If you read my previous posts you will know that usually I am not the one who recommends going short on stocks. Almost never!
The big advantage of not being extremely dogmatic with how money making is done is that when opportunities are crystal clear you implement them:
Why You Never Hear About Obvious Opportunities?
The internet these days is packed with Warren Buffet School of Bloggers. They teach the time tested principles of value investing. There is absolutely nothing wrong with value investing, or with growth investing as I practice. The problem is this –
Those who preach value at some point become slave to its principles. They shut their eyes even when they see something worthy of credit unless it is corroborated by the principles of value investing.
This is not a good thing. If money can be made, go ahead and make it. Let no one stop you.
I have been talking about markets being overvalued since the beginning of this year really. If Sensex was expensive @ 30,000; it is now even more Expensive @ 28,114/-. I have written here about how you can assess the overall valuations of the markets based on the Price Earnings Multiple of Nifty. Going by that, I can safely say that for markets to be valued fairly, we should have a correction of at least 10-12%. That’s when valuations will be down to 19.8, closer to their 15 years average.
Why it is OK For Markets To Remain Slightly Expensive
It’s all human nature really. Markets regularly overshoot and under-perform its historic average.
Bull Market Scenario: Earnings try to chase price. The hope of a bull market is so awfully drilled into people’s minds that even a 2% correction looks attractive. In these times valuations consistently remain ahead of their historic averages.
We are going through one such cycle and it is unlikely that valuations will come down to 19 anytime before we celebrate this cycle with the next big crash.
I have no idea when such crash may happen. Nobody does. Safe to assume that whenever there is a liquidity crunch, there will be a crash. I predict that this crunch will be led by weakening or may be even complete debasement of the U.S. $. But I’ll leave that discussion for another day.
Bear Market Scenario: Earnings tend to improve while prices stay stagnant. This is where value investors find maximum buying opportunities. Unfortunately on such occasions nobody is interested in anyone who has anything to do with stocks. In my own experience, I was almost an outcast between 2010 – 2013 – the slowest years for equity markets.
What Scenario Are we in Right now?
In a nutshell – Psychologically Bullish.
When this happens, valuations take a back seat. Over the last few months I have been talking about the markets being overvalued whenever I get a chance. I first said this when Sensex was at 28,666 level (as I explained in the above article).
I again said this when Sensex was @ 27,700 levels. Here –
Today’s 400 point move has reinforced my belief that markets are SUPER EXPENSIVE. So much so in fact that I see a clear case of going short on stocks. With that as backdrop, I shortlist 3 stocks which require your immediate attention if you believe in going short.
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So go short on the 3 stocks mentioned on this page** and hold on to your positions for a month.
Upside – 15-20%