To Compare or Not to Compare

Few days back, I was analyzing my portfolio’s performance in 2015. Though I haven’t fixed an exact date for this annual exercise, I generally do it either in last week of December or first week of January.

Comparing Stock Portfolios

So once I was through with the exercise, I felt that considering it was a negative year for indices, my portfolio giving positive returns was good enough. I felt moderately happy.
Then I happened to have a chat with a friend who is also quite passionate about markets.
His portfolio did far better than mine. Infact his knack of getting in and out of markets regularly in 2015, resulted in him doing almost 10% better than me.
Now I was not as happy as I was before talking to him. 🙂
Its natural. I am a human.
Even though I was happy that previous year gave me some good opportunities to buy shares of good companies, somewhere inside me I had a feeling that I too would have loved to see my portfolio doing better than what I actually managed in 2015.
I know that it sounds like having the cake and eating it too. But this is what I felt. Nevertheless, I know one thing. It is not possible to beat the markets and everyone, every year.
Even Buffett can’t do it.
So why should I be bothered about doing better than everyone else?
As long as the average CAGR of my overall portfolio (MF+Equity) remains in line with my low expectations (which means I need to invest more every month and I am happy doing it), I should be a satisfied person.
I came across some contextually relevant lines while reading the 1990 Memo by Howard Marks (I planto read all available ones this year), where he said something that was comforting:
There will always be cases and years in which, when all goes right, those who take on more risk will do better than we do. In the long run, however, I feel strongly that seeking relative performance which is just a little bit above average on a consistent basis – with protection against poor absolute results in tough times — will prove more effective than “swinging for the fences.”
This made perfect sense to me. I am a firm believer of protecting the downside. Infact my bias toward Return OF Capital is so much more than Return ON Capital, that I regularly pass interesting but riskier opportunities.
As investors, we grossly underestimate the power having slightly-better-than-average performance over long periods. And as Marks say:
I feel strongly that attempting to achieve a superior long-term record by stringing together a run of top-decile years is unlikely to succeed. Rather, striving to do a little better than average every year – and through discipline to have highly superior relative results in bad times – is:
  • 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).

Now when I say that I regularly pass riskier opportunities, it is because it would have required me to stick my neck out of my area of understanding (called circle of competence) and increase the chance of not knowing what to do if things did not fare as I expected them to. So it’s still possible that I might have had a better performance last year if I had taken those riskier bets.

But as Marks puts it, that bold steps taken in pursuit of great performance can just as easily be wrong as right. Even worse, a combination of far above average and far below average years can lead to a long-term record which is characterized by volatility and mediocrity.
Reading this memo clearly shows why there is no point in playing the comparison game. Being young, a 12% average return over the next 3 decades might be enough for me. For somebody else, even a 18% return might not be enough or satisfying or both. So as long as I don’t take too many risks and limit my direct equity investments to only high-conviction ones, I am sure that I will do just fine. 🙂
The best foundation for above-average long-term performance is an absence of disasters. I know all this sounds good in theory but is difficult in practice. But it is the truth and the reason why good investors do well.


Year End Report (2012) on Stocks we wrote about & our Personal Portfolio

We wrote a number of stock specific articles in 2012. Below is a table about how they have done since we last published about them.

2012 Stock Returns
As the table suggests, we got it right almost 81% of the time this year. 🙂 Lucky us…
The articles on above mentioned stocks can be accessed here: HUL, Cairn India, ONGCor Others.

Personal Portfolio

Our personal portfolio has gained approximately 11% (13% including dividends) in 2012. This seems disastrous when compared to Sensex returns of 25%+. But since most of the stocks were bought in second half of 2012, the results aren’t entirely comparable. By the way, Sensex gave 11.6% in second half of 2012. But if you still feel otherwise, then you have the right to do so because the numbers are against us…
By the way, as a disclaimer, we would like to share names of stocks we hold in our personal portfolios. We are long on all of them (except 1) and are ready to hold them for next 10+ years.

Stocks (Long Term Investments): Axis Bank, ONGC, Balmer Lawrie, Cairn India, BHEL, Clariant Chemicals, Tata Investments, IOCL, L&T Financial Holdings, Novartis India.

Stocks (Medium Term): Thangamayil Jewellery

We would be glad to buy any of the above mentioned stocks at lower prices. So as 2013 approaches and with most experts expecting a bull run, we presume we are among the very few who hope (& pray) for a correction… 🙂

Have a happy new year everybody!


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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Power of doing nothing in stock markets – Indian Stock Markets Perspective

A study found that a goalkeeper who stands in the middle — the stock market equivalent of doing nothing — has better success than one who tries to guess which way a free kick will come. It was found that goalkeepers jumped to the left or the right significantly more than was useful in preventing goals. In fact, they jumped an overwhelming 94 percent of the time – meaning they stayed in the middle only 6 percent of the time. In comparison, the shot went towards the centre 29 percent of the time. Goalkeepers, it seems, could achieve more by doing less.

Similarly in managing stocks in your portfolio, it is often best to stay in the centre and do nothing. Sitting put on your index funds & dividend stocks, not trying to find the bottom & most importantly, not panicking, serves an investor better than trying to guess and time the markets.
Experts (though you should not believe them blindly) agree that investors will be better off resisting the temptation to make changes to their long-term investments simply because of short-term stock market movements. If your personal circumstances and financial goals haven’t changed, and you are still interested in being invested for the long term, then it is probably appropriate to ‘do nothing’.
To test the benefits of doing nothing in Indian markets, we analyzed the data for last 20 years. We specifically looked at 5 & 10 year rolling returns (CAGR) of Sensex (index) to understand whether it made sense to invest once and sit through years doing nothing?
The results are shown in graphs below –
Click to enlarge
Returns on rolling 5 Years
  • 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
Returns on rolling 10 Years
  • 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.

Summarizing our finding in table (below), we found some interesting things –
  • 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! 🙂

So does it mean that Doing-Nothing works? We would say that it does, but only if you are ready to follow it for long term. And long term means years (decades) and not months. Frankly, there doesn’t seem much point in overanalyzing, overthinking, and exhausting oneself by trading in the short term. We must understand that it is TIME and NOT TIMING that is the key to successful investing.

P/E Ratio, P/BV Ratio & Dividend Yield Analysis of Nifty50 : And how we can benefit from it

In last post, we detailed how we plan to change Stable Investor’s approach in future. This post is first step in that new direction. In this post, we analyze how a little effort on one’s part can help ensure that one does not enter Indian markets when they are irrationally over-optimistic and chances of a major fall are quite high.
For this, one needs to know the current value of P/E Ratio, P/B Ratio & Dividend Yield (DY) of any of the benchmark indices. Though we have chosen Nifty50, you can also go for Sensex or broader NSE500, BSE500 indices. The latest values of P/E, P/B & DY can be found here

But the current data needs to be compared with past trends. We did some analysis of available historical data (Since Jan 1999) and found some interesting insights.

P/E Ratio (What is PE Ratio?)

The table below shows that on investing in a market with PE multiple of less than 12, returns over 3 & 5 year periods have been close to 40% per annum!! Even Warren Buffett has achieved 28% CAGR 😉 An investment in markets with PE in range 12-16 also gives a handsome return of close to 28% pa over a 3 year period. And our analysis reinforces expert’s opinion that investing in markets with high multiples (PE>24) is foolish and returns have been found to be in negative (-7%).

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?)

The table below shows that on investing in a market with PB Ratio of less than 3, returns over 3 year periods have been close to 27% pa. But on the other hand, if one takes the risk of investing in markets which are trading at P/B of more than 4 (According to us, a market that is running ahead of its asset based fundamentals), one should be ready to accept very low returns of 4-5% pa.

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?)

First things first. Dividend Yield (DY) of more than 2.5% for an index (Nifty50 in this case) is rare. Very rare! In last 13 years i.e about 3400 trading days, DY has stayed above 2.5 for just 130 days! And returns on investments made during those period have been an eye popping 41 & 45% for three and five years respectively!! So when can one find these days of high DYs? These are the days when markets are over pessimistic and everyone else is selling everything. There is blood on the street. And, if one has the knowledge of historical data like detailed above, one can take a call and invest in an index and be quite sure that he stands to gain handsomely in years to come. Similarly, an investment below an index DY of less than 1.5 does not make sense and returns are close to zero (6% to be precise).

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.

So what does the historical data tell about the current market levels?
  • 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 😉

Nifty Dividend Yields – A Long Term Analysis of relation between dividend yields and returns

Dividend Yield is a ratio of dividend paid last year to current market price. A further reading on Dividend Yields can be found here.
One of the two metrics used to evaluate over- or under-valuation of markets is Dividend Yield (Other is P/E Ratio). At present (Mid January 2012), Nifty has a dividend yield of 1.6 (find latest data here).
So is this a right time to invest? We at Stable Investor decided to look into index’s history to answer this question.
Analysis of Nifty’s last 13 years data (from 1st Jan 1999 onwards) reveals a few interesting points –
  • 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
So after this analysis, Stable Investor understands that though history shows that investing in markets offering high dividend yields makes more sense, one should never rely on just one mathematical tool to arrive at any investment decision. Any number should be taken with a pinch of salt and should always be looked in conjunction with other ratios and numbers.
We did a similar analysis of PE Ratios and Returns over 3 and 5 year periods and arrived at some remarkably useful results which can be found in the post Relation between PE Ratios and Returns.
If you are interested in further exploring slightly advanced topic of Effective Dividend Yield, please read our post on Dividend Investing in Indian Stocks.

Market Timing Or Disciplined Investing – Which is More Sensible?

If you have read some of the older posts, you would have a fair idea about what Stable Investor is all about. And you will also understand that timing of stock markets is not what this website is interested in. And that is because for all practical purposes, it does not work!
A famous columnist once said,

“The market timer’s Hall of Fame is an empty room.” 

And the great stock picker Peter Lynch once remarked,

“I can’t recall ever once having seen the name a market timer on Forbes’ Annual List of Richest People.”
This clearly shows how successful (or unsuccessful) market timers have been. In an ideal world, an investor would have all relevant information and would know when to invest and when to get out of markets.
To explain these concepts, lets take a scenario, in which there are 3 investors – A, B and C. All three are ready to invest Rs 5000 every month from January 2000 onwards. But timings of their investments are different. 

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.
So where do A (Perfect Timer), B (Perfect Mistimer) & C (Indifferent Investor) stand at the end of 12 years?
Market Timing Make Money
This analysis shows that the difference between a Perfect Timer (A person who has all the insider information) and an Indifferent Investor (Does not care about intra-month fluctuations and has automated his investment process to invest at month ends) is of just 6%. Just 6%.

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.
So what does this analysis point to?

  • 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.

And wish you all a Merry Christmas to all the readers!
Stock Market & Christmas

PE Ratio of Indian Markets – A Long Term Analysis

Price to Earnings ratio (P/E ratio) is a measure of price paid for a share relative to the profit earned by that share; i.e.

You can read more about P/E Ratios here & here.

They say that it is best to invest when valuations are low.

Sensex is currently (December 2011) trading at a P/E of 16.5. So is this the right time to invest? Is this what experts call a low valuation? We at Stable Investor have decided to answer these questions.

Analysis of Sensex’s last 12 years data (from 1stJan 1999 onwards) reveals a few interesting points –
  • 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!

(Caution – This statement is made on basis of historical data. Past performance is no guarantee of future performance.)

So after analyzing this interesting relationship between P/E Ratio and Returns, what does a Stable Investor do?
  • 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.
Update – You can check the latest PE-Ratio Analysis of Indian Markets in 2013 or 2012. For constant updates about Indian Markets’ PE, P/BV Ratios, please check the State of Indian Markets.