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

Stock markets are driven by economic growth. World economy is a complex machine with numerous parts interconnected with different gearing ratios.

Both Bull and Bear camp have valid arguments (and BS).

Bulls: (20% CAGR for the next 10 years)

  1. Earning cycle bottoming
  2. "Modi"fication of Indian economy.

Bears: (30% to 50% correction in 2 years)

  1. High valuation
  2. Deflation / Unemployment / Graying western world / China.

Many fail to think about a possibility of market drifting in the current
range (+/- 20%) for the next 5 years.

Wonder, if anyone here believes in the third possibility?
If yes, interested in hearing your views.

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I would add a few words to revise it.
The main point that I was trying to make is, that investors doing SIPs don’t need to worry about the market highs and lows provided that they are ok with returns ~ nominal growth rate of GDP.

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On a closer look, your third option, consolidation, is a subset of your second option, the bear view.

To give an example, suppose I invest in a specific share at Rs 100 and it goes immediately into consolidation for 5 years in a range of 80-120 for five years. So if it stays at Rs 80, my nominal loss would be Rs 20, but my real loss would be far more, because I need to take in account the cost of money also. Suppose risk free sovereign debt products give an interest of 8%, my Rs 100 after 5 years would become Rs 147 and hence, my loss of capital would be Rs 67.

Similarly, even if rises 20% in the consolidation phase, I would still lose Rs 27.

That’s why in some other post, a Valuepickr Top Contributor has aptly said time corrections are more dangerous than value corrections because we lose track of realizing how much we are losing.

Hope I am clear enough.

I personally has a very much similar opinion. If one is holding onto fundamentally strong script and is ready to remain invested for long (5-10 years) then even 2008 like crash wouldn’t have much impact on your portfolio. However it is completely different thing to say and do as when there is a panic out there you need real guts to stand in there without selling.

I would quote my personal experience from 2008 crash - prior to the crash I had bought some Tata Motors at approx 130 (split adjusted). After the crash stock went down to 35. I got into panic and sold out (can’t even imagine what I was thinking that day :slight_smile: ! ) and Tata Motors recovered to 250 just after 2 years.

Of course this strictly only makes sense when you are holding fundamentally strong and sound companies and you have enough conviction that they can sail through thick and thin.

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I agree with you,at these valuations it’s more psychology than fundamentals I believe and anchoring to past experiences tend to happen. Last bull run up was quick and the correction was also severe… This too the bull run has been slow and have to watch if the correction happens, how it will be.

The returns mentioned in various scenarios look like “nominal growth rate of GDP” because they are the based on NIFTY.

From what I have seen not many people invest ONLY in NIFTY.

I have posted returns from HDFC Bank in a different comment in this thread. If you observe they are far better than the nominal GDP growth.

Scenario 1: 20.45%
Scenario 2: 34.64%
Scenario 3: 25.14%
Scenario 4: 26.70%

I also have number for various other well managed large caps that tell a similar story.

One issue to ponder over when investing in a mutual fund whether through a SIP or any other route is that people tend to increase their investments when the fund is doing well and withdraw from it when it is not. So the funds reported results are always better than the actual results experienced by investors and in a majority of cases they are significantly better creating an optical illusion that one can do better by investing in a mutual fund.

This is true for all managed funds which provide for an exit option and it is also true for the index. The index may have given say 15% over time but in reality the individual investor would have increased his investments during a bull market and withdrawn during a bear market - so the net return to him would be much much lower.

In my view , what an individual investor should aspire for - is to increase his purchasing power i.e the investments should allow him to beat inflation by a wide margin over a period of time.

The main benchmark should be the inflation rate.

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Just created a new thread with fib time zones and charts. This is my view for long term

Hi,
I am in the camp for +/- 10% side ways market for next 2 odd years.
Just created a new thread.

One problem with SIP is that when showing long term returns, they tend to chose time frames that are extremely convenient to them. I have never seen any MF showing returns for a period, say, Jan 2008 to December 2013. They show returns generally from a time period when market is low to a time period when market is high.

Secondly, MF managers, in general suffer from herd mentality. Suppose a fund manager buys little known company and the stock tanks, it would be considered the fund manager’s fault. However if he buys TCS or any other well discovered companies and the stock tanks, it would be considered TCS’s fault not the fund managers fault. So for his own future and career, the fund manager would be rewarded by playing safe.

Thirdly, the inflow and outflow of MFs depend on the whims and fancies of the investor community. Sometimes when the market is right, the fund manager can not invest because of redemption pressure. Other times, he has to buy even at overvalued markets due to large inflow.

Lastly, expense ratio, especially for regular schemes, is quite high.

Disc. Invested in one SIP (regular not direct), stopped contributing around June 2017, not liquidated yet. Rest MF investments are lump sum investments in direct mode at opportune intervals.

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@Chandragupta
That’s a very true observation about creating an upward bias in the index.

On inclusion in Nifty, its not correct that all parameters are technical in nature. Nifty 500 is top 500 companies based on market capitalization. Nifty 100 is top 100 out of this list of 500. Nifty 50 is based on free float, impact cost etc - the technical factors as you put it. But note that even constituents of Nifty 50 are part of top 100 capitalization to begin with!

@valuestudent : Let me try and post the Nifty 50 index in 2007 and 2017; the difference in constituents will illustrate the point better that P/B and P/E then and now are structurally different.

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Dear Sir. Thank you. Would highly appreciate the opinion.

Sir, have you seen the latest indicator from CNBC :stuck_out_tongue:

Here’s the pic and for anyone who might suspect it is a photoshopped image, here is the link to the video:

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I agree with you on this. My comment was specific to your example of NIFTY. SIP will mimic the long term return on whichever asset they are made.

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Interesting data to ponder. Can be taken as both bullish and bearish as per your inclination.

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My attempt to answer the question: “How was the current result season?”

Short Answer:
Just above average, with 56% of the companies (from the list I track, 250 out of 690 have reported Q2 earnings) showing positive results and 44% of them have showed not so great results.

Long Answer:
During a result season this is the most commonly asked questions. There are multiple ways to answer it.

  • Listen to the experts on TV/print media. They seem to know how the result season has been
  • Check the EPS of NIFTY, Mid-Cap and Small-Cap Index and see if the earnings have grown
  • Individually go thru the list of companies that you are holding / watching / tracking and see how the result season has been

My short answer to this question is based on the 3rd point. I have been tracking 690 companies. Out of 690 companies, 250 have come out with their Q2 results. Of that 250 companies, 140 companies (56%) have seen a mild to vast improvement in their results while 110 companies (44%) have seen a mild to vast deterioration in their results.

I would love to hear your answer to this question that is asked the most during the result season!

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So far 393 companies have declared results. Sales have improved by 11.1% & Gross by 6.8% & Net Profit by 4.03%.

Source : etintelligence.com

In my view, given the current results and market euphoria the market is perceiving longer runaway periods for companies. Though unsubstantiated , my theory is every time the index goes up by 20%, the runaway period increases by 5 years - increasing the PE. Currently, the market expectation of the runaway period is 15 years. The bull run shows no signs of abatement & we must respect it but have a sense of an expected PE under the current circumstances. My own sense is a PE of 30-32 is on the cards given a runaway period of 20 yrs & a 10 yr govt yield of 6.879%. Any cuts to the interest rates going forward will add fuel to the fire.

Reasonable runaway periods in a rational market is 10 years , 5 or less in a pessimistic market, 15 in an optimtistic market & 15+ in a ebullient one approaching 20 & possibly more.

These are my views and if the market moves up by another 20%, a PE of 32 looks to be a reality.
Best
Bheeshma

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If these are monthly returns, then 2017 may become the first year in the last 30 to be one with no monthly negative returns.

And this covering 23 DMs and 24 EMs would mean a secular uptick in business/investor sentiment globally.

Some mean feat, lifting all boats together.

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I would agree with this quote. I am more or less into same situation.
I also go by stock to stock basis with valuations of individual stocks. I keep a broad eye on NIFTY levels to decide and fine tune my MF buy decisions. I prefer to keep some cash and ideally higher cash %, but it may not be always possible if there are some Value Stocks available (like IT, Pharma in 2017).
Also, good quality long term stories like TVS SriChakra and some more are available at decent valuations even though NIFTY is at P/E of 25 or more.

I think, one should have their own process and stick to that, and let that generate decent returns for you. With post tax returns in FD below 5% now, it could be worth taking Equity risk if it generates 12% in the long term. That is also double than FD.

New investor should be very cautious at these levels to start new investments in direct equity or even in equity MF.

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