Once again, Indian investors are in a manic-depressive mood.

They undergo bouts of wild joy when they see the stock market scale greater heights dragging up the value of their investments.

At the same time, they are sick with worry about whether they should stay invested, invest more or sell.

'Buy low, sell high', goes the oldest mantra of the markets.

Yet investors do their returns much damage by trying to 'Buy lowest, sell highest'. No matter how much you try, it isn't possible to time the markets with a reasonable degree of accuracy.

If you insist on waiting to realise all possible gains by selling at the very highest point, you are likely to miss it altogether.

• Are you a smart investor?

All bull runs come to an end

Every bull run brings out the chronic optimist in investors.

And every time that happens, it is accompanied by a complete set of reasons explaining why it is different this time.

In 1992-1993, we were told that liberalisation had fundamentally changed India, the markets were transitioning to a totally different level and the old rules no longer applied.

A couple of years later, when a spate of Initial Public Offerings hit the market, investors felt that the abolition of government controls had resulted in money flowing into the stock market on a new scale. This was bound to change the rules of the game forever.

In 1999, the tech boom convinced all that information technology and the Internet would forever change the rules of doing business and investing.

In 2004, we were being told that India's hour of global competitiveness has arrived and that henceforth, old assumptions and rules about the value of Indian business do not apply.

Today, once again we are told that the stock market will go on rising for a long time. Sure, it may pause a bit now and then, but surely won't fall.

On each one of these occasions (except 2004), there was eventually a painful reminder that the rules had not really changed and if the markets' rise, they would eventually fall.

Interestingly, none of the basic premises on which these bull runs were justified were really wrong. Liberalisation did transform the Indian economy, as did vigorous public participation in IPOs. The IT industry's crucial role in the Indian economy is unchallengeable, as is the new global confidence of Indian businesses and economy.

In each case, the problem lay not in the basic cause but in the euphoria generated by the it's-different-this-time propaganda.

• How to invest wisely

Where is the Sensex headed?

One question that most are obsessing over is whether the fundamentals justify the levels to which the Sensex has risen?

Clearly, the answer to such a question is expected to have a certain predictive value. If the markets' level is justifiable, then the bull run will be sustainable. If it is not justifiable, then it will not be sustainable.

Frankly, we do not believe in this line of thought.

Therefore, if we observe that the fundamentals justify current market levels, by no stretch of the imagination can that be construed as saying that the Sensex is going to go up to X,000 levels (for your choice of X) or even stay at the current 9,000 levels.

The stock market rises and falls for many reasons and fundamentals are only one of those. It is perfectly capable of dropping way below levels that are justified by fundamentals.

P/E ratios

In February 2000, when the tech-inspired bull-run was about to be stopped cold by the Ketan Parekh scam, the weighted average P/E ratio of the Sensex companies was around 26.

At the time, the Sensex was at 5,924 points.

In January 2004, when the Sensex reached its all-time high, its weighted average P/E was around 20. Now, the P/E is around 17.

Earnings Per Share = net profit/ number of shares
Price Earnings ratio = market price/ EPS

The PE ratio of the Sensex is around 17. This means if we add up the price of all the 30 Sensex companies and divide it by their EPS, the result would be 17.

Not all tech

In contrast to 2000, today's market is incredibly broad-based.

Then, it was the technology sector (fuelled partly by the dotcom hysteria) that was pulling the market upwards.

Today, there are happy stories across most industries including some very unlikely ones.

Most importantly, there is no longer any doubt about the global competitiveness of Indian companies.

The big picture

Escalating oil prices, the slow-motion collapse of the US Dollar, rising inflation and higher interest rates could dampen the party at Dalal Street [Get Quote].

• Investing mistakes you MUST avoid

It eventually depends on the stocks you hold

Of course, 'the fundamentals of the market' are a bit of a red herring.

Sure, we have seen averages of the valuations of the companies that make up the indices and they do paint a happy picture. But, eventually, these measures are mainly used to decorate newspaper articles, research papers and Power Point slides.

To you as an investor, even the index is of only marginal interest. What matters is how your individual stocks are performing. The average P/E of the Sensex is of very little comfort to someone who has a portfolio full of the HLL [Get Quote] stock.

If your stocks have appreciated greatly, sell them. If you've made reasonable gains, get out without agonising over unmade gains--you won't lose anything.

If you are convinced that the bull run is going to continue. Sell part of your stocks and keep selling gradually as the Sensex rises. But don't just sit and wait for the bull run to peak.

If you are convinced that it has peaked, then sell and invest your money elsewhere.