A lot of people are comparing this to 2008 crash. Moreover there is a pattern of a crash every 8 year. So did a bit of data crunching. (source nseindia historical pe combobox ). Date, nifty pe ratio, div yield.
2008 bubble
Peak: 08-Jan-2008 28.29 0.82
Bottom 27-Oct-2008 10.68 2.24
(Actually index value bottomed out on March 9, 2009. But the pe was higher than 27th oct, possibly due to higher earning in the subsequent quarter. Its 09-Mar-2009 12.21 2.18)
2015
Peak: 03-Mar-2015 24.06 1.22
Bottom* 15-Jan-2016 20.12 1.55 (as of now)
I understand that index has undergone a lot of changes and its not the right comparison. But if you look at the old index, a lot of not so good companies are out now. For eg, rcom, unitech, suzlon, satyam, vsnl, ranbaxy to name a few. A few high quality companies like lupin,indusind,bosch,kotak,asian paints are in @admin, It may not be the right place for this. feel free to delete/move to appropriate place.
Market is going through terrible correction/bear phase. I am sure you must have seen and gone through several such phases. As we know these times tastes the character of investor ( esp patience, not to panic, keep buying etc). Just wanted to hear your thoughts on the same. i.e what is the best strategy in these times esp for many on VP who are invested in quality mid cap and small caps, who are also down 30 % types in last few months. So, if you can share your thought process it will be useful to many like us, eg
Should one keep calm and do not do any activity and let this phase also pass by and we keep holding our winners tightly ?.
Should one sell lesser quality names and switch to superior quality mid caps/ defensive ?.
Time to increase equity allocation in big way for future rallies ?
The bull run in quality mid cap and small caps is over and PE/valuation will correct to normal levels or below large cap peers.
Quality large caps after correction also looking better than mid caps, time to switch ?
Can 2016 be like 2008, and many quality names may be also down by 50-70 % like last time.
Are the names not owned by FII or institutions more safe, like quality illiquid names, having strong hands.
I request other VP core team seniors @Donald, @desaidhwanil@ayushmit@vivekbothra@Vivek_6954 to also comment if they feel so, I think investing success depends a lot on how we react or dont react in these times rather than bull periods and many soft qualitative skills.
Other members are also free to comment as this will help us refine our thought process as we write and collectively we can improve as a community of value investors. ’
I am really new…in terms that this might be the first crisis which I
might experience in my investing career…I saw many companies fall 30% in
a month…having nothing to do with the China slow down…they are pure
Indian stories…having no direct nexus to China or other countries…take
the case of cement story in andhra…what has this to do with China
slowdown…no moat is a concern here…but these are sustainable
stories…the panyam stock has been beaten badly…markets are much
irrational than what I used to think…I feel we should use Kelly formula
here…best described in dhandho investing book…
Basis the Kelly formula we can fix the proportion of our total cash to be
deployed at this point in time…the theory is based on probability which
differs from person to person…I recently bought the stocks in my
portfolio using the Kelly formula…I shall give an example on Kelly
formula in a short while…getting late for office…
70% chance that the price would move up to 90 from these levels.
10% chance that the price would move to 70 from these levels.
20% chance that the price would move down to 45 from these levels.
Now, lets do weighted average of these probabilities -
(probability * expected gains or loss)
= (0.732)+(0.112)+(0.2*(-13))
= 21rs.
So,
Kelly Formula = edge/odds. (weighted average gains / highest expected gains)
= 21/32
=65.62%.
This means that currently we should use 65% of the total cash available with us to buy the stock at current levels. remember, there is a probability of CMP falling to 45 levels (chance of 20%). If it happens, we can deploy our remaining cash of 35% based on kelly formula probabilities found out at that time.
I am trying this for the first time. Read this concept some days ago only. Big investors are already practicing this. Dont know if it proves right, but yes the logic behind the formula is very correct and convinces me to use it. Bought sarla, fiem and satin based on the same formula. Gave more weights to negative returns and allocated less currently basis the kelly formulae (assumption - we might see the next crisis).
hope this helps. Also do advise me if i am going correct. Top contributors and admins please share your insights on the kelly formula - how helpful is it?
Hi Abhishek,
There is a fundamental error you are doing in using kelly formula IMHO.
Its not based on probabilites of stock price but on company’s performance.
Moreover probabilities are calculated keeping in mind worst case scenario.
Ya true that probabilities are calculated keeping in mind the worst case scenario.
But, how do you calculate kelly formula by company’s growth expectations.
Till what i read, kelly formula comes to use in distressed situations where the stock is beaten up much and you need to decide whether to allocate your excess cash at this CMP or wait for the price to go down and allocate at that point. Now, what i understand is, If i believe that the stock has an intrinsic value of 90 (say), then I would think that over long term the price will converge to this level (90) and this gives me my first probability (chance that the price move to 90 levels from here is 70% - example). Do correct me if i am wrong. Also it would be nice if you can explain your point through an example.
I have been waiting for these 7400-7500 odd levels since an year or so. I have a decent cash chest (more than 70% remaining) to deploy now. I have been a european government bonds trader in the past and was betting on markets to fall to these levels. Also have been a value investing student since my college days.
This forum has helped me a lot and has shaped my investment thinking/style. I have a list of 23 stocks that I have started adding to my portfolio. The price range is based on technical analysis. Would love to hear everybody’s views on these.
CRISIL - Diversified buy between 1770 and 1550
Page Industries - Consumer buy between 12600 and 10600
Bajaj Finance - Financials buy between 5000 and 4500
Max India - Financials buy between 480 and 415
Larsen & Toubro - Construction buy between 1350 and 1050
Gillette - Consumer buy between 4500 and 4150
WABCO India - Consumer buy between 6000 and 5000
Honeywell - Capital goods buy between 7500 and 6500
Cummins - Capital goods buy between 840 and 1000
Thomas Cook - Consumer buy between 172 and 150
Bosch - Consumer buy between 20000 and 17000
Blue Dart - Consumer buy between 5500 and 6100
Axis Bank - Financials buy between 450 and 375
Dewan Housing - Financials buy between 195 and 165
Castrol - Consumer buy between 415 and 370
Amara Raja Batteries buy between 830 and 710
Divis Lab - Pharma buy between 950 and 850
Finolex Cables buy between 200 and 160
Britannia - Consumer buy between 2800 and 2400
GRUH Finance - Financials buy between 220 and 180
ICRA - Financials buy between 3600 and 3100
Ashiana Housing - Construction buy between 160 and 120
Sundaram Finance - Financials buy between 1300 and 1000
Disclosure: I already have 5 of the above stocks in my portfolio and am adding more as the carnage goes on.
Hi, Pillasofcreation
Very nice to see your list of stocks. Almost all of good quality stocks in the list. But how did you arrive at the conclusions that Market will fall to 7400-7500 level only and no more. Technically I was expecting a bounce back from 7550 but now it looks that we may see more downside. I have also a list of stocks. No special theam for purchasing them but will like to make changes at this stage. Your suggessions solicited. My list is already in the forum but no body cared to reply.
1.Natco Pharma 31%
2.MCX 15%
3.Torrent Pharma 11.5%
4.Intellect Design Areana 11%
5.Associated Alcohol 9.5%
6.Vaibhav Global 7.4%
7.Thomas cook 5.8%
8.Ujaas Energy 5.2%
9.Suzlon 3.8%
With the quality of stocks that you have mentioned, you would definitely need war chest(s) of cash to buy good quantities, and gain appropriately.
Kudos to you in predicting the fall below 7500. As it has already breached the 7400 mark, I am not sure where this carnage might stop.
@sinha124 pointed out very nicely,as to what one must do during this time. And quite frankly it will depend on each individual on what they do, and most importantly how much cash they have got to invest now. I have mostly exhausted my buying power in the month of December, but not regretting it. I shall, with the little cash I have left, will buy few mid & small caps at lower valuations:
We and the market looked at mid and small caps as the P/E of large caps was unappealing. With the market correction, to 7200, the large caps become more attractive than others. The fund houses are going to get out of small stocks and pull them down faster.
Pick 3-4 large cap stocks where you want to put your money for long term e.g. L & T , HDFC Bank. Ignore the spread. Hold them for 1 year not looking at MTM .
Portfolio is down by over 20% (relatively), which is not much compared to 2008, but a lot more money is lost as compared to 2008 since the corpus and size of portfolio has grown over the years. Also I sleep well at night and the anxiety/discomfort level is still not visible in me as compared to what happened during 2008. The fact that I am not loosing my sleep makes me believe that we are yet to see the bottom. During the last few days I have been nibbling Motherson Sumi, Ajanta Pharma, Aarti Drugs, Shilpa Medicare & Granules. Looking to add AIA Engineering by month end. 100% invested and out of money now. Eagerly waiting for salary to buy again.
Well thank you for your encouraging words guys. To be honest, I only used basic technical indicators like RSI, trendlines and Fibonacci to figure out levels between 7400-7500. This has been significantly breached and if it gets any worse (which I am pretty confident of), I see the market bottoming out at 6850-6900 levels. I don’t know what will happen beyond that. Panic, maybe?
My approach towards my portfolio is simple. I choose predictability over everything. That is why my portfolio doesn’t consist of stocks that can grow 5x in a few years time. But they possibly will give me 16-20 % return year on year and most of these business will be in play for the next 20 years or so. That is want I want to achieve : Predictability of earnings + Longevity of business.
@rpbadoni : Sir, I only have views on Natco pharma, Suzlon and Thomas Cook. I like Natco and I have Thomas Cook in my portfolio (been influenced by Prof. Bakshi whose lectures I used to sneak in). I am undecided between Ajanta and Natco though. You would be better suited to solicit advice from other experienced members in this regard. As for Suzlon, I won’t touch it with a 100 ft pole. I know it can be a great turnaround story and I’m happy it if it does turn around, but it certainly does not align with my investment style, so no for me.
There’s no alternative to keeping one’s calm. Investing is a lot about temperament.
Lesser quality names could go provided u get the replacements which appear much more attractive.
Time to increase equity allocation is one’s own lookout. Bcos everyone’s finances will be different. Some will need regular income streams while others might infuse regular capital into PF. But looking at the panic around, one can deploy available and surplus cash in a staggered manner.
Bull run in quality midcaps might resume. As Lynch said, usually stock prices follow earnings over the longer time frame. But the run in frothy popular poor quality stocks might be over.
Quality large caps usually are the first to bounce back after major corrections bcos they have higher liquidity and are perceived to be better in terms of BQ and MQ.
I think the memory of 2008 will always remain with people who have undergone the correction. But my gut feel is this time it might not be as bad as in 2008.
Regarding names not owned by FIIs etc being not safe, it all depends upon the quality of the company and its financials. I wouldnt attach too much importance to whether FIIs are holding or not.
Basically I think the main aim should be to have a clear head and a pre meditated game plan of how to face the correction.
This too shall pass… This is a sentence which often helps in all kinds of pain.
Many a times after such sharp corrections sectoral themes often start their bull runs. One needs to watch the stocks that hit 52 week highs or all time highs after all the dust clears and uptrend resumes. Then it could be easy to spot the future winners.
Even after facing these corrections multiple times, there is always for me the feeling of regret, fear and all the other emotions investors face but over time the experience that quality companies do end up giving great returns in the next uptrend helps during those times.
I hope that helps. Nothing except to keep a stiff upper lip and grin and bear the pain. Darrrrr ke aage jeet hai.
Already shared above. Please refer my earlier post. Intrinsic value calculation is simply finding out the value of the company - by price multiples, DCF or some other methods.
IMHO correction is not yet over and any investment should be done in a phased manner. It is very difficult to pick the bottoms and hence it is better to play carefully. We may even get attractive levels down the line but it is impossible to say when. But correction is not yet over. The usual pattern Fall and then consolidation and then reversal. We are in fall stage and not consolidation. It can be also a reversal without consolidation. So far it is only falling and I have not seen either consolidation or reversal. Please also note that US markets are in LT bear market now.
Investing is a lot about temperament.