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

Investing Strategies
1481

Have a slightly different opinion here. Just quoting the cliched “never say never”

If you would kindly look at the following US stats:

  1. US Corporate debt to gdp which is at all time highs
  2. US government debt to gdp is at all time high
  3. Fiscal deficit is already 6 percent only getting worse at 1 trillion dollars today
  4. Consumer debt to gdp although not as high as 2008, is still well above 80 percent
  5. Interest rates are at 3 percent
  6. There is 3 trillion of qe led excess liquidity just in the US alone (Eu and Japan extra)
  7. Percent of non investment grade debt at all time high

To me it seems like 2008 problem which was a debt problem was never solved - the can was just kicked down the road.

Hope the debt monster doesn’t wake up else all bets are off!

2 Likes
1482

Hi @arunsg Sir,

Sir currently not only the second category as you mention, the stock market looks very confusing.

On one hand, there is a bull market in blue chips and on the other hand, obviously there is an ongoing bear market in small caps.

So, first as a gambler, I don’t want to play in a game where I don’t know what is going on.

Then on the other hand, I am thinking about what are alternate scenarios;

I am thinking, at some point money starts flowing out of blue chips and starts flowing into small and mid caps… then the blue chips start their well deserved bear run to the bottom of the performance percentile and maybe small and mid find some support. The thing is, good quality small and mid are at best decently valued, and money needs a big lollipop; it will need deep undervaluation, it cannot come just because they are fairly valued, they will need to be highly undervalued for money to make such a move abandoning the currently safe and warm snuggle of blue chips.

Another thing that could happen is that when the blue chips start correcting they bring fear. If that is the overbearing sentiment, then money will remember the recent bashing of small and mid, and will flow into safe havens of fixed income, then it can cause true carnage in small and mid. Then that is another way that small and mid will become very cheap.

In short, nothing looking very promising for the small and mid, this way or that way, they seem to be in a bit of a spot if you ask me.

We all remember the media; in the bull run they were very euphoric and used to announce everyday, 100 stocks hit new 52 week high, then 250 stocks hit new all time high etc… now no one announces 417 stocks hit new 52 week low :slight_smile:

I think, just like when there was euphoria, even bad news would not take a stock down, so we need to wait patiently for a time when bad news does not take stocks down any further, that should be a reasonable sign that we are around the bottom. I mean, at some point that will start becoming obvious. I am watching and waiting.

16 Likes
1483

Check out this tweet regarding return difference between top 29 companies and the rest of market


1484

Nifty PE is bound to get more expensive :slight_smile:

1485

@jamit05 will lose his temper now!
What do we do. Will the nifty correct and revert to mean or will it move up as earnings normlise and hence PE derates thus making us simply miss the bus…
Honestly I feel the only thing that can tank the market is if the India growth story takes a beating. This will happen only if modi loses or worse we end up with a hanging govt.
Another trigger could be the popping of a big story driven high quality over owned stock like Dmart.
I think SIP inflows will hold the classic bluechips in place. One thing is for certain when everyone is waiting for the dip it never comes. I think small and mid caps are close to bottom though.

2 Likes
1486

Musings: I don’t know why but my gut says we have bottomed out. When we will rally is unpredictable, but the time to start deploying aggressively has arrived as far as I am concerned.

Some random thoughts:
a. There is a lot of money looking to invest. I think it starts arriving now.
b. The uncertainty of the elections has been answered today with our nation’s response. I would expect a stable government and this should start getting priced in now, not after the elections.
c. We need a pessimistic cycle to get a decent MoS on our investments, and that seems to be the case currently.
d. We seem fairly valued and there is not much reason for us to become undervalued. Even if that happens, it will be bought into. I read a good article which helped me understand that now we have much more number of aware investors so it is not that easy for the market to offer a page, a 3m or a HDFC or one of the Bajaj co’s at undervalued prices since many people are tracking them. Fair value is a good price to buy.

I expect to deploy my 80% cash over the next 3 months at around 1 percent a day. I may do more on days the indexes are negative and bide out days the index is green but give or take should be fully invested in around 3 months.

The mother of all bull markets begins soon.

#bullish

Disc - Not SEBI registered and this is not investment advice.

13 Likes
1487
  1. Cnx small cap:
    March 2009 lows : 1370.
    4.5 yrs later, August 2013 lows, 2510.

(1.146^4.5)*1370=2510

So that’s 14.6% cagr.
If we take it over 10 yrs

(1.146^10)*1370 is arnd 5350. So March 2019 lows could be 5350. Or maybe because we made triple bottom at 5650-5700 , it may not go down further.

If we draw a straight line in logarithmic chart, then the slope of that line would obviously represent the CAGR. Try drawing a support line in log chart of cnxsmallcap.

  1. Cnxsmallcap to nifty 50 ratio, that also touched March 2009 levels recently. But in August 2013, small cap fell more than nifty 50 than even in 2009, so the lowest cnxsmallcap to nifty 50 ratio was in August2013 . But recently we touched March 2009 levels

Disc: 90% Invested.

6 Likes
1488

Just a small fact - despite the recent correction of over 35 percent - the small cap index has still returned 19.5 percent CAGR since the lows of 2013. Goes to show how frothy things were in in jan 2018. The follow up question is - do valuations need to normalise further?

1489

May be the lows of 2013 were abnormal. That must be normalized as well before we calculate the returns.

1490

For the sake of argument - from the lowest point of 2009 after an 80 percent fall when supposedly capitalism was coming to an end, to the lows of 2013 delivered a far worse 14.5% CAGR return. Just goes to show how brutal small cap corrections can be.

1491

Will be thankful to you if you can share the article you have read about changed awareness of investors.

1492

Return should be measured against the risk. Roughly speaking, If Small Cap index corrects 70% from the top, and Nifty corrects around 30%, then the returns from small cap ought to be more than double than from nifty etf.

1494

Please see the Sharpe ratio across MF 2014 till date.Large cap funds had the lowest ratio across all categories between 2013 and 2018. Midcap funds Sharpe ratio was > 1.5 times that of a large cap fund from the same AMC. Which means even after adjusting for volatility, mid caps beat large cap funds by a handsome margin during that period.

Even after the correction from 2018 till date, if you were to pull a report for all three categories and check the average, you will see that it is not too different for a large cap fund vs a small cap fund. Go through the data and I was pleasantly surprised, some small cap funds still beat the best large cap funds on this parameter though the return is way lower in 2018 for small cap as a category.

On a 5 year basis, it is literally a no contest even after accounting for the 2018 correction. Good small cap funds deliver a Sharpe ratio of > 1.2 (some delivering > 1.5) while the best large caps hardly make that number.

4 Likes
1495

Dear @Rajhans

Here’s the link: https://awealthofcommonsense.com/2019/02/first-mover-alpha/

Key Highlights in reference to context (although there is much more in the article)

  1. To excel when investing Munger recommended, “The whole trick is to have a few times where you know something is better. Invest only where you have that extra knowledge.”

  2. In the 1950s, retail investors controlled 95% of all trades. Today 95% of trades are executed by professional investors. In the first year of the rigorous 3-year Chartered Financial Analyst exam (a test which was started by Benjamin Graham) in 1963, there were 284 people who took the test. Last year there were more than 256,000 CFA candidates.

  3. There are well over 300,000 Bloomberg Terminals worldwide, giving professional investors more data every single minute of the day than most will need in their lifetime.

2 Likes
1496

Other than volatility, in Mid Caps, selection of stocks is crucial. Whereas, for large caps there is more security in that sense. There is visibility of earnings, time tested management and business model.

Which is why financial advisors recommend having 30% mid caps, and 70% large caps in ones pf.

1497

Thanks for sharing the link. It would be very intresting to think how investing & trading would evolve in coming next 10 years.

1498

Dear @Rajhans. Thats a good question since we are investing for the future. The returns will accrue only in the future so thinking more about that is more important than most other investment matters.

There are to me two parts to it;
A. Fundamental Investing; Buying future earnings of an enterprise and waiting for the earnings to be earned. This one is simple and does not need a high IQ.

B. The Impact of Market Participants; So today for example in India shockingly only around 3 percent of investing is delivery based and a whopping 97% is other forms of investing (futures and options etc). So we at VP are a genuine minority :slight_smile:

This second game has many warped minds who are constantly betting with other people’s money.

More so, a large part of this is becoming automated, so for example a computer can do option pricing much faster and better than a human being, and will be trading in and out based on the formulas entered into it.

Adding a layer of AI to generic computing the AI will also be able to sense “greed” and “fear” and react accordingly while scanning hundreds of stocks much faster than we humans can process information and would have executed a trade by the time we blink.

I mean I can go on but the gist of the above is that computing in its various forms will take over the day to day markets and some humans will keep trying to rationalize what happened without understanding “rationality happened” since computers will have lower and lower behavioral biases as they keep fine-tuning themselves with the assistance of the AI on whether it makes a profit or loss. We don’t have much of a chance there.

The one edge now and many years into the future could be “VTC” orders that get filled when the computers “lose their minds” and face a “glitch”. When they cause flash crashes (which are what I think will increase going into the future) we can fill our coffers with stocks when computers once in a while behave irrationally.

Money and computers are an irresistible combination and in combination both can make any person heady and giddy with greed (which is rational greed, imho). So persons with access to such technology and the ability to deploy it are going to, more and more.

Our future (10-25 years out) is to buy into such funds and play the wondrous computer video game. Today there is still games available for us, and it would be simplistic to think that computers will leave the small cap game to us to continue playing. Computers have taken over cars, aeroplanes, healthcare and everything else, they will not leave the epicenter of money power.

This is a link to Renaissance Fund: https://en.wikipedia.org/wiki/Renaissance_Technologies
They have been deploying quant like no one else and have delivered a mind boggling return. To quote one source “From 2001 through 2013, the fund’s worst year was a 21 percent gain, after subtracting fees. Medallion reaped a 98.2 percent gain in 2008, the year the Standard & Poor’s 500 Index lost 38.5 percent.” This should be a good explanation of the wealth that can be generated with the right models.

So, the direction is clear, and the money game will make us and the younger generation that follow us play this game in a new and interesting manner.

To those who think computers will not take away the edge, they haven’t worked with computers much.

18 Likes
1499

Very interesting read , keep sharing such things & thanks again for quick response.

1 Like
1500

I was trying to check how much the small caps have corrected in the context of their historical ratios. So, extracted data from https://www.nseindia.com/products/content/equities/indices/historical_pepb.htm, and selected the Nifty Small Cap 100. My goal was to plot the P/E from 1-Apr-2016 to 1-Mar-2019, but, the following observations were strange, so, need the help of you experts to explain them:

  1. For many months, P/E was “-”. What does that mean? The sum total of the profits of Nifty Small Cap 100 Companies was negative? Or something else? These correspond to the missing P/E values between mid-2016 to the beginning of 2017.

  2. Many P/E values were insane - some near 2000. Is there some problem with the data?

  3. In general, the P/E values appear very high. I would like to ensure that I have picked the correct data to plot.

To plot the P/E against Date, I had to replace such abnormally high values with lower values, but still insane, Otherwise, the plot would be hard to read. So, I have forced the max P/E to 500 (ie, Replace >500 values of P/E with 500).

Here is the plot:

image
image731×461 7.74 KB

Because, I have doubts on the correctness of the data, I would not draw any conclusions before getting some validation from the expert VP’ers.

1501

BEst to compare PB instead of PB as it normalises for few companies making huge losses.