52 Week Highs & Lows – How to Profit from Fluctuations in Sensex & Nifty Stocks

Fluctuations in share prices are as old as the concept of shares and stock markets themselves. Infact, had it not been for the regular fluctuations, stock market would have been a very boring place. It would be like a bond or a FD. And who would like that. 😉

As a long term investor, few things excite me more than the large fluctuations in share prices of individual companies. And I am not talking about small companies (having few crores market cap) here. I am referring to large caps, i.e. huge and well established companies of India.

Being a risk-averse investor, I have a liking for large businesses. Investing in well established and (supposedly) well-run businesses helps me sleep well at night. 😉 These businesses have witnessed and survived multiple bull and bear markets. So chances of them surviving again are pretty good.
And if we are patient enough, markets eventually do offer temporary mispricing in large caps shares.
But most investors believe that there are fewer opportunities to create money in large caps. I do not subscribe to this view and have already written about why it makes sense to consider large caps when others are looking elsewhere (This article was quotedby the CEO of a leading MF house in their monthly publication).
52-Week High Vs 52-Week Low
Now I did an interesting study comparing the 52-week lows with 52-week highs of various companies constituting Sensex and Nifty 50. Take a look at the analysis in tables below (share prices as of 30th June 2016). The column titled ‘% Change’ measures the difference between the 52-week high and 52-week low in percentage terms:

Sensex 52 week high low

As you can see, there is a huge difference between the two numbers for most companies. Infact, the average difference between the 52-week highs and lows is more than 50%.

Doesn’t that smell like opportunity to buy low and sell high, even in short term?

Now take a look at the Nifty 50 companies:

Nifty 52 week high low
The story remains the same. Here too, the 52W-high is almost 150% of the 52W-low.

Now these companies are well-established and safe businesses (ofcourse if bought at the right price). But think of it – does it really make sense that a company like (say) TCS, is worth Rs 4.2 lac crore today and worth Rs 5.5 lac crores after few months?

No – I don’t think so.

For most of these large companies, there isn’t much that changes at actual business level in the course of few months. Its only the perception of market participants that changes and moves the prices.

The reason for such wide difference in perception of actual value (which drives market price) can be many. In a post about fluctuations in market price of large companies, John Huber mentions about two sources of market’s inefficiencies: 1) Disgust and 2) Neglect.

Now large cap companies are generally not mispriced due to neglect, given the analyst coverage and popularity they have.

More often, mispricing is because of disgust or pessimism. This temporary disgust can be due to bad results, negative news, temporary legal problems, etc. Large caps (or even the stocks in other categories) can get beaten down even when the general market environment is pessimistic. In bear markets, shares of companies with no significant problems at all, are beaten down because of general economic pessimism. Its like all boats (good and bad) come down when the water levels reduce in river.

Mr. Market (and not Mrs. Market)

I am sure you have heard of the concept of Mr. Market (created by Benjamin Graham). This concept is quite relevant here and hence, I mention it:

Every day, Mr. Market will come up to you and quote a price for a stock (or stocks).

When he is optimistic about the future of the business, he will quote a high price to buy or sell. On days when he is not feeling great about the future, he would quote a very low price.

But luckily for you, he does not force you take a decision. You can choose to do nothing about Mr. Market’s quotes and he still won’t mind (maybe that’s the reason Graham created Mr. Market and not Mrs. Market). 😉

And if you are sensible, you would sell to him at a high price AND buy from him when his price is lower than what you consider low-enough.

And this is the beauty of this game. You can always wait. You can wait till the stock you want to buy is mispriced (on lower side).

Mr. Market’s continuous irrationality and urge to give a quote to you everyday creates the opportunity, which you should wait for.

And as Charlie Munger points out: “For a security to be mispriced, someone else must be a damn fool.”

So all you need to do is to wait to find a damn fool on the other side of the trade you want to make. If not a damn fool, even a fool would do. 🙂

A Real Life Example of Mispricing

A friend of mine is into poultry farming. Now without sharing the real numbers, lets assume that few years back his business was churning out annual profits of Rs 50 lacs.

One day, things got bad and some bird-disease spread in his farm. He had to take the drastic step of eliminating all birds as is the norm in poultry business. The business was in distress. At that time, he received an offer from a competitor to purchase his business (including physical assets) for about Rs 5 crore.

He declined the offer as it was too low. Also because poultry was one of the many businesses he owned, he could chose to wait for things to get better as he was not going to go bankrupt due to the poultry fiasco.

Eventually, he revived the business in an year or so and got another offer for about Rs 12 crore. He did not sell even then. I don’t know what price he would have sold at. Maybe Rs 50 crore (Sell high. Remember?). I don’t know.

But what I am trying to say here is that inspite of the business generating profits as earlier, there were buyers willing to give more than twice the original offer. Ofcourse, the original offer was made at a time of distress. But that was a temporary distress. Different people were valuing the same business at different times differently.

The same happens in stock markets.

Temporary problems (leading to disgust) or general pessimism (bear markets) causes share prices to go down. This doesn’t mean that that is the end of the road for the businesses. Businesses recover. And this what an investor should remember.

Market prices will continue to fluctuate more than actual intrinsic values. So as a discerning investor, if you are willing to look further than other investors and are also ready to accept short term losses and volatility, then you can indeed benefit from these opportunities.

This is what Warren Buffett had to say about how we as investors can benefit from these mispricings:

If you look at the typical stock on the New York Stock Exchange, its high will be, perhaps, for the last 12 months will be 150 percent of its low so they’re bobbing all over the place. All you have to do is sit there and wait until something is really attractive that you understand.

And you can forget about everything else. That is a wonderful game to play in. There’s almost nothing where the game is stacked in your favor like the stock market.

What happens is people start listening to everybody talk on television or whatever it may be or read the paper, and they take what is a fundamental advantage and turn it into a disadvantage. There’s no easier game than stocks. You have to be sure you don’t play it too often.

People tell me that small and mid-caps offer far more opportunities than large caps. That is true. And many times, these opportunities offer potentially higher returns than what mispriced large caps might offer.

But small cap investing comes with higher degree of risks and as I have already mentioned, I have a bias for looking out for mispricing in large cap stocks.

So if like me, you are also interested in large cap stocks, then do keep track of index (Sensex, Nifty, etc.) stocks and their 52 week highs and lows. I do it using simple Google sheet (screenshot below):

Tracking 52 week high low

I am sure that you will soon find large cap stocks getting mispriced. 🙂


P/E Ratio Analysis of Nifty – February 2016 Update

Note – I have updated this analysis in 2017 here.

I had been working to make this analysis more useful. Like all previous updates, this one too has index (Nifty 50) analysis of 3, 5, and 7 years. But this time, I have also added an analysis of 10-year returns. Since most readers of Stable Investor are interested in long term investing, it made sense to add an analysis for a longer tenure.

In addition to that, I have also incorporated few more tracking points to give a more comprehensive P/E based picture. The details will become evident as you go through this analysis.

In case you are interested in reading previous years’ analysis, then you can access them here: 2012, 2013, 2014 and 2015. (The latest summaries are available in tab named State of Market)

So what exactly is that this analysis tells?

To put it simply, it tells that it makes sense to invest (if possible, more) when general indices are trading at lower PEs. This statement is based on last 17 years’ worth of analysis.

But mind you, there is ofcourse no guarantee that the trends might continue in future.

So this analysis tells about the possible returns one can get when the money is invested (in index) at various PE ratios.

Let’s go ahead with the updated findings…

Nifty PE Analysis 2016

The table above clearly shows that if one is investing in markets where PE<12, the average returns over the next 3, 5, 7 and 10 year periods are astonishing 39%, 29%, 23% and 19% respectively. Now this is something remarkable. The money is doubling every 2-4 years.

On the other hand are PE ratios above 24. These are levels that are considered to be highly overvalued, in market terms. And returns on money invested at these levels, for the next 3, 5, 7 and 10-years are (-)5%, 3.4%, 9.6% and 12%.

This shows that if you invest in high PE markets, your chances of low (and even negative) returns increase substantially.

And for your information, we are currently trading at close to PE 19.

So as you saw, investing at lower PEs gives bumper returns. But does it mean that it will always be so?

The answer is No.


Because the above numbers are ‘averages’. To explain this more clearly, lets take an example. Imagine that your height is 6 feet. Now you don’t know swimming. But you want to cross a river, whose average depth is 5 feet. Will you cross it?

You shouldn’t – because it’s the average depth that is 5 feet. At some places, the river might be 3 feet deep. At others (and unfortunately for you), it might be 10 feet.

That is how averages work. Isn’t it?

So this needs to be kept in mind. And to handle this point, I have also found the maximum and minimum returns during all the periods under analysis.

Nifty PE Analysis 3 Years
Nifty PE Analysis 5 Years
Nifty PE Analysis 7 Years
Nifty PE Analysis 10 Years

As you can see, there is a big difference between the minimum and maximum returns for almost all periods. So the returns that you will get will depend a lot on when exactly you enter the market. Yes, it sounds like timing the market. But this is a reality. For those who can, timing the market works beautifully.

But point is that most people can’t – And this is the reason why they shouldn’t try it either.

Hence even though the average returns give a good picture for long-term investors (look at the table for 10 year), its still possible that you end up getting returns that are closer to the ones that are shown in minimum (10Y Returns) column and not the average returns. 😉

This is another reason why I introduced the column for standard deviation in all tables above (see last column).

Analyzing standard deviation tells you – how much the actual return will vary from the average returns. So higher the deviation, higher will be the variation in actual returns. I strongly recommend you read this post on importance of Standard Deviation by Prof Pattabiraman here.

Now, lets touch upon a very important point. Buying low makes sense. So should you wait to only invest at low PEs? Though it might make theoretical sense to do it, fact is that it is very difficult to wait for low PE markets.

Look at the time spent by the index at sub-PE12 levels.

It is just about 2% of the time since 1999 (Ref: Column name ‘Time Spent in PE Band’ in tables above).

Markets at below PE12 are extremely rare. For common investors, it’s almost impossible to wait for such days – that might be spaced years apart.

Another useful thing to note here is that as your investment horizon increases, the expected returns more or less are good enough, even when one invests at high PEs.

So, even if an investor puts his money in the index at PE24, the expected average returns are more than 12%. That’s pretty good enough.

And what about the maximum and minimum achieved since 1999?

At 13.8% and 10.5% respectively, these are not bad either. This is what really shows that if you are investing for long term, equity is your best bet for wealth creation.

The longer you stay invested, higher are the chances of making money in stock markets….even if you have entered at higher levels. On the contrary, if someone was thinking to invest at high PEs (above 24) for less than 3 years, then I am almost certain that this person will lose money.

Recommended Reading:

  1. Becoming a Value Investor using Nifty PE Ratio
  2. A Small Guide I refer to when investing in Stock Markets

Now you might be tempted to ask – what is it that I do with my own money (after knowing all this since I have been doing this analysis for past many years)?

The answer is that I have tried to keep my financial life simple.

I have few base SIPs running all the time. I don’t disturb them whether it’s a low PE market or a high PE one.

Since I am also interested in giving booster shots to my long-term returns, I invest additional amount when I feel comfortable with valuations on the lower side. I also keep a Market Crash Fund that I use every now and then. I have covered about it in detail here, hereand here. But I don’t recommend that approach to anyone. It’s for people with time and intent to track markets closely.

For most readers, knowing the market PE gives a broad idea about the valuations of overall markets. It helps ensure that you know when the markets are over-optimistic and hence, it reduces the chances of making mistakes when investing. It also helps in knowing when the overall mood of the market is down and probably, full of more than necessary pessimism. Let your base SIPs run irrespective of market levels. But see if you can benefit from some of the insights that analysis like above provides. 🙂

Reminder: I am talking about index-valuations here and not individual stocks.

A reader had asked me to create a PE chart to show monthly changes in Nifty valuations. Heat Map below shows monthly Nifty valuations – based on index’s monthly average PEs.

Nifty PE Analysis Long Term

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…

P/E Ratio Analysis of Nifty in 2015 (Since last 16+ Years)

It seems like a season of Excel-based Analysis. You must have noticed that majority of the posts I have been doing in last 1 or 2 months, use Excel-based analysis. Though there is no particular reason for this, here I am back again with another analysis. Don’t worry…it’s not a very complex analysis. It’s simple and very useful…

Regular readers would be familiar with my ‘fetish’ for tracking State of the Indian Markets on a monthly basis. And I make it a point to update the data set every year to update the yearly returns calculations. I have been doing this every year since Stable Investor started, i.e. in 2012, 2013and 2014.

So this post is about analyzing P/E Ratio of a popular index Nifty50 and the returns earned in 3, 5 and 7 year periods, when we invest (theoretically) in the index.

But before I move forward, you might question the rationale of doing such an analysis. And that too, on a regular basis. The reason is very simple. This small effort ensures that I have a broad idea about the valuations of overall markets. It helps ensure that I am not entering markets, when they are over-optimistic. This in turn reduces the chances of making mistakes when investing for long term.

It also helps me in knowing when the overall mood of the market is dull and full of pessimism. In past I have been unable to utilize such times to invest heavily. But I do not want to miss out on such opportunities in future. I hope you understand what I mean… 🙂

So let’s go ahead with my findings…

The data has been sourced from NSE’s website (link 1 and link 2) and starting from 1st January 1999. Ratio related data prior to this period is not available.

So here is the result of the analysis…

The table above clearly shows that if one is investing in markets where PE<12, returns over the next 3, 5 and 7 year periods are astonishing 39%, 29% and 25% every year. That is money doubling almost every 2-3 years!!

But markets with PE below 12 are very rare. To give you an idea about the rarity, the markets have been available at PE<12 on only about 50 days since 1999, i.e. in 4000+ trading days!!

Though as average investors, it’s almost impossible to wait for such days, 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 end of the spectrum is PE above 24. These are levels which are quite overvalued and returns over the next 3, 5 and 7 year reduces to (-)5.1%, 2.7% and 9.9%.
This shows that if you invest in high PE markets, your chances of low (and even negative) returns increases substantially.

And for your information, we are currently trading at PE=24 😉

But here is another interesting thing to note here. Even at a costly PE24, if an investor stays invested for more than 7 years, then average returns are still a very decent 9.9%. And this shows that longer you stay invested, higher are the chances of making money in stock markets….even if you have entered at higher levels (Caution: I am talking about index investing here and not individual stocks).

If you are still not convinced with the data shown in above table, I have a few graphs for you. These graphs have been plotted to show the exact Returns against the exact PE on a daily basis (though arranged with increasing PE, PB and decreasing Dividend Yields). 

Three graphs – one each for 3-Year, 5-Year and 7-Year Rolling Returns:

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

The 3 Year graph clearly shows that lower the PE when you invest, higher are the chances of making good returns in short term like 3 years and 5 years (graph below). Yes… I consider 3 and 5 Years as short term. 🙂

Now, interesting thing about 7 Year graph below is that there are no negative returns. 🙂 What does it mean? It means that it is very difficult to earn negative returns if you invest for long periods like 7 years, 15 years or even 30 years!!

Next I will be sharing my findings on a similar analysis for Price-To-Book-Value Ratio, followed by one for Dividend Yield of the Nifty since 1999. Hope to do it in a day or two.

Huge returns given by Nifty 50 Stocks & how we got it right back then :-)

You must be wondering – Why 10 months? And not something more rounded-off like 1, 2 or 5 years? The reason is that in December 2011 (about 10 months back), we wrote about Nifty 50 stocks and prices which they were available at. At that time, we felt that some of these stocks were available at quite low prices when compared to their previous highs (2011 & 2008 highs). Our view was quite evident from the title of the post “Large Cap Nifty Stocks available at deep discounts.

Though you can read the post to better understand our view, in short we felt that some of these large caps were available at quite beaten down prices and it seemed more prudent to stick to businesses which could weather the economic storm rather than trying to find the next multibagger. We advised and started selectively buying (for our personal portfolios) some of these large cap stocks, which scored high on sustainability parameter and had revenue & profit visibility.

So after 10 months, with index up almost 22%, we decided to see where individual stocks have moved. The result is given in table below. Please note that we have compared only price movements and not the underlying value.

Note – Stocks removed or added to Nifty 50 do not feature in the table
  • A few of these names, which are a part of an average investor’s portfolio like Tata Motors, HUL , ITC, Maruti, HDFC & ICICI have given close to 50% return in last 10 months!!
  • But there have been others like Bharti, PNB & BHEL, which have given negative returns too.

So are we saying that we have special powers to predict market movements? Do we know how to time the markets? Absolutely not!! Nobody can predict market movements. Not even greats like Warren Buffett. But what we can do is to learn from history of stock market valuations. And history tells that markets near PE=14 are undervalued. But does it mean that it won’t go down lower? No. Markets can go further down to PEs of 10. What it does mean is that it is time to start accumulating stocks of good businesses.

With current PEs hovering above 19, we are not sure if it’s a good time to pick stocks which have already run up a lot in last 3 months. But in times of confusion (as we said that ‘we are not sure’), it is best to stick with regular systematic investment (SIPs) and wait for valuations to come lower.

Note – We have added a State of the Market tab where you can check latest market valuations parameters. Hope you find it useful.

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