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. 🙂


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P/E Ratio of Indian Markets in July 2014 – Is It Telling Us Something?

I regularly monitor index ratios like price-to-earnings, price-to-book values to gauge overall market sentiments. I know it’s a very crude way of doing it. But still it provides a decent picture of what is happening in markets.

Now here is something interesting what happened on July 7th, 2014.

Nifty 50’s P/E multiple crossed 21 after almost 3 years. Surprisingly, last it stood past 21 was also on July 7th (2011). That’s exactly 3 years back!

Long term analysis (starting end of 1998) of Nifty’s P/E ratio tells the following story…
PE Ratio India 2014
We all know its common sense to buy low (Low PEs) and sell high (High PEs). And we also know that its difficult to do it. So if you go out and buy the index as whole when P/E multiples are less than 12 (quite low), then on an average, your probable 3 year and 5 year returns will be 39.5% and 29% respectively.

Similarly for index-buying during P/E multiples being in between 12 and 16, the 3 and 5 year returns are 28% and 25% respectively.

But we are currently in the band of 20-24. And this is not a cheap market at all. As per past data, your 3 year returns and 5 years returns look bleak at 4% and 7%. 

So does it mean that we sell all our stocks and put money in bank deposits?

The answer is I don’t know.

The above numbers are based on data of past 15 years. And there is no guarantee that past performance may be repeated. Or whether this time it might be different.

The last instance of PE21, for which 3 year returns data is available (May 02, 2011), the market gave a return of 5.3%.

Similarly for last instance of PE21, for which 5 year returns data is available (June 11, 2009), the returns were 10.3%. Not bad considering the superiority over returns given by safer ones, but also not eye-popping considering the optimism we have for next 5 years.
Now we are all quite hopeful that the new Indian government, if permitted by external uncontrollable like oil-shocks, natural-disasters, wars, etc… would be able to provide a conducive environment for India’s return to high growth days.

But having said that, I also beg to differ with those who believe that this would be achieved overnight and Sensex will hit 40000 by end of 2015.


As for the current markets which are rising everyday, it seems that they are now running ahead of the actual ground realities. But it is this over-optimism that gives us, the long term investors a chance. Isn’t it? 🙂

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Sensex @ 40,000 in next 2 years!!

In one of my recent posts about why I want Indian elections of 2014 to fail, I mentioned that due to recent run up in stock markets, experts were regularly coming out with one big target after another for Sensex.

Though I hate speculation, the fact is that we are all humans and its unavoidable. I hate it but I speculate every now and then. Very recently, I was fortunate enough to double my investment in MCX in just few months after company’s parent was caught in a crisis. Another stock which I believe can surprise in times to come is SAIL. I did two very detailed posts on why it was a good time to accumulate cyclical stocks like SAIL last year (2013). I still stand by that speculation. 🙂

Anyways, this post is a reaction to a report from a reputed research house, which thinks that Sensex would reach 40,000 soon. (Source)

 
Sensex Target 40000
Such Headlines are becoming common these days (Read: rising markets)

How soon?

If they had said 5 years, it would have meant a reasonable growth rate of 12.5% from current levels of 22,500. And this would have seemed quite achievable considering that chances of India getting a good, business-friendly political environment for next 5 years are pretty high.

But according to the news item, analysts of this research house feel that Sensex would reach 40K in less than 2 years!!  (Between 18 and 24 months to be precise)

This means a compounded annual growth rate between 35% and 48% for this period.

Is it possible?

I think it’s a little too optimistic and the research house is being Irrationally (Very) Exuberant. The current P/E multiple for indices like Sensex and Nifty stands at 19. And in case this target of 40,000 was to hold true by end of 2015, it would mean that earnings of constituent companies would have to grow at a rate in excess of 40%, just to keep the P/E of index at 19. And that too for two consecutive years!!

Now here we need to note two things:

  • P/E ratio of 19 is not cheap.
  • Earnings cannot grow at 40% for two consecutive years (Its not impossible, but its very tough)

Now, P/E Ratio for stocks (and indices) are calculated using below formula:

P/E Ratio Formula
Formula used to calculate P/E Ratios

So, in case earnings (denominator) don’t grow by 40%; but index (numerator) continues to grow at a rate in excess of 40%, then this would result in expansion (increase) in P/E ratio. This would mean that Sensex would become more expensive than current P/E ratio of 19. And stock market history tells that P/E multiples in excess of 20 to 24 are unsustainable and markets correct after reaching such levels.

But does it mean that Sensex cannot reach 40K in next two years?

No. Anything is possible.

But common sense says that its better not to believe the so called expert opinions which sound to good to be true.

What do you say?

Why I Want Indian Elections To Fail This Time?

Don’t get me wrong guys. I am not against our country.

If one was to take the current national mood (as suggested by opinion polls) and mediaproduced content as dependable indicators of election results, there are decent chances that India might get a strong and stable government.

India Elections 2014 Voting Machine
Indian Elections 2014 – To decide course of markets for next 5 years

Who would it be?

I don’t know. And atleast for this post, its immaterial which party or alliance it is.

But before I tell you why I want Indian elections to fail, I want to caution everyone.

What I Am Concerned About…

In last 6 months, Indian stock markets have made new highs and moved up from 19,000 to a new high of more than 22,000. This means a good 15% increase in less than 6 months!!  And if one thinks carefully, it has only been in last 6 months that various political parties have become ‘electionally’ active.

Fundamentally, almost nothing has changed apart from Rupee appreciation.

So as far as I am concerned, this rally is fueled mostly by hope and people’s expectations.

And there is nothing wrong in being hopeful and optimistic about a strong leader. But to think that someone has a magic wand and would change everything with the word go is like… being very unintelligent.

People have already started talking about newer and bigger targets like 40,000 for Sensex. 

And headlines like the below ones have become very common
India Elections 2014 New Headlines
Common Newspaper / Online New Site Headlines
So guys..

Let’s be a little rational, if not wise.

Stock Markets are riskier when moving up. And as of now, markets are moving up pretty fast.

A number like 40,000 or 42,000 is not unachievable. And it is possible that it might happen over the next five years. But stock market history bears witness that whenever things get a little too optimistic, and markets run up without any improvement in fundamentals, there is a reversion towards the mean, which means…


When will this happen?

I don’t know.

Will this happen?

Of course.

And gods forbid, if the new government is unable to deliver on its promises within the first year, the markets would definitely overreact and start grinding down.

So..

Why Do I Actually Want These Elections To Fail In Giving A Clear Majority To Anyone…

Once again, don’t get me wrong. I am not against our country. But I am an investor too.
Anyways the government would be formed. But in case there is no one with clear majority, then markets would not take this as good news.

And that is what I like. Markets go down because of bad news or because of absence of good news. So to bring sanity back to Indian markets, it would be a good correction to have. And for long term investors, what better can happen than a decent correction?

I will get to buy stocks I like & want to buy in high numbers but at lower prices. And to be honest, I regularly pray for stock market corrections.

These are my views and you can throw bricks on me for these thoughts about 2014 election results. I accept all kinds of bricks. 🙂

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2014 Would Be A Good One For Stocks. But…

I was browsing through morning newspaper when the following headlines caught my eye –

Indian Mid cap stocks
And another similar optimistic one was present in the online edition of the same newspaper –

2014 to be a hot year for equities” (source- Economic Times).

The first thought which crossed my mind after seeing such eye-catching headlines was that everybody is turning bullish these days. So by being cautious as usual, was I being stupid?

And to tell you the truth, I have personally observed that during last 6 months or so, people have become more comfortable, or rather more ‘confident’ talking about investing and ‘making-money’ in stock markets. So is it that just because everyone else one has started talking about it, and business channels are discussing number like 25,000 for Sensex and 7500 for Nifty, does it mean that 2014 would a good year for stock markets? To be brutally honest with you, I don’t know. And please understand that in this world, Nobody can predict anything with 100% confidence.

But remember, there is a very thin line between confidence and over-confidence. And one generally does not realize when one crosses that line.

And with current PE close to 18.5 (Market PE details), the Indian markets are not very cheap. There may be some sectors which might be actually cheap. But overall large cap space is not that cheap as the headlines may make it appear like. So take a sensible call, weigh your options and your risk appetite. There are some big newsflow scheduled for 2014 (general elections, new banking license). Keep a sensible head on your shoulders and be greedy when others are fearful.

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Indian Market’s New Life Time High & Why Stable Investor Was Silent?

First of all my apologies for keeping Stable Investor so un-updated for last one month. I know there should not be any excuses for something you are really passionate about, but this time around I was busy with preparations for the biggest investment of my life. No, I am neither buying a house nor a company. I am getting married this month. 🙂 So with so much preparations going into a typical Indian wedding, it’s the site that is paying the price with inactivity. But the silence has been broken and I intend to keep it that way.

(I even received an email asking me whether I had died because of some wrong stock pick) 😉

And it seems that just after the stocks in Dead Monk’s Portfolio were disclosed, markets as a whole decided to look at future through rosy glasses. Markets over the last one month have just been doing one thing, i.e. going up. And in that process, they have actually managed to hit new life time highs. And to be frank, markets are not looking cheap at all. With indices commanding multiples in excess of 18.3, this may not be a very good time to think about entering the markets. (Disclosure: I don’t believe in timing the markets much. Read why here). But as it always happens, when markets start moving upwards, retail interest in markets starts rising. And this once again happening now. People all around us have started asking for a hot tip or two to make a quick buck here or there. And this is how the process of losing money in the long term begins. But let’s keep that discussion for another day.

Sensex Nigh Highs
Markets Making New Highs. Reasons? Unknown.

I have been a little off-track for last one month and am yet to understand as to what exactly changed in the Indian economy that is forcing stock markets to run away like this. Is it because of new RBI Governor? Or is it the US’s delay in stopping the fund flow? Or is the economy really moving towards a better-than-yesterday scenario? Or is it that market expects some decent outcome from the coming general elections? Sadly, I don’t have answers to any of these. I am not a pro on answering any of these. But I would do what I am capable of doing. I would continue focusing on my long term plan of wealth creation. I would try my best to do things which I believe I am not-bad (if not good) at. I would continue to keep a hawkish eye on developments linked to stable, solid companies that form the core and satellite of my portfolio.

And since I am busy with my personal life, I would continue funding my SIPs as they having been going on for last few years. I would also continue accumulating funds in RDs which would help me make bulk purchases of stocks when markets crash in near (or far) future.

So, for the time being, that’s the update from Stable Investor’s side. Regular posts with more financial content would commence soon. Till then, have a safe, happy and a noiseless Diwali.


And do share details of what you plan doing when markets are making new highs.

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Déjà Vu?? Reliance Power (2008) & NTPC (2013)

As soon as we read this, we had a feeling of Déjà vu…


Déjà vu, according to Wikipedia, is the phenomenon of having the strong sensation that an event or experience currently being experienced had been experienced in the past.

You must be wondering why? The reason is…
2008 – Reliance Power’s IPO – About 2 Billion Dollars – Sensex near All Time High

2013 – NTPC’s Offer For Sale – About 2 Billion Dollars – Sensex near All Time High
Power Stocks : Deja Vu??
Striking similarities, isn’t it? Both companies belong to power sector, both are coming out with almost equal offer sizes and markets in both cases are trading near all time highs.
But similarities end here and there are some marked differences too:
  • In 2008 (Jan-Feb), Sensex was trading at multiples of 24x. As of today (Jan-Feb 2013), Sensex is closer to 19x.
  • Reliance Power did not have any assets at the time of IPO (2008). On the other hand, NTPC (2013) has an installed capacity of about 40,000 MWs.

We should pray that similarities end here itself. This is because if what happened after Reliance Power’s IPO (Great Crash of 2008-09) gets repeated in 2013, once again there would be massive erosion of investor’s wealth and confidence.


Disclosures: No positions in Reliance Power or NTPC.

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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.