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

(maheshkumar) #830

Pe will come down as good growth ahead

(pkk123) #831

Once again, go ask a saver who is getting 5% in FDs post tax what RoE does he want from equities? Why do we not take into account cost of capital when talking about RoE?


Let’s think about this saver. He was getting 7% in FDs post-tax when inflation was 9%. He was happy while eroding his wealth at 2% each year. Now he is getting 5% in FDs post-tax when inflation is 4%. He is increasing his wealth at 1% and yet feels miserable. This saver appears to be a creature of herd mentality and not logic. I would rather not follow him.

(Savishesh) #833

Would you start trading in bitcoins just because its recent returns have been phenomenal compared to Indian equities? Most of us will not because we do not understand it enough. Same way most savers put it in FD because they do not understand or are not comfortable with equities. I find nothing wrong in that. In china most savings go into Real Estate, same had been in India prior to demonetisation and that is basic nature of human beings. Nothing to blame them or feel surprised. They will invest where they understand and feel comfortable.


I also think that there is nothing wrong in that. Nor do I trade in bitcoins while friends do. But, I would find it peculiar if a saver feels happy while his wealth erodes and sad while it increases. I will not like to follow such savers.

(Tushar) #835

Adding Nifty chart of last 22 years and then upside down.

It more of looks like a continuous downtrend in upside down chart rather than a buying opportunity. Just considering the chart will never give you entry/exit points as market is in long term uptrend. Unless some unforeseen events at country level, market is going to stay in uptrend. There may be corrections on the way but that is welcome.

Having said that, I am really scared with current PE levels (Standalone or consolidated) but I believe better earnings will be reported this and next year considering low base last year.
Made my portfolio more concentrated and switched everything where I have even faintest of doubt about management or future growth. (Trimmed from 20 to 14 stocks).
Checking news about all companies nearly every week or twice a week (as against relaxed approach earlier)
In 10% cash and will continue to be so.

(Nolan) #836

Would you be happy with 1% return on your capital?
Did you see AMFI promoting Mutual Fund products on mass media 5 years back the way they do now?
The economy which has been on the verge of a breakout for last 10 years but never did, isn’t it sitting on potentially the best inflection point in many years?

I feel re-rating is on. The high PE may limit the upside (till earnings growth arrives) but the market would need very strong triggers to turn bearish, and high valuations may just not be enough. I saw several MFs (esp. small & mid cap ones) closing their subscription and sitting on cash in early part of 2017 as they couldn’t find value bets and they were in anticipation of a correction which never arrived. Some of them are repenting as their schemes’ performance dwindled. They corrected themselves and made necessary fund reallocation soon. (for eg. Vinit Sambre - managing DSPBR Micro Cap Fund)

I agree with @Yogesh_s that a very necessary condition for a sharp correction is a sharp upmove where the market peaks out like the tip of a mountain. A 15-20 percent correction cannot be ruled out in any market but for more than that, the market would wait for some tell tale signs.

Contrarion bets (although rewarding) are very risky and a very small percentage succeed. Not many swimmers can swim against the tide in anticipation of the winds changing direction (esp. when you know that there are no better oceans to swim in other than volatile equities). Its good to be flexible in stock market. Being a part of herd mentality gets rewarded with minimal risk. If and when the market turns, good swimmers know how to change course because the are both flexible and they respect the tide.

(pkk123) #837

You have completely missed the point. Why do you expect RoE to be 18.5% when FD rates are falling. Just as a saver shoule be happy to make inflation + 1 or 2%, why should the same not apply to equity owners that they also earn a little over FD rates. Where is it written that RoE should always be 20%? In fact, you will hear many business owners say that why would I do business for 7% returns when I can make that in FD. So if FD rates are down from 7% to 5%, RoE of 10% should make anyone more than happy. And that;s exactly why even with moderate earnings growth and not so great RoE, these multiples are holding.

([email protected]) #838

This business of turning charts upside down is a bit amusing. It can perhaps be an indicator of momentum (steepness of the rise/fall) but one must consider the fact that one end is finite (downside) while the upside is infinite, at least theoretically.


Can you please explain how have I missed the point? In my opinion, this is the point that I am making.

As inflation declines, so do returns - on equity and debt (interest rate). So, we should not compare the return on equity from a high inflation regime with that from a low inflation regime. When we adjust for inflation, there is very little earnings recovery to be expected.

I mentioned about the unrealistic expectation of earnings recovery, the numerator in discounting the Cashflows. That does not mean that inflation does not affect the denominator - discount rate. A decline in inflation will reduce both - the discount rate and the earnings. So, I reiterate that it is not wise to think that the discount rate would remain low but the earnings will recover to the extent that we saw during periods of higher inflation. Hence, the expectation of earnings recovery of ~30% over and above the normal 10% to 12% earnings growth per annum may be unrealistic at the present moment. It appears to me that there is a significant section of the market that is invoking the large expected earnings recovery hypothesis to justify the valuations. So, the realization of very low earnings recovery, whenever it sets in, may affect the valuations.

If we look at what appears to be most rewarding right now and invest, then we may end up investing in the wrong places at the wrong time. I would rather look at how things may play out, that is, a somewhat longer horizon.


Return on capital for what risk? Real returns are related to the risk taken by the investor. Those who do not want to take risks and invest in FD should not compare their returns with the returns on the risky assets class - the equity. They should be happy with a nominal positive real return on capital on a pre-tax basis. It appears that these peculiar FD investors become risk-taking when they see people making money on their risky investments and want to shift from FD to equity. These investors seem to forget that the equity investors go through periods of negative returns while FDs always get paid their fixed coupon. These FD investors could be a good example of investors prone to jealousy / herd mentality.

To answer you - If I would be unhappy with 1% return on my capital while investing in FDs then I would be terribly unhappy with -2% return on capital. At the cost of being repetitive, I would not follow an investor who invests in a riskfree asset (FD) and is happy with -2% but unhappy with +1% return on capital if others are making money on their risky investments.

I guess that I have been underestimating the power of groupthink. Valupickr is a good place to learn. But, I think that I have been overdoing it. I will try to limit the frequency of my posts on this forum.

(Nolan) #841

Its your perception that people were happy with -2% returns. Probably they were not aware of alternate means or open to the risks of equity investments. But with aggressive MF promotions, people are opening up to it now and with the returns they are getting in MFs,they feel unhappy with 1% returns on fd.


I agree with you on this. It had not crossed my mind. There could be a segment amongst the FD investors who were not informed that they could invest in equity without much inconvenience. I would not call them peculiar. They are just better informed now. I hope that they would be fine with the risks of equity investing and stay the course.

(Kumar Saurabh) #843

Pardon me for being little upfront but I don’t think any of us are adding further value to debate . I think there are two sides of thought process which has clearly been highlighted and both are sticking to it. One side says you can’t have a recession after 10 years of single digit growth when policy measures have been launched , GDP to market cap looks ok, return on equity is at low , profit margins at at low ,demonetization effect on numbers etc ,so, now because there is a hope before it happened valuations are stretched and if it does not happen that stretch will revert to mean which means a 15-20 percent correction but not recession. The other side is telling look whenever NIFTY has crossed 26-27, it has led to a big sell off and hence we should exit . I think this is pretty clear. This final message is being given in multiple ways. If i am missing any new insight then sorry but I don’t think beyond being rigid , we are going anywhere . Personally, I would be interested to see any data point across the world in last 50 years which violates claim made by 1st group briefly summarized by Yogesh. On 2nd point, the contrary point is whenever PE has gone 26-27 , was it euphoric time or was it a 5-8 years of low growth. If all ,20-30 occurances across world were euphoric times then using the same arguement on situation 1 , I would rather wait to see. At the end, none of groups deny on approx 20 percent correction but the divide is on is it time to sell everything n go home like market will correct 50 percent , Is it time for recession. ? This is my last post for sure as I won’t add any value . I belong to group 1 and expect for a 20 percent correction which would be healthy n make stock picking easier (though every market always gives value opportunity for long time, can’t say if buying would lead to gains in 2-3 years but on a 5 year CAGR basis). Now, would not visit this thread but watch what happens in next 2 years. Right or wrong does not matter, till we are open to learn n time is sometimes best teacher :slight_smile: I am really sorry if I have hurt anyone’s sentiments

(Amit Jain) #844

Well said. All agree that a correction is in the offing. When and how much, only time will tell.

(Abhay Amrite) #845

My Two Bits on Markets. For Last Couple of Years the Macros Were Favourable the Micros ( Corp Earning) unfavourable. Now for the last 6 Months micros showing signs of improvement all across. Corp Debt has stagnated for last 3 years. ROEs beginning to improve. So interesting times where focus would shift from Liquidity to Corporate Earnings.

(azardeen) #846

In my opinion, strategy in this situation should be different for each person depends on his investment plans/goals. For example, my present investments are very less compared to what I plan to invest over next 5-10 years through salary/savings. I would be happy if the market corrects 30% and stay there for 3 years, so that I can get better returns over long term. On the other hand if someone has huge investments compared to his income, the situation is different. If I am in that position I would keep at least 50% cash.

(Prem Shankar) #847

As a purely theoretical exercise, if we were to do a statistical experiment assuming an expected appreciation in the range of (20%,25%) and an expected fall in the range of (15%,20%) over the next year, you get the following:

  1. Mean return is 1.06%

  2. Probability of gaining more than 6% gain is 0.1 % and probability of loss is 33%

  3. Max gain is 6.22% and max loss is 3.98%.

The above is based on 100,000 random values generated in the above range.

Here is the distribution of net gain:


As mentioned in the beginning, it is only a theoretical exercise, and can yield very different results based on the range of gain and loss.

(maheshkumar) #848

I think everything depends on USA and us market is in bubble territory almost near the
Great Depression 1929

But as the profits are increasing everyday people are adding more and that’s what must be happening in last phase of bubble ,never experienced recession ,and not interested in recession in just 1 year of investing career

([email protected]) #849

Negative interest rates, jobless growth and just the numbers of participants on this thread mean that this may be in the intermediate new normal. We may be the earliest state-sponsored gamblers. So how long can this game go on? Just ask yourself how many times you heard the term “trillion” in the recent past vs even 10 years ago.