When the stock market is at its top and all the figures are not supporting the market level then players start throwing various positive news/stories and try to run the market on that news/stories. Sometimes experts come out with a big trap of numbers. First of all see the following table, just a few days back published on social media, trying to show how the market is so attractive.
Everybody knows that there is only 2 way the PE may get corrected in the following 2 conditions only. (PE = Price / EPS).
- When the Market Goes Down.
- When EPS is Going Up.
I think the writer is not trying to show how the market is going to be corrected they want to show how the market is cheap because 1 Year Forward PE is very low and this level is best for buying in the market. Any guess For showing what growth in EPS they have assumed?
Two things are most important in #FinancialLiteracy “#InformationReadings” & “#Think_Out_Of_The_Box“. Now read the following table and understand how we are fooled by forward PE.
For study purposes, we will refer only last event of 12-03-2020. Here on 12-03-2020 NIFTY is 9590.15 and NIFTY PE is 21.83 so NIFTY EPS comes to 439.31.
Now as Table 1 shown one year forward PE is assumed at 14.13 which is possible in two situations only.
- If Nifty slipped down to 6207.45 or
- If EPS gains 54.49% and reaches at 678.71 level.
Does it make any sense to expect such growth in EPS when the long lockdown period is going on for which nobody knows how long it is going to be there? Even if the lockdown is lifted on 30th April, the economy needs at least 9 to 12 months to make it streamline or recovered from the losses. In such circumstances how anyone can assume such a huge growth of 54.49% in EPS?
Table 1 is prepared after 12-03-2020 so it is also not possible that the writer is not aware of the Covid-19 spread and its side effects on the economy. It looks that either the so-called EXPERT is not knowing what is Forward PE, or deliberately he might be bluffing or fooling the public.
Let us see what Forward PE is.
As per Investopedia Definition of Forward PE is.
Forward price-to-earnings (forward P/E) is a version of the ratio of price-to-earnings (P/E) that uses forecasted earnings for the P/E calculation. While the earnings used in this formula are just an estimate and not as reliable as current or historical earnings data, there are still benefits to estimated P/E analysis.
We can also see other events also from Table 1 to justify what I am trying to say. We can see in Table 2 how unrealistic assumptions were made each time for calculating forward pe. We can also see the difference in the growth of assumptions and real figures.
One big question is coming to mind why do all these things come when the market is at high risk and whenever the fear in the market is at an extreme level? At this point in time buyers start to move out / stay away from the market. At this moment’s Market should look lucrative for the buyers to start buying.
One thing everybody should keep in mind whenever the market’s level is not justifiable such types of Traps are applied to make buyers a victim.
One Big Learning I have Taken from my 18 years long career in MF Industry. Whenever the market starts running on perception / Forward PE There is a Bubble in the Market.
Remember one thing If you don’t have the knowledge it is not a big issue, but if you do not have common sense you will be in trouble every time.
In the next blog, we will discuss “Learn to invest in various stages of the market.“
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Really a nice article.