Hi
This post I can write on this thread without hindsight bias now. Earlier when I was writing in January 2018 about a very simplistic novice like analysis of distribution curves (skewed or not) I only had historical data to talk about. Please note it has nothing to do with how PE is calculated or whether this is standalone or not. It is about statistical trends. I think I was not able to drive this point earlier.
But being a firm believer of certain quantitative principles I was ready to put money where my mouth is.
In this case I was ready to stay as much in cash as possible. I am quite certain that my 7% on my 70 odd percent of my portfolio in this period is better than most market participants in the small & mid cap space by the grace of lady luck.
Now lets look at how reversion to mean has panned out. The most right skewed probability distribution curve was for Nifty Midcap 50 index. In the picture below the orange arrows are what I showed in H1 2018 CY. The red arrow is as of today. Mind you we are still not in the undervaluation zone in midcaps.
If we look at the broader market because of the top 10-15 stocks where the fund managers are taking refuge we do not see an appreciable reversion to mean. This index covers ~95% of market cap in listed universe. This is also not a normal curve, it is right skewed.
Not that we are in prediction business but we want to be on the realistic side of events which will unfold. I don’t think no matter how good one is as a stock picker it is very difficult to swim against the tide.
Personally I continue to sit tight most of the time. Whatever investments I had I have added little to them (except my kid’s portfolio where I do an SIP equivalent & slowly build an auto basket). Some of my active stocks have taken a lot of punches, most of my mistakes is in not analyzing well and being naive.
If there is capitulation in the larger names God forbid then it will depress the entire mid and small cap space. The silver lining would be the further lower valuations.
As someone rightly said - It is better to be out of the market and hope that you were in than to be in the market and wish you were out.
Regards and all the best
Deepak