Where is the stock market headed?

So if you follow markets with a dream in your eyes, are your dreams going to come true in near future? Are markets really headed for the heights it achieved before this crash?

Well if you listen to all the stock advisers and the panel analysts then you will gather that by July 2010, markets will breach 25,000. :-)

But looking at the present earning rate of companies and their income statements, you can realize that most of the companies whose stock is trading at all time high are not really delivering on terra firma. Their profits are down, revenues have taken a hit and there is no real growth expected in the next 2-3 quarters. Then how come the stocks are at an all time high? P/E ratios have crossed 1000 mark for a few stocks. 1000, a P/E ratio of 1000 means that if the share of the company is available at 1000 bucks, it earns a profit of just 1. Normally a P/E between 5-20 is considered ok depending on the industry and the growth rate of business but 1000 P/E means you can go short on these companies with your eyes closed and your monitors on. Sooner or later, these companies are going to lose momentum and fall back sharply. Nothing and i repeat nothing can support such high P/E levels.

Beware of the stock tips that you recieve from your relatives, friends and TV analysts. Either the person providing the advice is not smart enough to understand the dynamics of market and is acting on tips himself or he has a hidden agenda involved.

Take a back seat, enquire about the fundamentals of the company, study the business model and then invest your hard earned money.

ROI under scanner

Now lets assume that you have somehow reached a consensus and have finalized your business metric. Good now start tracking it. But as soon as you start getting the data, you realize that you are getting traffic from different sources. The money spent on each of the source is different and the tracked metric has a different value. In other words, each source has a different ROI.

The next buzzword is "optimization". You want to optimize the money spent on advertising and increase your ROI. For this you need to stop going to some sources and promote other sources till they saturate, but the problem is to know where to draw the line. What is the ROI, below which you don't want to advertise and above which you want to promote?

It is a general practice to use average as the beacon below which you press the panic button. Several businesses use average as the sacred no. below which to demote and above which to promote. But is average really a good number? Let me use an adage, I heard from a statistics professor of mine - "Average is a bad thing, remember the guy who drowned in a river that on average was only 4 feet deep."

The point is that average can be skewed BIG TIME due to outliers. Lets take an example. If you are riding a bus with commoners, the average of the bus passengers could be a few thousand Rs. a month but if at the next stop, the Ambani Duo board the bus for some unexplained reason, the average salary of the bus passengers can go through the roof. This is because the 2 newcomers earn more than few crores every month. These passengers are considered outliers and they skew the averages from 1000's to 100000's.

A better option is to keep an eye on the median, mode and average before deciding where to draw the line. You can also use frequency table in case you are stats savvy and that will give you a much better perspective.

Marketing Mirage

Marketing is a very interesting domain. You know, you hardly ever get the credit for what you achieve but you get loads of s*** when things go wrong even without your help. ;-)

Presently my main focus is online marketing and I am glad that it offers quick analysis of achievement or performance improvement. But with experience and after several discussions, I have come to realize that the metric on which efficacy of online advertising should measured is elusive and always under argument.

Lets see, if we have a site that sells sports equipment, should the online adv. be measured on the traffic coming to the site or on leads generated through online adv. or on the online sales through traffic source. This is a case where you can atleast target a particular segment and maybe show your ads to relevant clients.

First, suppose I choose traffic to the site as the metric, then problem could be that the SEM manager starts driving irrelevant traffic to the site and the overall sales remain stagnant but the cost of marketing goes up. ---> ROI moves down, so not a good metric.
* traffic to site could be a good metric for SEO campaigns but not SEM campaigns

Now lets select leads generated as the metric. This means that no. of forms filled on site through online traffic is the new metric. This metric could be a good metric if your conversion rate of leads is stable and not very random. But this requires cooperation from marketing, design and tech teams as various forms in different colors, formats, position and length have to be tried on before settling for the best.
---> ROI might move up inc ase of stable conv. rate, could be good metric.

Now consider the online sales as the metric. This is the best metric business wise, but could be difficult to target. You need to bring in people who will buy from your store. How do you target them? You can use SEM account to get you focused traffic but the intention to buy is not conveyed in the searches. This only gives a vague parameter on which to improve performance.
---> could be a great metric, but difficult to employ and optimize.