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

(KunalKothari) #1358

The guy lost all his wealth with just a 15% or so rally? Unreal…

(777) #1359

That makes sense. This is being said time and again that it’s doesnt matter where the market is find good business and invest . However how many retail investors who invested 2006 /2007 made money even after investing in good business. Mr markets mood keep changing and we should wait for his good mood to offer good business at good price. Until then we FDs are not bad.

(Amit Jain) #1361

Sure. Shorting is a possibility. However, it will require a fully fledged plan.

Say, one decided to short Nifty. He will require some margin of safety, a vantage point, like Nifty 12000. It is very likely that this peak will not sustain and the market falls and there is good profit. However, if the flip side happens then he’d better have a plan, because for every 1000 points that go against him, he will require Rs.7.5 Lakhs per Ten lots of nifty.

Furthermore, nothing stops the market from going even 5000 points against the position. Who says that an expensive market cannot get more expensive. A six feet tall person can drown in a lake which has average depth of 5 feet.

So, will he be able to arrange for Rs.37.50 Lakhs in margin money? Surely, he will get this money back when the market falls, but till that happens, he is going to have to make arrangements.

Or is it likely that midway he loses confidence in the statistics, and gives up. Trashes the entire theory, bites the bullet and takes the loss.

(Amit Jain) #1362

For Shorting Nifty. Put Options are effective. For following reasons:

  1. Risk is limited to premium paid.
  2. No Margin money calls.
  3. Far month options have bearable time decay
  4. One can strategically set himself for a good risk reward ratio.

Waiting for a vantage point will be wise.

(Chandragupta) #1363

Short selling in not the opposite of long buying, it is much more (difficult).

  • In long buying, if the market moves against your position, it is a shrinking problem. In short selling if the market moves against your position, it is an expanding problem.
  • Markets have an inherent upward bias. People who are bullish are in the market, people who are bearish are out of the market. Hence in the market there are always more bulls than bears.
  • If you buy & go wrong, the downside is known. Price can go to zero but no lower. If you short and go wrong, there is no upper limit to what you can lose.

Short selling is therefore much more difficult and is not a mirror image of buying long. Short selling requires far higher degree of precision.

Having said that, there is one thing which favors the short seller – prices rise gradually but declines are sudden and steep. Several months of gains are often wiped out in a few days or weeks. So if the short seller is right for 2 weeks a year, he can spend the remaining 50 sipping pina colada on the beach.


Most of the leading financial newspapers and magazines are predicting comprehensive global slowdown in 2019 and 2020. Backed by statistics churned by leading international financial organisations. India can’t stay immune for long and considering most expensive among EM, this can be the right pitch for big shorters and grizzly bears. Caution is the key word and right asset allocation is critical at this juncture.

(Amit Jain) #1366

Indian markets will not start a bear market when people are expecting it. Instead it might just go ahead and make a fresh all time high, which efficiently attracts fresh lot of investors who are sitting on the sidelines, basically FOMO em. The elections will help to set a strong bullish sentiment such that people will be aggressive buyers at all corrections. When the stage is set, people are fuming with enthusiasm, the bear market will secretly ensue.

The true teachings of the Markets are usually accompanied by jolts. The unexpected happens, their favourite stock was supposed to be 20% up, is now 50% down… !! Jolt you see. Thats when they realize that stock market is a lie, and so is VP and all the security analysis… FD zindabad.

If it were as easy as buying a popular index stock, and holding for ten years, while one thrives on dividends, then there wouldnt be a working class. Market is an expert manipulator. It makes you act inspite of your plans.

(777) #1367

Very true and very well said. I think there is value in waiting for markets to be below average PE before investing new money. During such times market itself separates out Good, bad and ugly businesses and offer better prices for good business. No point in jumping to equity in the middle of cycle. FD for me also sounds good.

(777) #1369

I have this strong belief that this is liquidity driven stock market, in fact this is the case with all markets around the world. Free money led to indexes going up and because of that other than US ,all markets went up with no corporate earning growth which is against fundamentals. Now global growth is forecasted to slow down and infact indian gdp growth is also revised downwards recently. With near term slowing India gdp, slowing down economies world over, quantitative tighning sucking liquidity , there are no drivers left to keep indexes at the same level. I feel this is going to be a bumpy ride lasting 2-3 years. India will emerge as only bright spot when we come out of it , however it’s best to stay in cash for now. Higher Index PE can only be justified if corporate earnings are expected to be revised upwards in near term. US bull run is coming to end and downfall has just started . We need to find some cover while we still can. Consider this … us market makes up 55% of global markets now and only parallel to this is japan in 1980 when it made up 45% of global markets. We all know what happend to Japan after that. Both markets were driven by easy money and bubbles were created. Now this asset bubble in US has just started to puncture and landing won’t be easy for anyone anywhere in the world. It’s time to factor macro risk and allocate cash to portfolio.

(Amit Jain) #1371

One other thing which I would like to bring to the forefront is the tactical importance of buying low. The obvious advantage is that you get to sell high. But, to be able to reach that stage, of selling high, one has to go through nothing short of a warfare, albeit a psychological one, where your opponent is someone who has defeated many economists, doctorates, tycoons and politicians. So you and I are easy prey.

Once you are invested, market will swing all over the place. It will take you into profit and then take it away. Its sole objective is to get you to start getting sentimental about the business. People stay invested inspite of profit or forgone profit, because greed is manageable. But what cooks people’s goose is a drawdown of 30%. It is a proven research. Most people start bailing out after this 30% point is hit. Fear is the more dominant emotion. Mr.Market is really good at converting all those sentiments it has got you to feel, into Fear; The Modus Operandi.

Incidentally, at the time, while you are being flooded with daily news of gloom and doom, every person within your earshot will be corroborating. One way or the other, Mr.Market will succeed in clouding your perspective to see only loss and destruction. And all of this becomes exponentially convincing when the portfolio is 30% down. That is the final nail in the coffin. Selling your investments doesn’t seem like too bad an idea at the time. And people around you, your support structures, who are even less prepared for this onslaught. They too will nod their heads when you talk of getting out and salvaging whatever 50% of your capital is left.

This is where buying low becomes most important. You must not put yourself in a position of a 30% drawdown. Because then the only way to remain invested, is to scheme a total shutdown by alienating everyone around you and shutting all flow of information. This alienation is tough. Not many can do it. Most fold.

Therefore, it is of paramount importance that one gathers his tools. Be it PE ratio, charts or DCF. If you want to survive the market, just ensure that your PF is never 30% down. Some may say that, oh I have been through that. I got out unscathed. In that case, he must be invested a small amount of his net-worth, where sentiments are not flared;

In conclusion, buying good and buying low are important, as you will need to plan your “conviction”. It will be very hard to find when you need it the most. You will be the only source of it. No family member, coach or a friend can induce it.

Matthew 10:16 - “I am sending you out like sheep among wolves"

(aswin) #1372

@valuestudent @jamit05

Thanks for your valuable replies. Some more queries:

  1. Do you invest in equity mutual funds (MFs)? If yes, do you continue to invest in MFs in this overvalued market?

  2. If the market falls, the NAV of MFs will also fall. Do you currently hold any units in equity MFs or sold already? If former, do you intend to hold on to it without bothering about the (impending) market correction?

(Changu Mangu) #1373

Dear @aswin

Good question. I feel these do not divert from the thread and are about what to do in overvaluation stages, so I am happy to answer.

I do have a couple of mutual funds. I had stopped adding to them when I felt the markets were overvalued.

I am now considering adding some more to one of the mutual funds I have (PPFAS) since it is a 65/35 product. 65 India & 35 US. US markets are cracking and the INR is at lower levels, so the upside may soon appear (in next 6-12 months) to the 35% component. That is the US component both from the rupee devaluation over time and also the US stocks which are now fairly valued. If they crack any further, then the US market will go into undervalued territory so that would be great.

There is also a ICICI Blue Chip product that invests only in US Blue Chips. I am currently considering it seriously. The thing is I am also able to buy those stocks directly but I am thinking of using the fund so I do not have to manage the US portfolio myself. My research also led me to find out that the fund manager is not picking the US stocks and is simply mirroring a Morningstar index of US blue chips, so then one has to take a call on whether they want to pay a management fee for someone who is doing nothing but mirroring, I thought it is ok since then I don’t have to manage, but the cheaper option of self management exists.

To expand, it is a great idea according to me to diversify into a USD and INR product then I have a natural hedge against the devaluation of the rupee which has been and will keep happening forever. Also, I am then taking exposure in two different stock markets so that is also a hedge against one stock market. With this approach, if I lose my purchasing power in INR I gain it in USD, so my purchasing power remains intact and I am getting some market return on my stock investments on both currencies. So again it is a heads I win and tails I don’t lose strategy.

The second fund where I am already invested is only India specific so it will not yet get fresh money. Previously invested money will remain invested.

Hope this helps.

Disc - I am not SEBI registered and none of this is investment advise. Please check with your financial advisor before you invest.


Which is 65 35 fund? Also noticed ICICI US fund has very high churn

(Changu Mangu) #1375

Dear @nav_1996 The 65 / 35 Fund is PPFAS. I have edited the original post to reflect that as well.

The turnover is high for ICICI US Blue Chip but I think it is due to the weights and stocks being updated by Morningstar. This was my best guess though when I had looked at it.

I must add a note here: If you buy a 100% US focused fund there are some tax implications as there is no capital gains tax (directly to them) for funds who have exposure of up-to 35% outside India. I am fine with the tax component to ensure I have diversification to another currency and stock market without the hassle of monitoring it.

Disc - I am not SEBI registered and none of this is investment advise. Please check with your financial advisor before you invest.

(phreak) #1376

Lately this thread is being dominated by fear. The fear looks to be more towards making mistakes than of the consequences of it (possibility/probability vs payoff). Investing in MFs can’t be a strategy for anyone actively participating in VP, IMHO. The strategy is more ‘Out of sight, Out of mind’ than one of Prudence. Nothing of value was ever built without bearing risk and flirting with failure. Understanding the difference between reversible and irreversible decisions is crucial. If you are not making small mistakes on a regular basis, you are doing something wrong.

Standing on the sidelines of the beach admiring the surfers while fearing the tsunami will lead you to do the same thing month after month, year after year, of standing on the sidelines. Get your feet wet but respect the tide and someday you will swim or even surf.

There are numerous small-caps with a respectable/admirable return ratios trading at just around 2 times book and P/E in the low-teens. Many of these are trading below their historic valuations and down anywhere from 30-50% of their tops. Hunt for the best of the best among them (takes effort) and take some positions and spread your buys over several months. Spend your time understanding businesses and try to avoid threads like these which simply don’t add much to finding investible ideas. I think its high time we shut down this thread as well, like the other carnage thread and drive people to contribute towards individual business threads.

P.S. This is very much a note-to-self, though it sounds like a sermon.

(Changu Mangu) #1377

Dear Phreak, while I certainly agree with you on the above; have you considered that there may be people here who have already taken the risks in life and built what is necessary financially?

Not everyone still needs to still build mate.

So one persons strategy of everything in one basket (risk) is not suitable for another who has been blessed enough.

And be sure, when there is real carnage some will post here and advise to buy stocks fearlessly.

There is no need for everyone to think the same way.

The carnage thread was a post mortem which you have done many times; post mortems. I have many a times seen the hindsight bias in you. Just pointing it out. Don’t judge the messenger.

This thread has always been used to point out the potential risk reward of the future and has admirably served it’s purpose multiple times now.

I believe all those threads already exist and are active. You can mute this thread but some of us may need it. This forum does exist for all of us does it not? Or only for what you think might be appropriate for us to discuss?

Not engaging you further. No replies to this post from me to any responses.

Best regards.

(Amit Jain) #1378

Agreed, this thread does not facilitate in discovering companies. And is also guilty of being predictive in nature.

I see this as it’s strength. The entire forum is about discovery. Whereas this thread brings the investors attention towards the bigger picture. No matter how good a sailor one is, without the air in its sails he can only do so much. In that vien, only when the situation is conducive will all your stock picking skills gather good returns.

I partially agree with the MF part, but totally disagree that this thread should be closed because it brings people’s attention to the risk of investing at such high levels, and hence discourages them, esp unseasoned investors who are more vulnerable to sharp losses, from putting there money on the line.

(Divyanshu Bagga) #1379

Yes, we should have a thread to discuss the big picture. Afterall big moves are driven by macro perceptions. But the specific tool that this thread uses, that is PE ratio, does it work?

If concerns about PE ratio made you miss 2017 rally, kept you from investing sizable amount in stocks like Dmart, then is it not time to question whether it is a harmful concept?

If avoiding bear market is the goal, then I have a much simpler suggestion. Use the 200 day moving average of index. Buy when index is over the 200 day SMA, exit market when it falls below. That way, you would have taken full advantage of 2017 rally, while staying invested in stocks like Dmart in 2018, and you would have naturally exited in preparation for bear markets now.

Attaching the chart during 2008-2009. The blue line is 200 day moving average. Following the “Invest only above 200 day MA” rule, we would have moved out of the market in May 2008, and entered back only in May 2009, therefore avoiding the entire 2008 bear market.

While in 2017-18, we would have remained invested mostly, and got out of the market at the end.

In both cases, we might be doing opposite had we used index PE ratio for our decisions.

([email protected]) #1380

Can you please substantiate your idea with some past data?

(vaibhav) #1382

Here’s s&p 500’s 100 yr log chart which suggests it could fall till 2200 n below A Brief summary of the Micro/Small/Midcap Carnage