How to Invest When the Market is Overvalued - Peter Lynch Interview | Stock Market | Viral Reacts - YouTube

Friends if we speak about nifty, it is at its lifetime high, a question pops up that when the market is soo high what to do.

and another statement you might have heard about me talking about stocks touching their 52-week high

to remove this confusion I saw a video of Peter Lynch in which he was asked the same question that how should an investor react when markets go at an all-time high

For which we thought of introducing a new format in which we will bring world-famous investors to put forward their perspective

and how does it impact you and from which you can learn a lot as an investor.

Friends the title of these videos will be Viral reacts because we will bring the viral videos of famous fund managers and investors

and in today's viral react we bring you clippings of Peter Lynch which I will be explaining

that how is it important for you and how does it work for you as an investor.

I, Jagdeep Singh welcome you to the Groww youtube channel, if you haven't subscribed please do so that you don't miss out on important videos

Peter Lynch has been considered one of the best fund managers of his time. Times magazine recognized him as the best money manager in 1980

Peter Lynch used to run a fun by Fidelity and from 1977 to 1990 the fund gave a return of 2700% to its investors

which shows us that such a marvelous fund manager he was who gave such good returns to its investors.

Around that time only he gave an interview in which he was asked the same question that what should one do when markets go high

So let's quickly see the first part of the interview.

I am pleased to have Peter Lynch talk about a remarkable record volume on wall street and other things

smart of me to schedule it on a day like this, 3 months ago I was asked when to Peter Lynch on and I said let's bring him this Tuesday

Well we had a huge run in the market it was just 4000 two and a half years ago and it touched 8300 in August

and like any other rally, it backs off, and it's healthy It rather goes down by 1000 points than to go to 12000, I mean look at Japan

It went from 5000 to 15000 on their DOW and it was fairly priced with earnings and everything else and then it went to 40000

and that caused 7 years of inflated real estate, people were overspending basically they were in a recession for 5 to 6 years because the markets went too high

If the markets go too high that is discounted earnings of 7 to 8 years

The market since we were 2 has sold 10 times earnings and 20 times earnings, if you see dow jones, S&P

out of all companies you take the earnings and there is a relationship that follows, Mcdonalds has been doing great for the past 30 years and its stock too

so the earnings of S&P500 has always been between 10 and 20, we were just about to go above 20 which is the high end of PE

We have only been a few times over 20 and usually, inflation has been 0, and in early 60's the inflation was about 0

we were a little above 20, if you subtract inflation from 20 you get PE of the market

that is a pretty good ratio, when the inflation was 12% the PE was around 8 or 9 in the early '80s

I had never thought that I would have ever wished for the market to go up dramatically, let's say it goes to 16000 tomorrow

basically, there are earnings behind companies

Stock market prices are ought to be dictated by earnings and future potential earnings

So in this part, Peter Lynch explains that whenever there is a bull run in the market it should be backed by corporate earnings

Assume that a company has announced a good quarterly result and they have raised their profits and revenue

meaning the company has performed well fundamentally due to which the share price of the company is going up

So here Peter Lynch is emphasizing that the bull run is backed by corporate earnings and if that doesn't happen

meaning the company didn't do well fundamentally or if we look at the broader indices and most company's didn't perform well

and still, the company's shares are going up, it is not a good signal

Peter Lynch here takes the example of Japan's Nikkei and says when it went from 5 to 15000 point it was purely backed by fundamentals

meaning the companies were performing well, their results were good, their price to earning was good due to which the index went up

but when the index went from 15000 to 40000 points, he says that it wasn't backed by corporate earnings

meaning that the business didn't grow much till the level the index went whose aftermath was a huge crash in the index

due to which their economy also stagnated.

Here Peter Lynch clearly states the index's PE. When the PE of the index is between 10 and 20 means that the index is not overvalued

meaning that there is no bubble but he also emphasized that you have to adjust the PE ratio with inflation

Now assume that a country's inflation is very high due to which their PE would also be high, here you should specifically see that is the inflation adjusted or not

and PE being between 10 and 20 is not being in a bubble

Let's now understand India's scenario, if we speak about the past 20 year PE ratio of nifty after adjusting for inflation has been between 10 and 25

but if I talk about it now, nifty is trading above 14000 and currently, its PE ratio is 35 above after adjusting inflation

So if we compare this number to the number stated by Peter Lynch, we can say that this rally is not backed by corporate earnings

because compared to that number this number is very high

Now let's go to the second part and try understanding that between so many companies how to choose a good company

I would say fairly priced, larger companies are okay, we have had 3000 companies go public in the last 4 years that's 2 companies a business day

some of the companies have gone down dramatically and that's a lot of research that goes down

Some people know a lot about it, there are 10000 public companies and a lot of them are very attractive and no one has followed

I like to see companies who come into unions or go into trouble

But you have to look it how you want it, you cant go to the mall and find a stock say that it sounds good but then you have to do some steps

you have to do an organized method, people are careful when they buy a toaster

they do research but they don't do it for stocks, they discuss it as man I have a hot stock and invest 5000$, small investors

It's like a casino, you get the same result but with more paperwork

that you know something about, you have to have an edge, let's say the industry goes from crummy to semi-crummy to fairly good, the stocks are going north

you gotta make money and you know the published industry, you gotta have an edge, the last 30 years you worked as a restauranter

you have seen taco bell, you have seen pizza hut, you have seen chilli's they have done well

you should have bought those and not of biotechnology which you don't know anything of

I mean I know about local area networking, a lot of people are buying Cisco, they are buying the equipment saying we are going put them together and route

Only a few people know about it, we will try then more people will try then higher schools will try then overseas

they knew they were early in the ball game and they should have been buying that company instead of something they didn't even know about

Charlie all you need is a few good stocks

People wake up the morning, there are 5000 companies which one should I buy only 4 or 5 people follow because they understand them

Let's try understanding this video in the context of India and I'll try to explain it in a simple language.

Assume BSE has 5000 trading companies and out of those Sensex is made and Nifty50 is made.

Nifty 50 has top 50 performing companies and Sensex has the top 30 companies

Now if I speak about those 30 or 50 companies, there are many analysts following the business changes

they publish their research reports or you are able to see them through television or newspapers

meaning even if you do your research you might not get a strategic advantage.

Here Peter Lynch says that before investing in a stock you should do a lot of research so that you have an edge over the market

now how to do that, he says that you should invest only in those stocks or sectors in which you have a circle of competence

circle of competence tells you, assume that I come from the banking industry and I know it works

I can do better research as I know the business and its strategic initiatives as compared to other sectors

Here Peter Lynch says that you should invest in those businesses which you understand because you will be able to research better

and when you research better you will be able to take a strategic advantage over the industry soo that you can make good long term returns

So it's not important to buy all stocks, you should invest only in those whose business you understand

where your circle of competence lies so that you can understand their news, initiatives and discuss them so that you can take a long term decision

Next comes the most important question, that now you have done all the research and have chosen a company

where you are thinking of investing and now want to know that at which price and at what time you should buy its stock.

Let's try listening to the next clip to understand it

One thing you do is here are the companies I really like the fundamentals are doing well, the earnings are doing good, the competitors are doing poorly

and I think the stock is doing well and all of a sudden the stock goes from 40 to 30 because of a decline and you say here's a good chance to buy

so you might say that some companies were overpriced at 60 and did well at 50 and say not a big deal

soo you try to find companies that you liked anyway, right now you liked them and then they had a haircut

not about underpriced or overpriced, they are fairly priced at the starting and then had a 5 for 4 sale

I would have been researching like crazy and see for those who would do good even when there is a recession and that's the kind I would try and buy

You say that this will earn something in the future, you have to find out that if I am right how much am I going to make

If I am right I am going tp make double triple but if I am wrong I am going to loose 30 or 40%, that is the favour ratio if you say it's going to go up, it's already discounting a lot

So in this clip, Peter Lynch says that you have selected a company and know that the future growth aspects are very good

After this, you need to see the valuation that what is the price of the company, and price here means the price of the company to its earnings

according to growth prospects, business expansion how much premium valuation are you giving for the company.

now you need to pay attention that you may have chosen a goo company but there can be a possibility that you are already paying that price

Soo the risk can be seen that you are already paying for the good but if anything bad happens the price could fall very fast and low

So while choosing a good company you should keep its valuation in mind that how much are you paying for the stock price

because this will be the deciding factor that the stock price would go up or down

It is important to buy a good business but to buy it at the right price is even more important.

That is why Peter Lynch says that the business of the company is important but at what price of the company you are buying is also important

So invest after looking at the company and its valuation.

So let's go to the next clip containing the most interesting question which you guys also ask and was asked to Peter Lynch too

which was that will the market crash in the short term, let's find out

So Peter Lynch also stated that will the stock market crash in the short term, no one can tell

you can speculate but cannot predict

If we talk about India, it will grow in the long term but there can be a possibility that some big companies vanish and some small ones become big

His major objective of saying this was that to speculate anything in the short term can be risky for you because it can never be accurate

and invest in quality stocks with a view of long term gains and don't worry about the short term

So this was our video on Peter Lynch where we reacted to his viral comments and how does it make sense in the context of India

Comment and tell us that should we bring videos of veteran investors so that you can learn from them

and you can give your suggestions on which you want to see viral reacts