Market corrections can be blessing in disguise for value investors

Valuation is commonly measured using financial ratios such as the Price-to-Earnings (P/E) or Price-to-Book (P/B) ratios. Let's focus on the P/E ratio for instance. This ratio increases when a stock's price rises faster than its earnings during the same period. If the price significantly outpaces the company's earnings potential, the stock is considered overvalued or sometimes “extremely overvalued” too.

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There's a well-known Hindi adage: «Aukad se zyada aur samay se pehle kuch nahi milta,» meaning «Nothing comes before its time or beyond one's capacity.“ and even if it happens, it doesn’t last long. In market terms, when prices exceed their fair valuation, a correction is inevitable.

Fall and Recovery Analysis of Nifty 50

Fall

Recovery


Correction


Date

Correction Period


Nifty 50


P/E

Price

Valuation

(PE)

Recovered on

Time to recover

Return on

Recovery



Correction

Correction

1

14-Oct-99

1

Months

1505

23.5

-16%

-16%

03-Jan-00

2

Months

113%

01-Nov-99

1270

19.8

2

11-Feb-00

20

Months

1756

28.5

-51%

-57%

18-Dec-03

27

Months

37%

21-Sep-01

854

12.3

3

14-Jan-04

4

Months

1982

21.9

-30%

-41%

02-Dec-04

7

Months

41%

17-May-04

1389

12.9

4

10-May-06

1

Months

3754

21.3

-30%

-30%

30-Oct-06

5

Months

156%

14-Jun-06

2633

14.9

5

07-Feb-07

1

Months

4224

20.3

-15%

-15%

21-May-07

3

Months

36%

05-Mar-07

3577

17.2

6

08-Jan-08

10

Months

6288

28.3

-60%

-62%

05-Nov-10

25

Months

29%

27-Oct-08

2524

10.7

7

05-Nov-10

14

Months

6312
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