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

For mean to remain mean, the market bottom needs to be as much below mean as the top was above mean. If the true value investor is seeking margin of safety - as he should, to be called “true value investor” - he should wait for the Nifty PE to go significantly below mean to start buying. IMHO, just touching the mean is not enough.

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Hi

Quoting from social media of someone’s account

The NIFTY is so polarized that if we constructed a NIFTY 40 Index ie. stripped of the top 10 cos and kept the balance 40, the Index would actually be at 9000. NIFTY is currently at 11k, Since Jan-18, the top 10 market cap cos are up~21.4% whereas the rest 40 is down by ~14.6%.

image

I haven’t verified the data.

Rgds
Deepak

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Valuation work on our short listed scrips starts after Nifty PE has touched its mean. After that, our projections, valuations, DCFs etc will all be well grounded.

During valuation process one tends to account for margin of safety, therefore there isn’t much charm left in waiting for PE to correct further.

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So nifty 40 is at 9000, and nifty 50 at 10980. Valuation difference comes out to be 18%.
The top from today comes to be 9%. So the difference between the apparent bottom and top is significant.

According to this, then shouldn’t nifty50’s mean be somewhere around 10544.

I doubt the top 10 will be as devalued as the bottom 40.

So there should be more of a drawdown of 3.5-4% from current levels.

I don’t know if this is how this can be seen. Do let me know if my thought process has errors.

Disclosure: Invested today and still sitting on 55% cash

There is no simple and reliable way to isolate/dissect the Nifty PE and its constituents. Even if someone did come up with any such combination, I would still believe the NSE website’s published information more.

NSE website has been publishing the PE for past two decades. Be it standalone or consolidated, it is consistent nonetheless.

Moreover, it is only one aspect of our investment plan, a starting point.

You must read Parag Parikh’s book Value Investing and Behavioral Finance. Surely, he would have seen through it if the concept of Nifty PE was flimsy.

While we are at it, could you post the latest Histogram and the bell curve and update us regarding the most recent mean and median numbers.

I will work on my version as well, in case there is some notable disparity in either of our work.

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My few cents here… I just normalised NIFTY and NIFTY EPS from 2003. Meaning divided the whole series with 01-01-2003 ( on 1st Jan 2003 NIFTY:1100 EPS: 73.7 ) value. That will give us the fold increase in nifty and its eps. I have plotted the both below.

As you can see the valuations and EPS are still far away… Market has to correct more and NIFY EPS should start growing to find a mean. With this recent slow down, EPS growth looks a bit far away…

Below are the raw data without any normalisation…

NIFTY:

NIFTY EPS:

data is from here NIFTY50 - Nifty 50 EPS - Earnings per share ratio of NIFTY50 is 795.87. View and compare historical EPS ratios of on a chart with price and other fundamental ratios.

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2008-09 lows for:
Nifty: 2500
Small cap index: 1400

Today:
Nifty 10900
Small cap index: 5400

GDP:
2008: 1.19trillion USD
2019-20: expected 3 trillion USD

Exchange rate :
2008: 45 rupees to a dollar
2019: 69 rupees to a dollar

Ratio of GDP in terms of INR
= (3X69) / (1.19X45)=3.865

Multiply this with 2008-09 lows to get equivalent lows for today for GDP to market cap ratio:
for Nifty = 2500x3.865= 9662
For small cap index= 1400x3.865=5411.

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That’s a valid approach. Point taken.

But 2008 bear market was quick, this has been going since January, 2018. If it is to cause same amount of pain as 2008, then the correction should be comparatively shallow as the breadth (time in bear market) is more. Ofcourse there is no guarantee, for all we know, this can be worse than 2008, it is always possible for it to be deeper than 2008 and longer lasting.

Disclosure: not trying to time the market, hence fully invested.

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Since May 2014, EPS has grown 7%, whereas Nifty has jumped 47%, an excess of 40%.

(An investor friend theorizes that, post May 2014 bucket loads of black money was parked into the safe haven stock market in garbs of DII, FII, participatory notes. These aren’t investors, but opportunists.)

The next major support, technical and psychological, is Nifty 10000 mark. At that point the PE will be around 25, which is still historically a very high number.

The growth rates of Nifty EPS and Nifty have seldom crossed paths (been equal), once in 2009 (thanks, but no thanks, to Lehman bandhu), then in late 2013 when corporate growth was picking up, but the sentiment was beaten, which was clearly shown by the Nifty PE being at a lackadaisical 16.50.

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In May 2014, Nifty was around 6500-7000. Let’s take it as 7000. Now add 7% to 7000, you get around 7500. So it means Nifty should be around 7500 now?

The P/E in that time was around 20. Getting the P/E to around 20 now, would been Nifty going down to 8200.

So the right correction would be for Nifty to crash to 7500-8000 before it can start going up again.

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It is tough to predict when it will go down or go up. The business of prediction is tough, and basically a lost battle. However, as investors what we can do is form our own opinion as to what is a reasonable environment to start seeking lucrative opportunities to invest.

Some people are aggressive, their portfolios will see wide swings in upside and downside. Usually, these swings are commensurate. Accordingly, the investor too should be attuned, and truly honestly expecting such swings, else he will bail out on the wrong side, which is what happens in most cases.

Some are defensive, they will get lesser opportunities to enter, once in five year types. But, their PFs will see lesser drawdowns. This requires a mature, confident and a patient mindset. It is the best kind for being a true long term investor.

Hence goes the saying, to the effect, that there are bold investors, and there are old investors, but rarely both, old and bold.

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There is no denying the market is overvalued. But this thread gets active whenever there is a fall or raise. People attribute the fall to some current event. (For example FPI, budget now.). The fact is we never had decent earnings growth since 2014 and all the gains were due to PE expansion.

Imagine if the market hasn’t fallen. Then, people would have justified saying bond yield is very low ( Its 6.34% now). Theories like PE multiple would be high when the yield is low. GDP to market cap, Earnings will review, govt capex etc etc.

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Can some senior members throw light on effect of strong DII and increase of SIP money by retailers in this? I am sure that there is a significant increase in people doing SIP these years and DIIs have become stronger.

Unless you can time the exact long term bottom of markets, every investor will face some drawdowns. You seem to suggest that timing the market is necessary for lesser drawdowns. That will make market timing a necessity; what about those investors who don’t follow the macro or don’t have the skills to time the market? And what about the loss of opportunity if you didn’t enter or got out too early?

I feel that one can achieve relatively low drawdown with careful stock selection and does not need to time the markets. If your drawdowns are lower than market, and the earning of businesses you own are growing, you may not panic even in events like 2008. Even better if you maintain some funds in fixed deposit always, to be used only in case of events like 2008. That way, you spend the necessary time in market, without missing the opportunity extreme fall of market can provide.

I don’t want to brag, but I have managed to do that (achieve lower drawdown than index in current market). You may see the portfolio I shared here

I started investing in considerable amounts since mid-2017, lured in by the 2017 bull run, but I have managed to keep my drawdowns in single digit, even though the midcaps are clearly in bear market since January 2018. That is because my biggest investments are in stocks like Dmart, Bandhan, InfoEdge, etc, accumulated whenever they fell considerably, each accumulation point higher than the previous one mostly, and I have never averaged down my initial positions in stocks that qualify only as good, but not the best, even as they fell considerably. (I do have an initial position in Khadim and TVS Srichakra). Neither have I tried investing in murky opportunities like DHFL. You can say I have used some elements of market timing, but they were stock specific, not trying to time the market index.

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Waiting for sub-20 PE is not a skill in timing the market, considering that in the last 20 years the market has spent 70% of all trading days in sub-20 region.

If one calls out, PE 12 or 13, then sure that would require some skill and bucket loads of patience, but PE < 20 is just a matter of time.

As a retail investor, one who feels complete responsibility for his own capital, drawdown is just as crucial to plan for as are other features of his investment plan, like MoS, Quality of managment etc.

Another way to look at it is, even if everything else done correctly, and yet the portfolio shows a drawdown of 30%. I don’t how how many investors will have the courage to see it through?

And if the answer were simple, then every Tom, Dick and Harry would be a long term investor.

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What relevance has Nifty PE in the case of individual companies that are outside of Nifty 50 or Nifty 100? If a stock is available at a price I am comfortable with, shouldn’t I go forward and buy it or should I wait for Nifty to drop another 500 or 1000 points? If I were an index investor, I would love for the indices to go down and I can wait for as long as possible, and nibbling in between with small drops. While I do acknowledge the correlation between the broader indices and other stocks outside of the indices, at times I do see certain companies going substantially up defying the broader market perceptions.

What more indicators or events are you expecting to see for Nifty PE to come to 8000-9000 in addition to the already existing conditions? Or are the existing conditions will bring it down as there will be lesser earnings in the coming months?

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So what generally you invest in Index fund? or do you pick some companies out of Nifty

How can you compare two plots with an entirely different scale?

As I wrote in the post, it has been normalised individually… The whole series is divided by the first data point… which will make both NIFTY and EPS as one… It will give the fold increase from that reference point…