2008 which was almost 50% below Sensex@MRP. Sensex@MRP hadn’t dropped much thus clearly indicating that the intrinsic value was much higher and the market was being unreasonably fearful. Voila!! Time to be greedy, isn’t it? What’s more is that this phase continued till March 2009. Imagine a period of 6 months when you could have bought stocks at dirt cheap prices. Thus not only does Sensex@MRP protect you, it also helps you make a killing during irrational times.

But was this a one-off event? No, it wasn’t! We even tested the model for the Tech boom during 2000 and guess what, it worked wonders! Just click the graph below. Again, Sensex@MRP gives clear cut signals of what you should be doing considering the market scenario.

So, now you know how to make the most of Sensex@MRP. All we need now, is the next crisis, isn’t it? I wonder where is the Greek economic crisis everyone was talking about??

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