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Will the Sensex ever catch up with earnings?

If you keep waiting for the correction to happen, you might wait forever. So, form some rules as to when you will invest and follow the same rigorously, says Dhirendra Kumar

When Covid cases were about 500, the Sensex was at 26,000 and when cases shot up to 12 lakh, the Sensex was almost 38,000. Will Sensex ever catch up with the earnings or fundamentals? Should a value investor continue to invest or is it more prudent to wait?
- Gigi Sunil Jacob

I really don't have an answer to this question. A few days ago, the SEBI Chairman also said that he was perplexed on seeing the number of retail investors participating in the market today. Even the RBI Governor talked about the complete disconnect between economic outlook and market behaviour. So, I believe, everyone in the market is clueless about the current scenario and why there is such an anomaly between economic conditions and market behaviour. It is very difficult to guess when the markets would see a correction or would there be any correction at all or not.

Coming to your question, I think you need to form some rules for yourself and follow them. If you actually keep waiting for the correction to happen, you may wait forever. So, my advice would be to form some rules as to when you will invest and follow the same rigorously. Remind yourself of these rules daily. For instance, let us assume that you have Rs 1 lakh to invest. Now form a rule that if the market reaches a particular level, you will invest Rs 25,000. Then, when the market reaches this particular level, you will invest another Rs 25,000 and so on. If you don't formulate these rules, you'll keep waiting forever. Also, forming rules for yourself is important, as it helps keep your anxiety in check because if the market corrects, then we get fearful that it will fall further and if it goes up, then we have the regret that we could not participate in the market.

Make sure that you are not likely to need the money for the next five-seven years, as that is a time frame when your investments will rectify. I don't think economic fundamentals will catch up very dramatically with the market levels. While there will be exceptions, few companies will be outliers but a good part of the economy will be a long drag from here on. So, formulate your rules based on the valuation of stocks and market levels and act accordingly.