Making sense of sensex

Yeah, the markets. I never understood them though I keep trying.

Remember that “pay it forward” scam? Pay only $100 and get a$300 worth ipod, how? The two next guys in the ‘queue’ would pay the rest $200 towards your ipod. Now, if the scheme were to exhaust all ipods in the world – what are the chances- only two guys stranded last in the ‘queue’ would end up unlucky. Nice scheme, but well, they called it a scam :)

Tell me if the ‘markets’ are any different. Some day, one set of guys will find themselves standing last in the queue while rest of the crowd would have gulped and belched the rewards. I have had the misfortune of being in that set on a few occasions, 2000’s dot com burst being one.

Next. I know they don’t print currency on Dalal street. Would that mean that every spectacular gain I encash makes a dent in someone else’s pocket? Or is it the same ‘pay it forward’ scheme, err… ‘trick’ in play again!?

Last, the market jargon. How do you like “Company X is expected to beat the expectation today” I heard on TV a few times? Hello! why couldn’t you just revise your expectations then!? Have you heard the confident talk of support levels? “Nifty has support next at 4013 … if it can hold there, next one should be 4201 … if not then we could see 3900 very soon”. Oh how precise, almost to the decimal! Why not just say “anything can happen” !?

One last-est one: the confident talk of analysts and armchair experts on what their pet companies should do. “I think they should chop product line X and buy company Y”. Oh yeah? Why give an advice on public media if its really valuable. Shouldn’t you go run a consulting house instead!?

It is fun though. Just because me the loser doesn’t get it doesn’t mean you should keep away. Rush, I hear there is a small dip coming but after that a huge rally is expected :)

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3 Responses

  1. Another GEM –

    At a P/E multiple of 32, this stock is an excellent buy and we believe that it is good upto 56 !
    The EPS at 10.76 beat market and analysts expectations of 9.87 !! (Brilliant, Voila !!). With inflation at 8.3% and GDP growth at 4.4%, the sensex can safely move upto 5000 in sync with the NYSE and LSE !!!

  2. Inflation 8.3%? That will be scary Namma Nadu. GDP growth 4.4% – not possible for at least a decade!

  3. Pranav, NN,

    One of the theories is that the current value (price) of a stock is the present value of all future earnings that one can get from this stock. So a company that is expected to grow will have a higher P/E ratio. Companies in similar industries will have similar P/E ratios. Also depends on macro economic factors – inflation, GDP growth, interest rates, etc.

    The BSE Sensex (SENSitive indEX) itself is the weighted average of the price of 30 select stocks – usually blue chip. The weighting is done by the market capitalization of the stock. Hence one cannot compare LSE/NYSE levels with Sensex and Nikkei.

    Individual stock could perform very differently from the sensex. Some events cause the whole market to react similarly – recall May 2004 when the Congress formed a government with the help of the communist parties.

    Most big companies manage their earnings so that they do not fluctuate wildly – (hence analysts can talk about expectations and so on). Big fluctuations from quarter to quarter is a capital mistake. the idea is to be predictable – so when you start your own company make sure that you give predictable results :)

    Want to play safe – invest in mutual funds. Or mirror a fund by diversifying. With demat one does not have to buy minimum lots, etc. Buy it and hold for 10 years. You can expect 10-12% returns in the long run.

    Srivathsa

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