State of Indian Stock Markets – June 2016

This is the monthly update of the state of Indian stock markets. As of now, it comprises only of an analysis of Nifty50‘s ratios, namely P/E, P/BV ratios and Dividend Yield.

But before that, lets see what happened in June 2016, which was a month of exits.

RBI Governor Raghuram Rajan said No to a second term and instead, has decided to return to academia (lucky him!) after his term ends in September. Read his address to RBI staff here.

People termed it as Rexit (= Rajan + Exit). I am a fan of Mr. Rajan for his sensible views and how he took a tough approach towards cleanup of PSU banks. Personally I think that having him around with the current PM in driver’s seat, would have been great for the economy. But life moves on and so will the Indian economy.


Then people of Britain decided to do a Brexit (= Britain + Exit) from the European Union (EU).

In short term, Indian markets were expected to react negatively to the news of Rexit. But that did not happen. Tells how brutal the markets can be towards people’s expectations. 🙂 As for the Brexit, there was a knee-jerk reaction when indices fell more than 2% in a day (might look like a big drop in short term but is nothing when long-term is considered). Some stocks whose business is dependent on British and European economy, witnessed far deeper one-day cuts. But markets seem to have recovered since then. Experts are still trying to predict the consequences of Brexit. But no on seems to be sure about the actual impact. Whether it will result in a mild recession in UK or whether government will eventually disregard people’s verdict in referendum and stay back in EU – no one knows anything.

Coming back to the state of our own markets…

The numbers are averages of P/E, P/BV and Dividend Yield in each month. The heat maps don’t show the maximum and minimum values of each month.

Caution – Please remember that relying solely on averages can be risky. Its like a 6-feet person drowning in a river which had an average depth of 4-feet. 🙂

Don’t make any investment decisions based solely on just one or two ‘average’ indicators. At most, treat these heat maps as broad indicators of market sentiments.

So here are the Heat Maps…


P/E (Monthly Average)
Price to Earnings Nifty June 2016

P/E Ratio (on last day of June 2016): 22.75
P/E Ratio (on last day of May 2016): 22.60


P/BV (Monthly Average)
Price to Book Nifty June 2016
P/BV Ratio (on last day of June 2016): 3.37
P/BV Ratio (on last day of May 2016): 3.40

Dividend Yield (Monthly Average)
Dividend Yield Nifty June 2016
Dividend Yield (last day of June 2016): 1.25%
Dividend Yield (last day of May 2016): 1.32%


You can read about last month’s update hereThe State of Markets section has also been updated (link).

For detailed analysis of the relation between investments made at various P/E, P/BV and Dividend Yield levels and the historical returns, please have a look at these 3 posts:


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State of Indian Stock Markets – May 2016

This is the monthly update of the state of Indian stock markets. As of now, it comprises only of Nifty50’s P/E, P/BV ratios and Dividend Yield.

The numbers are averages of P/E, P/BV and Dividend Yield in each month. The maps don’t show the maximum and minimum values of each month.

Caution – Please remember that relying solely on averages can be risky. Its like a 6-feet person drowning in a river which had an average depth of 4-feet. 🙂

So do not make any investment decision based solely on just one or two ‘average’ indicators. At most, treat these heat maps as broad indicators of market sentiments.

So here are the Heat Maps…


P/E (Monthly Average)
Nifty PE May 2016


P/E Ratio (on last day of May 2016): 22.60
P/E Ratio (on last day of April 2016): 21.24


P/BV (Monthly Average)
Nifty PB May 2016

P/BV Ratio (on last day of May 2016): 3.40
P/BV Ratio (on last day of April 2016): 3.27

Dividend Yield (Monthly Average)
Nifty Dividend Yield May 2016

Dividend Yield (last day of May 2016): 1.32%
Dividend Yield (last day of April 2016): 1.37%


You can read about last month’s update hereThe State of Markets section has also been updated (link).

For detailed analysis of the relation between investments made at various P/E, P/BV and Dividend Yield levels and the historical returns, I suggest you have a look at these 3 posts:
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State of Indian Stock Markets – April 2016

I regularly update the State of Markets section (link) on Stable Investor. This time when I updated it, I took a step further and decided to try and publish heat maps for 3 popular ratios (P/E, P/BV, Dividend Yield) of Nifty 50, on monthly basis.

The numbers are averages of P/E, P/BV and Dividend Yield in each month. The maps don’t show the maximum and minimum ratios of each month.

As with any such ‘average’ indicators, its worth saying that you should not make any investment decision, based solely on just one or two indicators. At most, these heat maps should be treated as broad indicators of market sentiments.

So here are the Heat Maps…



P/E (Monthly Average)


Nifty Historical PE Ratio
P/E Ratio (on last day of April 2016): 21.24


P/BV (Monthly Average)


Nifty Historical PBV Ratio
P/BV Ratio (on last day of April 2016): 3.27%


Dividend Yield (Monthly Average)

Nifty Historical Dividend Yield
Dividend Yield (last day of April 2016): 1.37%

For detailed analysis of what have been the historical returns for investments made at various P/E, P/BV or Dividend Yield levels, I suggest you have a look at these 3 posts:
I am planning to see whether I can also bring in data for some other mid-cap / small-cap indices from next month. Do share your feedback and help me improve these monthly State of Indian Stock Market posts.
 

Becoming a Value Investor using Nifty PE Ratio

First of all, I am overwhelmed with the responses I got for the financial concerns and issues survey conducted few days back. Thanks to you all, there are so many feedbacks that I am still reading through all of them.

And to be frank, I was surprised to see so many people being so honest and more importantly, aware of their financial issues. This awareness in itself is like a quarter (not half) battle won. I plan to regularly take up issues raised in the survey and do detailed posts around it. And here is the first one…

One of the readers had an interesting concern:

I am not a value investor. And nor can I become one as I don’t have the time to monitor or analyse stocks. But I still want to become a sensible investor who invests more when there is panic around. I have read that it’s wise to Buy Low and Sell High. I don’t want to think much about Selling-High right now, as I am pretty young. But I do want to invest more when everyone else is selling, i.e. I want to Buy-Low. But if I go for individual stocks, it can be risky. For someone like me, it makes sense to stick to mutual funds. But how can I know when to Buy More. Even if I invest regularly, shouldn’t I be buying more when markets are down and I have additional funds?

That’s a pretty reasonable concern of the reader. And I think that many among us do not really have the time to become real investors. We are better suited to piggyback on expertise of others.

So what I understand from this question is that he wants to become a Value Investor, without bothering too much about picking individual stocks.

Fair enough…I would say…

By the way, I don’t consider myself to be a value investor. At most, I am an opportunist who is interested in buying good companies, at relatively cheap prices and holding them for very long periods of time. And yes…every now and then, I do take up small short-term speculative positions as well. But these positions are small and generally not more than 5% of my overall portfolio size.

I know…the above paragraph is more like a disclaimer. So anything I say from here onwards should be considered as coming from the mouth of a self-confessed non-value investor and not an expert of any kind. 🙂

But jokes apart, it’s a fact that 95 out of 100 people who invest in stocks, would be much better off if they do not invest in stocks directly. They should rather stick with well-diversified mutual funds. And I am saying this not because I consider myself to be an expert or an authority in something (on the contrary, I am a pretty regular guy as detailed in 17 Unknown but Honest Facts about me). But because successful investing is more about our own personalities and discipline rather than just about picking the right stocks.

 

To explain this, lets take an example. Suppose your overall portfolio size is Rs 10 Lacs. Now you consider yourself to be a good investor and find a good stock selling cheaply. But you only invest Rs 5000 out of the Rs 10 lac in this stock. This stock goes on to become a multibagger (10X) – your Rs 5000 investment becomes Rs 50,000. But at an overall level, your portfolio of Rs 10 lacs only moves up by Rs 50,000 (or Rs 45,000 to be precise) ~ to Rs 10.5 lacs. Nothing much to boast of. Right?

So it is never just about picking the right stock. It’s also about position sizing and how convinced you are about the stock (and a thousand other factors).

Successful value investing is also about being prepared for the rare investment-worthy opportunities. This means that even if you have chosen the right stock, and are ready to allocate a significant part of your capital to this stock, you still need to have the cash to invest in the opportunity. Because if you don’t, you cannot become a value investor, of for that matter even a decently good investor.

So what should an individual who wants to do value investing, but not through specific stocks, do?

The answer is not very complicated. But there is a catch, which I will disclose after giving the solution.

Lets break down this problem statement into 2 parts:

  • Identify situations when it makes sense to invest additional money.
  • Identify investment options where one can invest

Here is the solution…

Part 1

 

It is not difficult to identify situations where it makes sense to invest more (and as much as possible) for an average investor. A real value investor can go and find undervalued stock in a bull market. But an average investor needs to be right first and then think about the return percentages. And chances of being right with individual stock picks are lower than that of being right about investing in a group of companies.

So here is an indicator (or rather 3), which give you helpful advise about when to invest more.

PE Ratio India Stocks
PBV Ratio India Stocks
Dividend Yields India Stocks

If you go through these above tables you will realize a clear correlation between these indicators (P/E, P/BV and Dividend Yields) and Returns you can ‘expect’ to earn when you invest on basis of these indicators. And here, by investing I mean – investing in a large group of stocks and not in individual stocks.

So…

Lower the P/E Ratio when you invest, better your chances of getting higher returns. (Proof)

Lower the P/BV Ratio when you invest, better your chances of getting higher returns. (Proof)

Higher the Dividend Yield when you invest, better your chances of getting higher returns. (Proof)

It is as simple as that. And a few years back, I even found a range of P/E ratios, which seem to control Indian markets. You will be surprised to see how clear this PE Band is!! I was mightily surprised when I say it first. Here is another interesting analysis of how much time Indian markets spend at various PE levels.

Now you would want to know how to track these indicators regularly. The answer is that you can either track it using this link on NSE’s website. Or you can check out monthly updations, which I make to State of Indian Market page.

Part 2

Now comes the second part. Once you know that it’s a no-brainer to invest at a particular moment, and you have the cash power to do it, the question is where to invest.

I know you would love to invest in individual stocks, see them become out-of-the-world multibaggers and boast of being a great stock picker. But lets be honest. It’s not easy at all. Even expert investors are unable to find great stocks easily. So for all practical purposes, individual stock picking is best avoided by average investor. End of discussion.

So where does one invest?

The answer is… in a group of stocks. A well diversified selection of stocks belonging to various industries, which as a group help in mitigating the risk of getting it wrong by investing in individual stocks. Yes. I am talking about mutual funds.

When its time to invest more (identified in Part 1), you need to invest heavily in well diversified and proven mutual funds (Part 2). Done. Nothing else to do. You will be rich. 🙂

So the action plan for you is:

  1. Invest regularly in a few good mutual funds through SIP.
  2. If possible, increase SIP every year by 5% to 10%
  3. Keep a regular track of P/E, P/BV and Dividend Ratio (DY) of overall market.
  4. If markets go down and with it PE, PBV goes down and DY goes up, you would do well to invest additional money in these mutual funds.
  5. If the thought of investing more when your portfolio is going down does not make sense to you, then you need to rethink whether stock markets are a place for you or not.

The above approach is like giving booster shots to your portfolio when markets are going down. I have done a comprehensive 4-part analysis on investing more when markets are down. Results of the analysis were surprising as it proved that just by keeping it simple, i.e. investing a constant amount regularly still made a lot of sense for majority of investors. But if you have additional money, which you can invest and forget for few years, don’t hesitate to put it in mutual funds.

I hope that with this post, I have been able to clarify on how to become a value investor by using just plain, simple mutual funds. Let me know if you all have any questions or suggestions for this post. It will help me improve future posts addressing financial concerns.

Note – Whenever you think about investing in stocks or mutual funds, make sure that you are doing it for atleast more than 5 years. There have been 5-year periods when stock markets did absolutely nothing.

Dividend Yield Analysis of Nifty in 2015 (Since last 16+ Years)

This is the analysis of 3rd and final indicator which I track on a monthly basis in the State of Indian Markets. The previous two posts have analyzed P/E Ratio and P/BV Ratio of Nifty since 1999, i.e. a dataset of more than 16 years.

The data for this and all previous analysis has been sourced from NSE’s official website (link 1 and link 2). Since data prior to 1st January 1999 is not available on the website, the analysis starts from that day itself..

So here is the result of the analysis…


The table above shows that if one is investing in markets where Dividend Yield (DY) > 3.0, returns over the next 3, 5 and 7 year periods have been an eye-popping 55%, 40% and 27% respectively. But if you think that you are smart enough to time the markets and invest only when DY>3.0, then let me tell you that it is really very tough. Markets with DY>3.0 are extremely rare. And to give you an idea about the rarity, here is a fun fact…

The markets have been available at DY>3.0 on only about 28 days since 1999, i.e. in 4000+ trading days!! Now you know how tough it is. And though as everyday investors, it’s almost impossible to wait for such rare occasions, it shows the power of long term, patient investing for those who know when to wait and when to jump in the markets.

On the other side of this return spectrum is DY<1.0, where returns over a period of 3 years drops down to a mere 2.2%

For your information, currently Nifty is trading at Dividend Yield of 1.23%

Below are three graphs to provide details of the exact Returns against the exact dividend yields on a daily basis (though arranged with increasing PB numbers).

The left axis shows the P/B levels (BLUE Line) and the right axis shows the Returns (in %) in the relevant period (Light Red Bars)




All three graphs clearly show that there is an direct correlation between Dividend Yield and returns earned by the investor. Higher the Yield when you invest, higher the expected rate of return going forward.

This completes the analysis of 3 key indicators. A few readers have mailed me and requested to combine these 3 Analysis and make it available online at one location. In few days, I will do a Comprehensive Post covering all three indicators P/E Ratio, P/BV Ratio and Dividend Yields and a few other findings about these 3 indicators.

Hope you found this and previous two analysis useful…

This Stock is up 30,000% – So Why is my Relative Not Selling it?

What would you do..?

…if the stock you purchased is up more than 30,000% from your purchase price?

A common and a sensible reaction would be to sell it immediately & celebrate. If I would have been in your place, even my first reaction would have been the same. And more so if this appreciation had taken place over a very short period of time. 

But this particular one took almost 25 – 30 years.

And the stock I am talking about is Hindustan Unilever (HUL).

One of my relatives called me up last night for a general chit-chat. Since he is into long term investing, or rather passive & lazy kind of investing, we generally end up talking about stocks much more than anything else. And this time was no different.

He told me that since markets had run up so much due to election-induced-euphoria, many in his friend circle were asking him to sell this ‘mega-multibagger’ now. As mentioned above, he was referring to the shares of HUL which were a part of his portfolio. Adjusting for various bonuses, splits and dividend re-investments in last few decades, his average cost per share worked out to be less than Rs 2.

And the stock is currently trading at around Rs 580!

And as mentioned in the title of this post, this amounts to a un-booked paper profit of more than 30,000%

Now the question is, why isn’t he selling his shares? That to after a rise of more than 30,000%!!

In 2013-14, HUL paid/announced a dividend of Rs 13 per share.

So what does this information have to do with the decision to sell (or not) a stock which is already up more than 30,000%?

This means that my relative is earning a monstrous dividend yield of 650% per year, i.e yield-on-cost. Yield-On-Cost is the dividend yield of a stock on its purchase price.

Dividend Stock Wealth
Sometimes, its the only button you need on your Wealth Keyboard



For a stock having an effective purchase price of Rs 2, a dividend of Rs 13 every year means a yield of 650%. And since HUL generally pays dividends which increase with time, it is highly probable that this yield-on-cost will continue increasing in future too.

Now where else can you find an investment, which pays 650% every year?

And that is the reason my relative is not selling his shares. The logic which he gives is an extension of previous statement. If he sells his shares of HUL, it would be impossible for him to find an asset class which would provide him with such phenomenal annual returns.
Returns Assets India
Comparison of Annual Returns by various assets
** HUL in this particular case
And this makes a lot of sense.

Though I call myself to be a long term investor, I still think that it is really, really tough to buy stocks and keep them for more than 25-30 years. Really, I am proud to be a relative of this person. 🙂


You can read my article on the concept of Yield-On-Cost in world famous value investing website Old School Value here.

TATA Investments available at 50%+ discount to its NAV!! Should you buy?

Tata Investment Corporation Ltd (TICL) is an interesting company. I have personally liked this company for its simplicity and its dividend payouts. And having a Tata brand attached to it does not hurt anyone. 🙂 This company can be one of those so-called safe businesses, when bought at a good price.

tata investment corporation logo

The business in itself is pretty straight forward. It invests primarily in equity shares, just like any mutual fund. But it does not collect money from investors. It uses its own money for investing.

The Company’s investment philosophy is to “invest predominantly on a long-term basis in (industrial) companies that are well-managed and offer potential for high dividend yield as well as high growth and whose stock may be trading at a discount to its underlying intrinsic value.

The underlined text in company’s investment philosophy is what attracts me to this business. I have always been an advocate of companies which pay decent dividends, even though it may mean that these companies lack better investment opportunities. This is because when investing for decades and not just years, it’s wiser to stick with stable, rock solid dividend paying companies for core portfolio. This helps in generating an ever increasing stream of dividends and provides additional money to fund acquisition of growth stocks.

Now, if we go by the book value of TICL, it has shown a decent (but not continuously increasing) trend. It has climbed up from Rs 150 in 2003 to above Rs 350 in 2013.

tata investment corporation book value per share
TICL Book Value Per Share (2003-2013)

In the meantime, and as already mentioned, the company has been generous to its investors and has doled our liberal dividends year after year. The graph below shows the stability in dividends paid by the company.

tata investment corporation dividend payout
TICL Dividends (2007-2013)

And with recent market correction, the stock is trading at a mouth watering dividend yield of more than 4.5%. For me, this is a very exciting number. But same may not be the case with you. This may not seem like a very big number to you. But assuming you are a long term investor who can hold the stock for many years, the dividends under normal circumstances would continue to increase. This in turn would increase the yearly yield on cost basis. So even if we just look at this stock from dividend income perspective alone, the stock deserves to be accumulated at current levels.

Another interesting way to check stock valuation for this company is to compare the stock NAV with its current market price. This NAV as explained on company’s site, is a measure of market value of all investments made by the company. This is similar to a mutual fund’s NAV. If you see the graph below, it’s clear that market price has always traded at a discount to company’s quarterly disclosed NAV. This is not a strange phenomenon as holding companies (like TICL) tend to trade at a discount to the market value of their investments.

tata investments stock price discount NAV
Stock Price has always been less than company’s (investment) NAVs

But important point to note is given in the next graph. The red straight line is the average discount at which the stock has traded to its NAV. This is close to 38%. But with recent fall in share prices, the discount has widened to around 55%. 

tata investments stock price discount with NAV percentage
Discount to company’s NAV has risen in recent times (Check Right part of chart)

Now, TCIL has traded at such steep discounts only in the crisis of early 2009. Such deep discount to NAV demands that this business be given a serious thought when buying stocks for long term portfolio. 

Risk – Before you go ahead and buy this stock, please do remember that just like stock price, this NAV too is market dependent and fluctuates depending on market value of investments made by the company. For a detailed description of company’s investments, please go through the latest Annual Report here. For a quick glance of company’s financials, click here.


Disclosure – Long term positions in TICL.

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