- less likely to produce extreme volatility,
- less likely to produce huge losses which can’t be recouped and, most importantly,
- more likely to work (given the fact that all of us are only human).
|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.
|Click to enlarge|
- Average 5 years returns have been a good 11.8% pa. i.e. if you invested some money in index (Sensex in this case) and did nothing for next 5 years, your money would have grown at a rate of 11.8% every year (Doubling in just over 6 years).
|Click to enalrge|
- Average 10 years returns have been a good 10.9% pa. i.e. if you invested some money in index (Sensex in this case) and did nothing for next 10 years, your money would have grown at a rate of 10.9% every year (Doubling in just over 6.5 years).
Now these two figures of 11.8% & 10.9% are not earth shattering, but if maintained for decades, they have the potential to make investor following do-nothing approach, super rich.
- In all we had 201 Five-Year Periods. Of these returns earned in excess of 10% were 91 of those periods. i.e. 45%
- The buy and hold strategy (for 5 Years) beat long term average of 11.8% a good 37% of the time.
- For Ten Year Periods, we had a fewer 141 periods. Returns earned in excess of the long term average of 10.9% were a brilliant 59% of the time. i.e. If you stayed invested for 10 years and did nothing, chances of beating the long term average were a high 59%.
And you thought that buying and holding did not work! 🙂
Caution – Five year returns do not follow the same pattern as 3-Year returns. Even on investing at foolishly high PE of more than 24, data shows that one can earn close to 26% pa for the next 5 years. Though data is correct and calculations have been thoroughly checked, we think that this should not be taken as a general rule. This is more of an outlier (due to high returns in Dot com boom and great Indian Bull run of 2003-2008). The fact is that investing in high PE markets increases the chances of low (and negative) returns. A graph below shows that PE Ratio and returns earned over 3-5 years period are inversely proportional.
|PE Ratio & Returns (Click to enlarge)|
P/B Ratio (What is P/B Ratio?)
Caution – Like in case of P/E Ratio, it is found that five year returns do not follow the same pattern as 3-Year returns. On investing at high P/B of more than 4, data shows that one can earn close to 23% pa for the next 5 years. This is foolish! Though data is correct and calculations have been thoroughly checked, we are not convinced with this result. Investing in markets trading at high PB levels increases the chances of low (and negative) returns. A graph below shows that P/B Ratio and returns earned over 3 year periods are inversely proportional.
|P/B Ratio & Returns (Click to enlarge)|
Dividend Yield (What is Dividend Yield?)
Caution – Like in previous two cases, five year returns do not follow the same pattern as 3-Year returns. But rest assured, investing in markets trading at high dividend yields increases the chance of (very) high returns. A graph below shows that Dividend Yield of index and returns earned over 3 year periods are directly proportional to each other.
|Dividend Yield & Returns (Click to enlarge)|
So how can one benefit from these historical trends at present? As already said, we first need to get the current values of the 3 parameters. These are taken from NSE’s website.
- An investment at PE = 17 will give returns of 13% pa for next 3 years. (We are intentionally omitting 5 year returns data as we are not sure of its relevance – Read Caution Statement in part pertaining to PE Ratio above).
- An investment at P/BV = 2.9 will give returns of 27% & 37% pa for next 3 & 5 years respectively.
- An investment at Dividend Yield = 1.62 will give returns of anywhere between 6% to 26% (We are giving a range because thought the DY=1.62 lies in bracket for 26% returns, the fact remains that it is also very close to lower bracket of Below 1.5, which has a return of close to 6%)
*By investment, we mean investment in an index (via Index Fund or ETF) and not any particular stock in the index.
Though readers are free to draw their own conclusions, we thought that we would put down a few of ours –
- If you invest in markets trading at lower multiples (PE<16) OR PBV2.5, you are bound to make some serious money in a few years time.
- If you have some money which you want to park (at one go) in some index fund or ETF which tracks the index, we suggest that you should wait for levels when most of the markets health indicators discussed in this post are in your favor.
- But if you are one of those disciplined investors who avoid timing the markets, then you should continue investing on a regular basis without any regard to bull or the bear markets. But you need to pray that when you need your money, it should be during the reign of bulls 😉
- Returns during last 13 years, when segregated on basis of Dividend Yields are –
- This clearly indicates that at current Dividend Yield of 1.6, chances of earning around 20% per annum for next 3 years are quite high! (Caution – The statement is made on basis of historical data. Past performance is no guarantee of future performance.)
- A graph between Dividend Yields and 3-Year-Returns (CAGR) also shows that there is a high (positive) correlation between the two. Higher the dividend yield, higher the returns over 3 year periods.
|Dividend Yield & Return Since 1991 [Click to Enlarge]|
- But one must understand that market does not give enough chances at higher levels. Our analysis shows that out of 2500 trading sessions in last 13 years, markets spent less than 5% (127 days) at dividend yields of more than 2.5 (which offers maximum returns over 3 year periods).
|Days Spent on various Dividend Yields|
Investor A invests at lowest index level during the month (i.e. A has all the information);
Investor B invests at highest index level during the month (i.e. B mistimes the market every month!);
Investor C is indifferent to news flow and invests at month-end closing prices. Each one them has invested a total of Rs 7,20,000 in 144 months.
That is, if you are ready to invest in a disciplined manner for long term, having information and timing does not matter much. Even an indifferent person can make money by investing dispassionately.
- It should be understood that there is no point in trying to time the market. Though it has been tried by millions of people and people have made money and have become millionaires, the fact remains that it is neither easy nor feasible for a average investors like us.
- Timing is possible. But only for those who are part of the inner circle – people who have insider information.
- There is a difference between information and wisdom. An investor should be vary of all information being bombarded at him and one needs to be wise enough to filter out the noise.
- As a regular retail investor, it makes sense to keep on investing in a disciplined manner. The reason being that there is not much to lose (6% – Refer to above example) if an investor decides to ditch time-the-markets approach.
- But if you still think that its easy to time the markets, then its better if you stick with shares of companies which are robust and have withstood the test of economic cycles. And there is nothing better if you can buy shares of such Large Caps which are available at Huge Discounts)
And wish you all a Merry Christmas to all the readers!
- Over any rolling period of 5 years in last 12 years, Sensex has not given negative returns! So if you are ready to stay invested (in this case, in an Indian Index Fund) for a period of 5 years, you won’t lose money.
- Returns earned during last 12 years, when segregated on basis of P/E ratios are –
|Returns (Over 3 & 5 years) & P/E Ratios|
This clearly indicates that at current P/E of 16.5, we have a chance of earning more than 15% per annum for next 3-5 years!
- Stable Investor is now in a better position to respond to people’s view that it is better to invest in markets of lower multiples (P/E). Our analysis clearly shows that if investor invests in markets of lower multiples, probability of earning high returns is very high.
- P/E Ratios are still relevant for judging overall valuations of markets, if not individual stocks.
- It is advisable to invest when markets are trading in early teens (i.e. 13<P/E<16). It has also been seen that Indian markets tend to stay between P/E Multiples of 12 and 24 (Read Indian Markets PE 12 to 24 for details)
- P/E Ratio is a beautiful indicator of market’s overall valuation. But before making any buy or sell decisions, an investor should also look at a lot of other information/data.