Nowadays, in the world of people with high hopes and
aspirations, people are willing to switch for anything/ ditch something for anything which can be better
as well as can generate higher returns.
At what price should you enter in the market? What can be the
lowest value of an asset? These are the questions which investors search day
‘At what value and how should the
asset should be priced?’
To introduce to the topic, let us first understand the basic
movement of price, which is through demand and supply forces prevailing in the
market. The demand for an asset increases its price and vice versa the supply
decreases its price.
In simple terms, asset pricing is the amount paid to acquire
an asset. This price is the value which is assigned by the market, fairly or
(Discount rate which is also
known as the risk free rate is derived from bond yields. We can compare this
with the PE ratio of nifty 50 and hence can calculate the price of assets.)
The best time to enter or to exit the market is when re-rating
and de-rating cycle starts. The concept is simple, the uptrend cycle of an
asset is known as re-rating and vice versa the downtrend cycle is known as de-rating.
The aim is to find the boom/ bust cycles and to take in &
out positions of under/overvalued assets.
People always look for butter opportunities and try to catch
the bottom and peak, which the game is all about. But is it so easy to find the
bottom loops and come out of the peak falls.
Returns and losses are always made in panic situations. The
fear and hype of asset’s price creates a panic situation where in an investor
may settle for any price of the asset and hence can go wrong in the decision
making/valuation. This unrest in people’s mind forces them to run on their
sentiments and hence take inapt positions in the markets which usher them
towards the losses.
The catch is to find the peaks and bottoms wherein the trend
of the asset’s price changes.
(In the asset pricing model, discounted rates are used which
is the risk free rates derived from 10 year government bond yields and hence it
is used to determine the price of the asset, in the situation to either take
buy or sell position for any given asset.)
–bond-equity earning yield ratio — bond yield/earnings yield
Peek <-> bottom EXPLAIN WITH GRAPH
(1.4-1.5) – Good point to enter
(1.8-2.0) – Good point to exit