Nifty PE crosses 24|A statistically informed entry-exit model!

Friendly advise from a friendly bear :bear:

This current market and itā€™s PE ratios are NOT sustainable.

Except for your family jewels and highest convictions, get out of your potential multi-baggers. SOON.

Please spend this weekend differentiating between the multi-baggers and family jewels.

Dashed dreams of a multibagger are not as painful as a dashed portfolio.

There is no market depth. The only buyers are MFā€™s who are propping up the market.

Whoever wants to discuss or curse me for my thinking this weekend bring it on to the forum. Letā€™s discuss. If it helps even one save their portfolio even the bricks will be worth it.

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Advice well takenā€¦I am reviewing my portfolioā€¦It will be goodā€¦if you donā€™t mind please disclose your cash level(not essential for a discussion though!). I am fully invested at the moment.

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This is why it is very important to invest in quality stocks and with a MOS. This is my only learning. Market is ahead of time , no doubt. Reduce exposure to Mid & Small caps.

Challenge is - I have seen, if you sell quality stocks which you bought at distress times, they never come back to that level

It is true, economy is not in a good shape. This Loan Waiever stuff has further weakened the whole system. Please listen to Q1 concall of HDFC bank. No other bank will give you actual picture. Private Capex is Zero. What they are doing is working capital financing.

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My two bits I would rather concentrate on stock specifics rather than the broad market.
I did not buy post demonitization nor in Feb 2016, when it made a small bottom.

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As discussed adequately by other members I have a different view.

Market vals are at lifetime high and will not go up any further. But we canā€™t rule out earnings improvement and hence lowering of vals. We should see the market as a whole - so basically all sectors.

Consumer discretionary, FMCG, Healthcare and other consumer related sectors are at high vals. This is a typical trend before Bull run in other beaten sectors. So what I predict will happen in the next 2-3 years is all blue chips and overvalued stocks will remain flat or correct to align with earnings. However we have a few sectors like - metals and commodities, auto, power and other infra and even real estate / telecomā€¦

These sectors are at lifetime low valuations. And we must remember these were all bellwether some years back. So IMO, market crashes when bad news comes and when all sectors are priced for high growth. This is not the case now.

So, I still go with the fact that we need to buy quality plays with MOS but in sectors that we are not used to. Following is my portfolio for now:

  1. JP Associates - 16%
  2. Rain industries - 11%
  3. Pokarna - 11%
  4. RECL - 11%
  5. Cash - 50%

I recently exit all my consumer stocks with modest gains and invested in the above.

My investment rationale is as follows:
JP Associates
The company is genuinely repaying debt and after recent asset sales, I expect company to delever to comfortable levels. Based on earnings potential I see PAT of 1k Cr approx, which implies a current PE of 7x

Rain Comodities:
I am betting on this to play a commodity revival. After China supply cuts, the company stands to gain. The stock is trading at 10x TTM. Peers are trading at a much higher premium though they are stable players with lower debt.

RECL and Pokarna - VP threads. RECL for its dead cheap valuation and dividend yield and is a perfect power play. Any revival in discoms is likely to catapult the stock.

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@sivaprakasamp I broadly concur with your assessment. Although I do feel that healthcare will again serve as a defensive play when ever the correction comes. I would appreciate if you could spell out the reasons for your purchase of Pokarna especially as market is expecting poor growth and its moat is being questioned. Would like to know your purchase price and expected target? Thanks

@sajijohn
No I donā€™t mind. I am currently allocated as below:

5.5% - Long Term Stock Blue Chip FMCG (20-30 year window); Looking to increase in case opportunities present themselves. This is a new blue chip addition in my portfolio so it is not yet a substantial investment to move it to my family jewels portfolio. Will build it up and move it out of the action portfolio where I monitor prices. For the family jewels, we donā€™t even look at the annual reports and check stock prices once in 3-4 years.

3.5% - Long Term Stock Solid PSU with great dividends (5-15 Year Window) - Looking to increase in case opportunities present themselves.

27% - Small Cap special situation - Till the mis-pricing is available. When it is well priced I may exit.

Over 60% + Cash Position (With a 6% interest income awaiting deployment when the risk reward is in my favour)

@nil_71 You are very right. Even after lot of thinking in my fam we were unable to come to a conclusion to even trim our overvalued jewels. It has been a no go area and even armed with charts and PE multiples I was not able to convince anyone in my family to agree with me. But in fact, they made me agree with them on not timing quality holdings and as I was explained; if it was 20% lower would you have advised selling. I said no. Then they said, ok think it is 20% lower, now go away :slight_smile: So I went away understanding why they donā€™t sell because have been bought much lower and many a times at times of market distress and the prices will not go back there so why trade.

That seems like the only plan right now.

Siva, the only issue is earnings have not been rising broadly speaking. Only the multiples have been expanding in the hope of earnings growth. Letā€™s all keep our fingers crossed. That says something about valuations when we need to cross our fingers :slight_smile:

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I am currently 60:40 in equity and debt respectively. ( Has always been like this).
Within debt, more than 70% is in FD (the remaining in , debt mutual funds, forced PF etc)ā€¦ Paying huge tax on FD every year really hurts. So I am thinking of converting FD into a mix of liquid debt fund and ultra short debt fund. Although these are meant for short term, i will treat as long term because if we hold for > 3 year, then effectively no tax. Does this look like a good strategy?
If not, can someone suggest some debt instrument for 6.5-7% post tax returns?. ( Other than PPF, PF, NSC). I want to know how other people in this forum are investing in debt.

Look for shorter duration bond funds. You could increase the return by going direct, not through any brokerage.

Thanks Sajijohn. On Pokarna, I am betting on IKEA setting up shop in India. The company has increased quartz stone capacity by 130%. IKEA is known to aggressively compete wherever they go hence I believe they will set up a sustainable model here and Pokarna is their exclusive partner for Quartz. Further their current Quartz plant is running at full capacity and in the worst case this new capacity can be used for exports too. Quartz biz is very high ROCE thus far and I expect company to repay debt in a few years of operations. I am expecting the stock to reach 10x PE in the long term and considering new Capex, I see the stock doubling if all goes well.

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Agree. . Broader market earnings grown may not happen. But company specific turnaround is happening. As an example, JP is back in black in the June Q:

Thanks @sivaprakasamp

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This is what I tried to explain even at our fam meeting. The CBOE VIX / India VIX is something I too understand quite very well as well, and that is my secondary indicator in an overheated situation. Agree 100% that it is going to explain itself sometime soon. Both (overvaluation + VIX) must converge and when they do, we should become mostly cash and they were my triggers to start taking action. But, world wars have happened and things (maybe in 5-8 years) have come back as well, so fam jewels are a no go unfortunately.

I did try to get them to trim but not approved :slight_smile: And I sorta agree with them. The dividend on some is equal to the actual investment now, so why play around trading them.

I can literally feel the black swan coming, and thus mostly cash. Not able to fully exit with what I like, and there is no way to go 100% cash because then it is exiting not just the markets but a way of life. What is at risk is just profits of last year and mostly all investments are out, at-least as far as the action portfolio is concerned.

You have a good allocation to cash, so you can take some plays as well. In fact should. Which ones, of course we all decide individually.

Hi Gautham, as I have never used them, no idea, but I do hope someone here who understands it answers.

ā€“

In this last decade, many have gotten so used to liquidity that it is very difficult for them to understand the lack of liquidity. When it disappears, selling even well known names becomes difficult and the lesser known names have million shares for sale with buy orders for 5000 shares.

When that lesson is learnt, then it is understood that why not to participate in a liquidity driven rally. Until then, rarely.

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Beauty of ā€œthe black swamā€ is, if you can feel it coming then it is either not coming or it is not the black swan!

A black swan event will occur when no one is expecting it!

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You are not clear about it in theory and concept. And I would not want to begin a long one here but will leave you with just one example.

You are going to die. Itā€™s a black swan and you know itā€™s coming. Just not when.

Similarly, I cannot say when; but I can sure feel that donā€™t invest in tulips anymore. There is no need to participate in the mania.

That simply requires common sense.

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A black swan is an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict; the term was popularized by Nassim Nicholas Taleb, a finance professor, writer and former Wall Street trader. Black swan events are typically random and are unexpected. This is from investipedia.

I think as investors we invest money in the market thinking of normal scenarios and not of a very unthinkable or very low probability event. Even though I agree with valuations being expensive and we need to have some cash in the portfolios. But itā€™s even more important for us to not get sucked into bad stocks at the peak of the market. Again I donā€™t know where is the peak is but itā€™s good to have quality stocks at expensive valuations than have bad stocks at cheap valuations.

Its very important that we remember ā€˜Mr. Marketā€™ is above all and is always right. Itā€™s possible that we are right about market being expensive but can miss big rally in the market by being cautious.

John Maynard Keynes: The market can remain irrational longer than you can remain solvent.

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Well said. So tulips may have changed in price from valuations of bulbs to mania prices. Just because I donā€™t participate does not mean their prices will not keep rising. Itā€™s possible. But would I want to participate? No.
We usually donā€™t go insolvent with cash. It is more possible for that to happen with buying tulips :tulip:
One day they do revert to mean, then all I need to do is not get carried away. Same for anyone else.

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If I am going to die because I already have 3rd degree cancer than it is not a black swan event.

Here:

Death == Correction
Cancer == Over-valuation

Your analogy did not cover the ā€œover-valuationā€ bit it just talked about ā€œcorrectionā€.

While making market prediction, being too far ahead of the time is equivalent to being wrong (Howard Marks). For example if I say ā€œMarket is over valued; correction is comingā€ and keep saying it for 2 years and then a correction does come ā€” it does not make me a soothsayer!

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I am sorry if you felt that I was trying to prove you wrong. That was not my intention at all. I was trying to put my understanding in words to clarify my own thought.

Ok Bhai. Well hereā€™s the core difference in opinion. I am not here to make money. I am here to not lose money. If after that I make money, that is an acceptable scenario. So the strategies I will employ will be different to someone elseā€™s.

I donā€™t see waiting 2 years to deploy cash as a long wait. In fact it is a very comfortable and easy wait for me. Just like after investing, we must be able to let the story play out. Maybe someone else thinks itā€™s a long time to wait in either scenario. Who am I to argue with them. I also donā€™t see the money I did not make as a loss.

I do take small punts and gambles with stocks. They are for entertainment. Those I will continue to do whether PE of nifty is 5 or 25. But they will be gambles and I will be aware of why I am doing it. Some days, I am bored so I will play with a momentum stock and stuff like thatā€¦ but they donā€™t become investments.

Investing must only be done, according to me (not necessarily right) only when everything has a high probability of success. The current time is not one with such probability with a very few exceptions. The chance of a black swan is more.

There is a good link that was posted above, about why no one is to blame for either over heated or drawdowns; because every player has a different agenda; my horizon might be 2-5 years, someone elseā€™s horizon might be 3 months and a third one may be playing a day trade on margin in the same stock. So, no one is more right that another.

I just put my views on this forum so if someone has a nagging doubt they will listen to their doubt after reading some notes on caution. But everyone will still make their own decision. No one is right or wrong.