Long-haul investors play a heroic supporting role in the stock market

Subscribe to enjoy similar stories. A stock market ‘correction’ implies a sobering up of investors after a heady uprun in prices that overshot its rational limits. The slump in Indian indices over the past five months, a long slide unseen since 1996, has not been as deep as what we saw after crashes triggered by the West’s financial crisis of 2008 and the global outbreak of covid in 2020.

As reported by Mint, the latter were far worse. Both those scary episodes saw the NSE Nifty-50 index fall so much that more than double the investor wealth was wiped out—as a fraction of the total—than in the five months from October to February. And while those price slides left investors edgy, both eventually turned out to be perfect points of market entry.

A long view, thus, would urge people to stay invested. However, since we face other kinds of headwinds now and mustn’t simply extrapolate the past to the future, whether the market has ‘sobered up’ requires us to check if prices that went too high are reasonable again. As companies and their prospects differ, what their shares are worth is a matter of subjective evaluation.

Standard financial yardsticks, though, can still be used for comparisons. A handy way to judge a price is to divide it by annual earnings-per-share. This is its price-earnings (PE) ratio—or what a share costs for every rupee the company earns.

The lower it is, the cheaper. But there is no rule on what ratio makes a good buy. The share price of a startup with no earnings, for example, would not even have a ratio, but its price could still be justified by the future profits it’s expected to rake in.