Which value metric works best?

I recently undertook a quick and dirty backtest on NIFTY stocks to verify whether buying a portfolio of the cheapest index stocks and rebalancing annually would beat the broader index. In spite of the fairly short period under test (nine years from 2008 to 2017), if you’re a value investor, the results are encouraging. From Sep 2008 to Aug 2017, ignoring transaction costs and dividends, a 10 stock value portfolio returned 18% annually compared to 9.8% for the NIFTY. The details of the test and outcomes are in the post ‘Can buying cheap NIFTY stocks beat the index‘ For this test,

Read more

Mean Reversion: The Value Investor’s secret weapon

  Successful Equity Investing To become an equity investor, you need three foundational elements: to tell a fundamentally strong company from one that is not based on it’s financial statements, it’s business model, and the dynamics of it’s industry to put those fundamentals in the context of the prevailing market price and how those prices are subject to variation based on swings in the nebulous concept called market sentiment, and to recognise, and protect against the potential influence of those market sentiments on our decision-making i.e. our susceptibility to behavioural biases when making investment decisions These elements are common sense, but they take a lot of conscious effort

Read more

Decoding the PE ratio of a stock

At a glance Price-Earnings or PE is the most widely valuation metric by equity market investors However, arbitrarily shifting PE levels and differences across industry groups mean it’s hard for an investor to utilize it in his decision-making The conservative interpretation of PE should be “the number of years of earnings it will take to pay back your cost of buying a share” Additionally, PE is an indicator of the market’s expectations of earnings growth over a sustained period of time. Working out that expected growth number provides an investor additional information on the suitability of a purchase Ask a

Read more

Predicting market returns? Not so fast!

“Be careful – you are using the same data to predict as the model itself. You used past data to determine how stocks have behaved 1 year in the future based on the P/E that the index had (average ranges). Then you plot the “prediction” of that past data as a backcasted chart. Obviously it will show the same curve, because you used the very same data to determine the ranges in the first place :)” – Deepak Shenoy Excellent comment on my last post: Predicting stock market returns, by one of the most prolific analytical finance practitioners in India. (If you

Read more

3 charts that sum up Indian equities in 2014

1. An “exuberant” 2014 Both key benchmark indices up by 30% December so far has seen the only significant correction in 2014 2. A “can’t go wrong” 2014 Every sub-index provided positive returns, some more than others with returns ranging between 10% and 70% Metals, Oil & Gas, IT, FMCG and Power under-performed the broader index Small caps, Consumer Durables, Mid caps, Auto & Capital Goods offered 50%+ returns 3. An “Expectations ahead of Earnings” 2014 Indian markets currently trade just above 21x earnings (For every ₹1 in earnings, you pay ₹21) Unless earnings show significant growth in the next quarter or two, historical data over 15 years suggests you’re more

Read more

Markets this quarter and a game of dominoes

At a glance Indian markets have just ended their best quarter in five years – Valuation metrics tell differing stories – Nifty P/E say “expensive” but P/B say “fairly priced” – History suggests the interplay between the two reveal prevailing themes of investor expectations – Current expectations count on a bunch of interconnected things going right – Overly optimistic short-term investors might be rudely shocked – “Watchfully optimistic” should be the theme for calm investors After the frothy action in May, June 2014 saw some semblance of normality return even though the direction of the overall index remained the same, UP.

Read more