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

Investing Strategies
715

These days when I meet friends and relative, I categorize them as following:

  1. Never invested in stock markets, nor care about it.
  2. Burned their fingers badly in 2008 and have stayed out. They may or may not be regretting it, however, don’t talk about it.
  3. Fully invested, very optimistic, ready to invest more. Don’t see any downside risk in near future.

I’m not sure if there is any meaning in this. However, have a feeling, that when the type 2 eventually start investing, market should be ready to form a top.

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716

The peak of pessimism was policy paralysis during 2013( I was in infra financing n files were literally not moving) . That time NIFTY touched 5000 I think. From 2013, with a 5 percent EPS growth in 5 years (NIFTY EPS from 328 TO 390 between March 2013 to current in 4.5 years) , it turns out to be around 6500.

So, now if we consider today’s time without any pessimism or optimism, how much extra would we add to 6500. Let us say the range of swing of optimism and pessimism is between 30 to 40% which means +15 to20% on optimism and -15 to 20%on pessimism. So, considering now, 6500 was pessimistic number of last 5-6 years, let us add 15% to it and we are almost 1000 points up. So, 7500 should be the NIFTY value without much bias.

Now, what is the bias. When growth base is lower n many of indicators n structural reforms are looking to be in place, then, historical chances of bubble has been lower and vice versa when economy grows at super high rate for multiple years and every thing is glittering gold, chances of bubble formation are high. The current situation seems none of the two but the 1st situation with super high optimism. So, the bias is over optimism of this future performance. So, from current 10,000-10,400 points, based on NIFTY performance and removing all such bias, the maximum possible correction I see is :

  1. -5% EPS growth - very less probability ( lower growth base ): 10,200 (avg) to 7100 (-5% from 7500): 30% gap
  2. 0% EPS growth - Low probability ( lower growth base ): 10,200 (avg) to 7500 (0% from 7500): 26% gap
  3. 5% EPS growth - Medium probability ( lower growth base ): 10,200 (avg) to 7100 (5% from 7500): 23% gap
  4. 10% EPS growth - High probability ( lower growth base ): 10,200 (avg) to 8200 (10% from 7500): 19% Gap this could be 2 years of optimism factored in
  5. 15% EPS growth - Medium probability ( lower growth base ): 10,200 (avg) to 8625 (15% from 7500): 15% Gap. this could be 1 year of optimism factored in

So, if EPS grows at 10-15%, I do not see any chances of major correction beyond 10%-15% which will make overall market fairly valued and pockets of opportunities may emerge. The trouble starts with less than 5% growth which may need 25% type of correction and may lead to turning of over optimistic sentiments into over pessimistic sentiments which may means more than 25% correction.

So, the Crux lies in future EPS growth and one has to do his own research.

I have tried to highlight the above method as a number driven, easy to understand approach which suited me to do this academically. Principally, I am a bottom fisher and I do not care much where is NIFTY going until and unless there are clear signs of bubble in overall market. I think there are major pockets of small bubble forming up and minor pockets of opportunities some value gap. So,

  1. On NIFTY basis, the odds to make big money is low, the odds to lose money is high on a NIFTY basis (time based correction could also be a loss of money if NIFTY stays range bound).
  2. The chances of 10-15% correction looks moderately possible even with a 10% growth which will make markets healthy
  3. 25% or bigger fall need some strong justification that why EPS growth would be muted as reforms is a lagging indicator and if one believes reforms are happening then lag effect should be visible in economic data sooner or later
  4. If NIFTY grows at 15%, the exuberance may continue and we might see earnings driven bull run (so far it has been optimism driven bull run from NIFTY perspective, history is evidence it has happened until the gradients of next bubble were formed)
    4 On a stock to stock basis, all this does not matter until there is total bubble in overall market and view is limited to 1-2 years

So, for sure this is not a time to go all in cash and try to time the market. For 10-15% , healthy correction , a 20% cash position might be worth if someone invests by NIFTY logic. For bottom fishers, all this does not matter.

Counter comments with logical data based justifications are invited.

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717

I am just adding a case study by renowned investor Peter Lynch

“People spend all this time trying to figure out “What time of the year should I make an investment? When should I invest?” And it’s such a waste of time. It’s so futile. I did a great study, it’s an amazing exercise.

In the 30 years, 1965 to 1995, if you had invested a thousand dollars, you had incredible good luck, you invested at the low of the year, you picked the low day of the year, you put your thousand dollars in, your return would have been 11.7% compounded.

Now some poor unlucky soul, the Jackie Gleason of the world, put in the high of the year. He or she picked the high of the year; put their thousand dollars in at the peak every single time, miserable record, 30 years in a row, picked the high of the year. Their return was 10.6%. That’s the only difference between the high of the year and the low of the year.

Some other person put in the first day of the year, their return was 11%. I mean the odds of that are very little, but people spend an unbelievable amount of mental energy trying to pick what the market’s going to do, what time of the year to buy it. It’s just not worth it.”

Excellent timing returned 11.7%. Lousy timing gave 10.6% and disciplined investing provided 11%. Always keep this in mind and stay the course.

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718

Everyday these brokerage house increases there targets :smile:
Maruti crossed 10k, we are increasing target on basis of bla bla bla to 14k… I mean WOW. And what if it reaches 14k then they will come and say we are increasing our target further to 20k.
The markets are showing sign that it is not stable at current level, falling 0.7 to 1% is a regular thing these days and just look at midcaps rising 20-80% in 1month and even continuous UC’s. It is time to make money by momentum trading… look at a chart’s of stocks which rise 5% or more or which are in top gainers the mango-man will come to buy the very next day in expectation of UC, so you can check the graphs of such stock’s and you would come to know when to put in the money, just buy it then and exit after taking 20%.
I have been doing this for last 2 months, very rewarding I must say…

719
720

The difference between 10.6% and 11.7% does not seem much but if you extrapolate it over 30 years, you would find that the corpus of the market timer is 50% more than the lousy one.

Not advising market timing but simply indicating the power of a small percent over extended period of time.

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721

Perfectly valid for someone investing for next 30 years. The discussion here though is different. Its about whether someone who is invested almost fully, should continue to remain invested, or exit partially/fully from the market and thereafter sit on cash to again re-invest heavily when the market tanks. The returns thus made will not only be more efficient, but heavily more. Imagine exiting the market today with all your money - “X” crores and investing it back when market is at 0.5times today, your portfolio holdings doubled, (not the value) and when the market again goes higher, you have automatically made a lot more money than staying invested now. This is the point being discussed. Let me quote Donald’s opening post:

However the discipline to forgo the cream, might also mean tremendous capital safety for me. I would not again be caught in a situation of hopelessly remaining fully-invested; worse still - be unable to bet decisively, & heavily on the very stong buy signals in Oct 2008 and Mar 2009, because all my funds were tied-up in buy-and-hold!

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722

I agree…but can anyone time the market…9 out of 10 cant…but if you have invested for specific goal and if you happen to meet it…then it makes sense to take the money off…but what if it’s a retirement goal which is years away? will that be a good idea to liquidate and sit in cash waiting for markets to fall? most renowned investors are fully invested at all time…lastly its all in the individuals risk appetite though

723

AFAIR, there was a time when Buffet had sold all his holding in the fund or whatever he was managing and returned money back to the investors saying there are no more investible opportunities. Not saying the case is same now.

724

Is everyone Nifty investor here?

There are tons of stocks languishing below historical multiples (10 years) - IT pack, Pharma, Tata Motors.

There are many which are trading at historical multiples (10 years) - Energy pack, Utilities, HDFC, ITC

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725

A very sensible thing to say. Yes, IT Pharma nice valuations. Get out of expensive and get into cheap.

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726

Let’s discuss a few points around the decision making process of exit.

  1. Personal situation. If someone’s personal situation demands encashment, or a personal goal of wealth creation has been achieved, it makes sense to cash out now. This is very true and valid comment and is as true at a Nifty of 20 as when Nifty is at 30. What we are discussing here is outside of that personal situation where there is no personal need for cash and exploring the framework for a informed decision to exit - based on historical past data where sustaining Nifty about 25 has been difficult for long and the returns thereafter have always been muted or even negative. So, assuming one has significant investment, To Sell, or Not to Sell is the question. This is a framework for financial optimization, i.e. based purely on selling high now, so one can buy low later. Is this timing the market? Hell, yes! And it’s true that 9 out of 10 do not get it right not because of errors in decision around the level of selling, but because of psychological barriers to remain rational in the face of exuberance! In other words, it does not matter if I sell when Nifty is 10400 or 10000 or even 9500 if its going down to 7500 in next 12 months.
  2. Is everyone investor in Nifty. No, of course not. But the reason Nifty is called an index is for a reason. When Nifty goes down in a sustained manner, very, very few stocks if any will withstand the selling pressure and hold its ground, or advance. When I check my holdings in 2007/8/9, I see that every stock I owned went down, some less, some more, and this includes large caps, midcaps and everything from Pharma to IT to Banking. Tata Motors: 770/140, Tisco 850/135, HDFC Bank 1720/900, Biocon 550/110. But the key takeway is that these recovered, and still provided decent returns thereafter. THe question is…could I have sold Tata motors at 770, or…say even 700 or even 600…and later bought back at 140/180/200 ? Is such an opportunity presenting itself again now? If I had done that, the portfolio thus constructed after a year of waiting out would be at least 2-3 times larger for the same cash invested !
  3. Get out of expensive, get into cheap. Yes, this seems the most straightforward course of action and needs to be investigated more. In this raging bull market, if a stock is cheap, or even relatively cheaper with regard to other stocks that is due to causes which is likely to remain, so if an expensive stock like HDFC bank goes down 40%, very likely a cheaper stock like Karnataka Bank also goes down 40% or even more. In fact, in 2008/9, Karnataka Bank went down from 255 to 68, and KB has remained relatively cheap to HDFC Bank forever, and that did not lessen its fall; in fact, it fell more.

In the process of this discussion, my own thinking is being stimulated and clarified - so thanks to the forum for enabling this and the members who are participating in this discussion.

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727

Point 3, moving from costly to cheap is sector rotation and not moving down the quality curve in same sector.

728

2008 correction didn’t make us lose as much money then as much as it made us stay out of the market today and lose upside now. - Kalpen Parekh

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729

As per ICICI-Sec research and 2018 outlook, the bull run still has legs.
Synopsis: ‘The Triangulation process is ascertaining the way ahead for markets that pencils in a) bottom up approach, b) conventional charting methods and c) market internals. All outcomes reaffirm that bulls will prevail in CY18 wherein the Nifty is expected to return 14% with a potential target of 11900 over the next 12-15 months.’

I don’t understand Techinal analysis (partly due to my inability to believe in the premise), so my judgement on the quality of this’ research’ may be flawed. However, one thing is clear: the report seems to throw around a lot of anecdotes, figures, charts and matrices while being devoid of any clear structured thesis and deductions. Sharing for other seniors, if interested.

IDirect_TechnicalOutlook_2018.pdf (1.9 MB)

730

If any AMC comes out with a bear case, they will be out of business. I personally would completely disregard such reports.

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731

NIFTY MID 50 PE RATION FROM 2004 TO 2017.pdf (169.7 KB)

I am a novoice person don’t have substantial knowledge of stock market …And thus not able to understand the above PE movement can any one please elaborate reason behind such high PE

732

Nobody can always time the market correctly

The benefit of correction will be far lower than the cost for waiting for the correction

Don’t time the market
Buy when u have the money and sell when u need the money
Or sell when there is total pagalpan in the market
Now Pe is high but eps growth is yet to come

733

Dear Admins - Donald, Ayush, Hitesh, Dhwanil, Vivek, Yogesh …

This is one of the most interesting topics for a thread. It will be great to get your views as well:

a) what is your worst case, base case and best case scenario for Nifty 50 by Dec 2018?
b) how do you plan your investments at such elevated levels (and considering other risks like Gujarat results, US tax rate cut, rising crude)?: I hope the answer is not “it is stock specific” so that it gives us a better perspective :slight_smile:

My position: I am a novice investor with a small capital, so it does not matter much. However, I am in 100% cash since a day before Gujarat results (market has gone up since then, still I am sleeping better and hence it is ok for me).

It will just be great to get your perspective/thought process when you see market at such levels.

Thanks
Amit

734

Copper is called Dr Copper because it diagnoses the condition of world economy quite accurately. And if you look at the price of copper, it’s going up well. As of now it has more than doubled from the bottom.Its now@7000+ and appears headed towards 10000. So while focussing solely on high p/e ratio, are we ignoring the prospects of a growing economy in India and globally

And those who are very confidently predicting a correction solely on basis of high p/e pattern, may
read up on Monte Carlo fallacy
,

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