How To Know If The Market is Overvalued or Undervalued? (The story KLSE Index VS Interest Rates - 1st Jan 2015)

Happy new 2015! Year 2014 is a tough year indeed. KLSE in red and most counters ended up RED for 2014. Before we start posting counters to watch for 2015, let’s us get back to basics. Familiarize with the reasons why we invest into stocks:

A lot of people do not know that FD or Interest Rates also have their own P/E and EPS. If you are good with the bank and able to get a good deal from them, most likely you will be given 4% of FD per annum. Using the ‘Rule of Thumb 72’ (capital gain/interests received reinvested):

Rule of Thumb 72/FD Rates 4% = 72/4
Interest Rates P/E = 18

How about KLSE P/E?

On 11 November 2014, we did mention that KLSE was trading at P/E 17++ and it was quite pricey and one of the highest at South East Asia. We are not comfortable to add position to our Virtual Portfolio. Why we said that?

If you put all your monies in the Bank you will receive 4% per annum (P/E 18) – PIDM guaranteed.
If you put your monies in KLSE (P/E 17++), you will be having EXTRA RISKS INVOLVED IN THE STOCKS MARKET VOLATALITY. Why are we still putting monies in KLSE? Logically speaking, if any investments that trading around P/E 17 and above, would not it be better off for us to put it in the bank? Indeed.

That is why most of the Analysts are putting their recommendations/buy call USING FUTURE P/E and FUTURE EPS and NOT CURRENT P/E and EPS or HISTORICAL P/E AND EPS. Rarely analysts use 5 years HISTORICAL P/E to FORECAST FUTURE P/E. In the near future, if the market direction changes, the analysts will keep revising the Target Price ups and downs.

AS A MINORITY INVESTOR, WHAT AM I GOING TO DO?

1. 2015 will be a choppy year – to study the last 5 years trend/historical performance of our targeted companies to be invested. Normally when it rains, it pours, those companies who are able to perform most likely able to sail through the storm and REPEAT THEIR SUCCESS STORIES.
2. To AVOID investing in companies those are selling at HIGH P/E and LOW EPS and not having a consistent return over the past few years.
3. Avoid the companies with LITTLE CASH ON HANDS.
4. DO NOT CHASE THE GORENG STOCKS, year 2014 window dressing is done. You have got your year-end KLSE ANG PAU (if any). Buying into penny stocks in 2015 with no strong fundamental value will increase your trading risks.
5. Selectively and slowly choose your stock – please do share with us some stocks that you think are good in FA so that we may explore it together.

P/S, as at 31/12/2014, KLSE P/E is 15.78 (bloomberg).
Till then Happy NEW YEAR!

Regards,
Humble Pie