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15 stocks to buy for long term in india – Dead Monk’s Portfolio

We recently wrote a post detailing rules for Dead Monk’s Portfolio (DMP). Therein, we mentioned that we plan to divide DMP into different parts i.e., core and satellite(s). This approach will help in addressing requirements of dividend income, capital appreciation & long term stability.

But before delving deeper into DMP, you must understand that it is built around our risk appetites, our understanding of markets & our strengths and more importantly, weaknesses. Since it is born out of our personal vision for ourequity portfolio, DMP will always be like a magic mirror for us. It is there to show how our equity portfolio should look and be like.

And since your risk appetite and investing style may differ from us, we suggest that you use DMP as a snapshot of what stocks we own / plan to own in our long term portfolio. This should not be taken as an investment recommendation from us.

So have a look at DMP below…


To put on record, we are very risk averse (atleast the author is) J. The author still holds a large part of his assets in fixed deposits, mutual funds & cash. At present, equities form only 10% of the overall portfolio. You won’t be wrong in thinking that these guys are running a blog on stock investing and themselves have only 10% of their money in stocks! But low levels of equity exposure are due to our past financial commitments. But slowly moving out of that phase, we now plan to increase our equity exposure. And we won’t be boasting if we were to say that this time, we are far more structured than we have ever been (Boasting 😉 (Read details of portfolio structure in previous post)

After DMP has been applied, this is how author’s investment portfolio would look like:
  • 4-5 Dividend Stocks (~ 50% 0f equity portfolio)
  • 8-10 Large Caps + High Growth Potential Stocks (~ 30% of equity portfolio)
  • 4-5 Cyclical / Risky Bets (~ 20% of equity portfolio)
  • 2 mutual funds (ongoing SIPs – Large Cap & Multi Cap)
  • 2 planned SIPs to be started in 2012 (Mid & Small Cap) & 2013
  • Fixed Deposits
  • PPF

Note – Author has a few financial liabilities and has secured them by a couple of term insurance policies.


Author plans to invest whatever he saves every month (& receives as dividends) in a few of these 15-20 stocks.

But how to decide when to invest in these stocks? Should they be bought at current levels?

We will try answering this question in our next post which would be based on Warren Buffett’s quotation – “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”

We will also weigh these stocks on parameters like P/E, P/BV, Dividend Yield, dividend growth, PEG ratio, etc and try to arrive at intrinsic values, graham’s number etc.

We also plan sharing our stock watch-list. This contains stocks which may form part of our portfolio in future.

Please remember that we will never suggest you to blindly go ahead and buy the stocks from the above list (or even include these in your personal watch list). Reasons is simple and explained by dead monk’s disclaimer – No matter how careful we are, as an investor, we will never be able to eliminate the risk of being wrong.

PS – ’15 stocks’ in title refers to all stocks mentioned except cyclical and miscellaneous ones. 
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Launching the Dead Monk’s Portfolio – Ground Rules

After a lot of deliberation, both recorded (Part 1, 2, 3, and 4) and unrecorded, we have finally managed to put down the ground rules for Dead Monk’s Portfolio.


If you haven’t read our earlier posts on this issue (which changed our hearts), we recommend you do so. It will give you an idea about how and why we zeroed upon this approach.



So without further delays, we present to you the details of our new portfolio in form of FAQs.
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Where has the old portfolio vanished?

We have abandoned our old portfolio – Monk’s Portfolio. We have removed all posts related to it.
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Then what is this new portfolio?

The new portfolio is named DMP – the Dead Monk’s Portfolio.
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Why such a funny name?

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Do you have to pray to God for making this portfolio work?
Yes. We have a Portfolio Prayer (We need it) J


~ ~ ~
Remember God in good times and equities in bad times.

We shall welcome bear markets as they allow us to buy from pessimists.

We shall love fear and blood on the streets.

We will always buy with an intention to hold for long periods and preferably, forever.

We shall hate selling stocks, unless fundamental reason of buying them changes for worse.


Amen.
~ ~ ~
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What is DMP’s basic structure?


The portfolio would follow Core-Satellite approach with one core and four satellites.


_________
Can you give the details of the new portfolio’s exact structure?


Dividend Core
This would form 50-60% of the portfolio.

This would comprise stocks which
          Are regular dividend payers
          Have paid dividends consistently for last 5 to 10 years
          Have been profitable in last 5 years
          Have sustainable & ordinary dividend yield of more than 3%
          Have a sustainable dividend payout ratio
          Trade at low P/E multiples (<12; preferably <10)
This part of DMP would result in a regular, sustainable & increasing income stream, which would be used to increase the size of DMP by reinvesting these dividends selectively in stocks already present in DMP.
Growth Oriented
This would form 20-25% of the portfolio.
This would comprise of stocks which
          Are from mid-&-small cap
          Have been in existence for around 10 years
          Even with most pessimistic outlook, would survive for next 10 years Or should be good takeover targets
          Have been profitable in last 3 years
          Trade at low to medium P/E multiples (preferably <20)
          We don’t expect such stocks to pay dividends
          Good ROE in past 5 years
          Good and dedicated management
These stocks would be our bets on long term growth and can be potential future blue chips. These would be businesses which have potential as well as management genuine intent to reach the blue chip category. But we must be cautious that obvious prospects for physical growth in a business do not translate into obvious profits for investors (Graham).

Large Caps
This would form 15-20% of the portfolio.
This would comprise of stocks which
          Are from large cap category (preferably of Market Cap>Rs 15,000 Cr)
          Have been in existence for more than 20 years
          Even with most pessimistic outlook, would survive for next 10 years
          Have been profitable in last 5 years
          Trade at low P/E multiples (<12; preferably <10)
          Trade at low P/BV multiples (preferably <2)
          If they do pay regular dividends, then nothing like it J (why we love dividends so much?)




Large caps give strength and stability to our portfolio as they are better suited to weather downturns, economic recessions, etc.

Cyclicals (Large + Mid Cap)
This would form 10-15% of the portfolio.
This would comprise of stocks which
          Are preferably from large cap category
          Have been in existence for more than 10 years
          Even with most pessimistic outlook, would survive the next downturn and for next 10 years
          Have been profitable in last 5 years
          If they do pay regular dividends, then nothing like it.
We would have loved to time our entry into cyclical stocks because there cannot be better wealth creators if one can time one’s entry and exit well. But timing, that too cyclical business’ is tough. That is why we prefer large caps of cyclical companies as they can weather the downturns better than small caps.
Note – We are still trying to understand how cyclical stocks work and how empirical ratios like P/E, P/BV can be used to enter such stocks at levels which may not be lowest, but somewhere below historical averages.

Miscellaneous / Speculative / Special Situations related bets
This would form 0-5% of the portfolio.
This would comprise of stocks which
          Are preferably from large cap category. But may be from any of large, mid, small or micro cap categories.
This would comprise of stocks in high risk – high reward category. We would never take blind bets based on tips given by others (read traders – We hate them so much!!). We would analyze the business behind the stock to see whether risk reward ratio is skewed towards reward or not and then take sensible calls.
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When would you buy stocks for DMP?


Though it’s a tough task to time the markets, the fact remains that one should invest when there is over pessimism in market. In one of our earlier posts, we tried to decipher whyaverage investors like us should be concerned about entry price of stocks. Here also, we share a few guidelines to help us make buying decisions, a little quantitatively.

·         Dividend Core
          When stocks are trading closer to their 2-3 year lows
          When stocks are trading in PE & P/BV range of Lowest & Average of-last-5-to-10-years.
          When P/E x P/BV < 22.5 (Graham’s)
          When stock features in top-20 lists made on basis from High ROE and High Earnings Yield (Magic Formula)
          When Dividend Yield of stock crosses 5% without any substantial negative change in fundamentals

·         Growth Oriented
          When stocks are trading closer to their 1-2 year lows
          When stocks are trading in PE & P/BV range of Lowest & Average of-last-5-to-10-years.

·         Large Cap
          When stocks are trading closer to their 2-3 year lows
          When stocks are trading in PE & P/BV range of Lowest & Average of-last-5-to-10-years.
          When P/E x P/BV < 22.5 (Graham’s)
          When stock features in top-20 lists made on basis from High ROE and High Earnings Yield (Magic Formula)
          When overall markets are trading at low multiples of P/E, P/BV & Dividend Yield, as detailed in an earlier post.

·         Cyclicals
          Note: We are still trying to understand how cyclical stocks work and how empirical ratios like P/E, P/BV & Dividend Yield can be used to enter such stocks at levels which may not be lowest, but somewhere in a range, which skews the risk reward ratio in favor of rewards.

·         Miscellaneous / Speculative / Special Situations related Bets
          Need to be analyzed on case by case basis.
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When would you sell stocks in DMP?

Though we hate selling stocks, there may and will be times when the very reason which resulted in a buying decision, ceases to exist. This would require selling some shares in DMP. We will work on selling triggers for our portfolio soon. As of now, we don’t plan selling what we own, and don’t plan buying what we would like to sell in the next 10 years.
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In the event of temporary downward movement in a stock’s price, would we be happy to buy more shares?

If we have free funds which we do not require for next few years, we would definitely be interested in averaging down our costs. But this would be done after confirming that fundamentals of stock remain good enough and there are no fresh triggers for us to sell the stock. Some investors may be unwilling to pick up more shares of a particular stock, even when the opportunity to buy discounted shares is presented.  We would rather treat this opportunity as a discount sale of stocks which we would love to buy.
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Is there just one Dead Monk’s Portfolio or multiple versions?

Dead Monk’s Portfolio is a reflection of our thoughts. It is built around our risk profiles, understandings of markets & our own strengths and weaknesses. It will not be exactly same as ones maintained by the two of us, as we maintain a total of 4 portfolios (2 personal and 2 for our families). But since Stable Investor is a journal of our learnings in portfolio maintenance, sooner or later, our personal portfolios would come in line with what we learn here. Therefore, to keep things simple, we will have just one DMP.
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Do you maintain a buy list of stocks at all times?

Absolutely! We would prefer that any stock which we buy should first enter our buy list and then our actual portfolio. A buy list also helps in tracking multiple companies which we may be interested in future. Keeping a rough record of such companies from the start is necessary as the price may not be right at the time when we first analyse a company.
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How do I track Dead Monk’s Portfolio?

We are putting up a dedicated page for easy tracking of DMP. All posts related to DMP and latest portfolio snapshot can be found there.
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Do you have anything else to share?

We have a personal experience about large and mid caps. There are times when due to lack of any trigger worthy news and discussion in media, a stock tends to go down without any significant change in fundamentals. These are the times when one can accumulate these blue chips.

According to WB, as an investor, our goal should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, we will find only a few companies that meet these standards. We must also resist the temptation to stray from these guidelines: If we aren’t willing to own a stock for ten years, we shouldn’t even think about owning it for ten minutes. We should aim to put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.

One should “never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”
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What is this Dead Monk’s Disclaimer?

Dead Monk’s Disclaimer: No matter how careful we are, as an investor, we will never be able to eliminate the risk of being wrong.
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Thoughts on starting a new portfolio – Part 4 – Why we prefer dividend investing for the Core of our portfolio?

In our last post, we discussed why entry price is important for a dividend investor. But does it mean that we are advocating timing the markets?
 
The answer is Yes, and No.
 
Yes because if one can time the markets, there is nothing like it. If one buys stocks of a good company trading at low valuations, the stock (generally) cannot go down much lower as it may already be at levels which are close to what it would cost an acquirer to pay for it. The problem with high multiple stocks is that future growth is already accounted for in stock prices. This implies that long term investor could likely see little gains even if the earnings grow over time.
 
No, because markets are supreme and trying to beat the market is an illusion. Though people like Warren Buffett have done it, the fact remains that we are not Warren Buffett(s).
 
After our last post, it became obvious that we shall be using Dividend Investing to construct the core of our portfolio. The proportion of core to that of overall portfolio is still under discussion. In this post we would like to give reasons about why we want to use the Dividend Investing approach.
 
One of our heroes, John D. Rockefeller once remarked – “The only thing that gives me pleasure is to see my dividend coming in.” And dividends are what give us pleasure too. We just love dividends! So without any further delay, here are our reasons –
 
Our Real Reasons J
  • It is easier to sit, relax and wait for good companies to share their profits, year after year, with additional potential of capital appreciation. Though capital appreciation may not be at rates comparable to high growth companies. This can be attributed to our laziness  J and inability to do comprehensive equity analysis.
  • We prefer picking stocks of companies which are ‘so-obviously-good’ on parameters of safety, stability & growth, that we don’t need to analyze them much.
  • Evidence of profitability in form of dividends helps us sleep easily. Profits on paper say one thing about a company’s prospects and profits that produce cash dividends say entirely another thing.
  • We hate selling stocks! And to a large extent we agree with concepts of value investing. One of the concepts of value investing tells us to buy stocks to hold it forever. Our question is that, if we do not sell our stocks, how are we going to make money on a regular basis?
 

Text Book Reasons we agree with

  • A company’s willingness and ability to pay steady dividends over time – and its power to increase them – provides good clue about its fundamentals. We are still on a lookout for a database of Indian stocks or a tool, which lists out stocks that have consistently increased the dividends year after year (Just like S&P’s Dividend Aristocrats of US markets). If you know of any such tool, please let us know.
  • Dividends signal sound fundamentals and typically, it’s mature and profitable companies that pay dividends.
  • Dividends bring more discipline to management’s investment decision-making. Holding onto profits might lead to excessive executive compensation, sloppy management, and unproductive use of assets. Studies show that the more cash a company keeps, the more likely it is that it will overpay for acquisitions and, in turn, damage shareholder value. In fact, companies that pay dividends tend to be more efficient in their use of capital than similar companies that do not pay dividends.
  • Value investors always like to buy shares forever. When a value investor buys a blue chip stock they are most certain that the financial stability of the company will ensure regular dividend payouts. A blue chip stocks will ensure that you are earning regular streams of income in the form of dividends. This dividend payout will only increase with time as the company grows and its profits also grow. So if one is making healthy income (which is also increasing) from current holdings then why will one sell his shares? Hence value investors prefers to hold share forever. Dividend focused investment (in blue chip stocks) is also like a risk-free investments like bonds, bank deposits etc. So not only dividend based investment is profitable in long run but also offers returns with minimum of risks. As the volatility of the market price of stocks will not affect your earnings, as an investor, one will feel very secure. The only thing that one needs to keep a track of is the companies’ business fundamentals (which will ensure dividend payouts). Volatility is not one’s concern. Let bloody(!) traders worry about stock index fluctuations, you can rest in peace even in the most turbulent of times in the market.
To conclude we would say that investing with focus on dividend yield & payout ratios is one of the safest and one of the more profitable forms of equity investment.
 
Note – Some parts of this post (Text Book Reasons) are adapted from Investopedia& GetMoneyRich.
 
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Thoughts on starting a new portfolio – Part 3 : Does entry price matter to a dividend investor?

Stocks mentioned in post – INFY
We have been thinking a lot about developing a framework for our long term portfolio. As of now, we are quite sure that this portfolio would be based on Core-Satellite approach. For Core portion, we are almost sure that we want to use dividend investing (what?) as our primary approach. But why have we chosen dividend investing as our main approach? We found an article which words everything we had in our mind to answer this question. If you have time and are interested in dividend investing, please do read the article.
 
Though we have chosen our primary approach, we must confess that we are not 100% sure. We are confused. We have dilemmas which we hinted at in our last two posts (1 & 2) too.
 
Dilemmas
  • Does entry price matter to a dividend investor?
  • Does it make any sense to bother too much about capital appreciation of stocks chosen for their ability to give out dividends year after year?
Though we will try to resolve these dilemmas in this post, we would like you to read a financially touching article on Seeking Alpha (link). The article describes a man’s dividend investing journey and how he ensures that his income increased year after year, without any dependence on his employer. A brilliant story!
 
Note – We shall be using the term High Entry Price in text below. By high entry price, we mean that company is trading at multiples which are more than their historical averages.
 
Suppose an investor purchases share of company which is trading at high multiples. This company is a regular dividend payer. This investor would now be stuck with a low yielding security for a long period of time. On the other hand, a company trading at lower valuations, cannot go down much lower as it may already be at levels which are close to what it would cost an acquirer to pay for it. Luckily, an investor would now be stuck with a high yielding security for a long period of time. Now who would mind that?  J
Problem with high multiple stocks
The problem with high multiple stocks is that future growth is already accounted for in stock prices. This implies that long term investor could likely see little gains even if the earnings grow over time. And one quarter of missing earnings estimate, will damage stock price for a long while as these high multiple stocks are volatile (Example – Infosys) . Also, once the earnings slow down, the PE also contracts (stock is de-rated) and price either goes down or stays flat if earnings have increased sufficiently to compensate for lower multiple.
 
Problem with investors like us
Investors like us chase overvalued dividend stocks because they are afraid to miss the boat on future price gains and dividend increases. Unfortunately, stocks with higher valuations have a higher chance that anything that goes wrong could have a negative effect on share price & dividend income stream. On the other hand, investors who purchase stocks at reasonable valuations, have better chances of realizing rising price and dividend returns.
 
Did we answer the main question?
All the above discussions point to the fact that it is important to have some sort of valuation guidelines, before we purchase a dividend stock. This will help in avoiding stock purchase decisions made out of ‘love for stocks’and regardless of price. After all, purchasing a stock at inflated price levels might lead to sub-par returns for several years.
 
Would like to know your views and counter arguments.

Thoughts on starting a new portfolio – Part 2

Without wasting any time, we start from where we left in our last post.

  • We mentioned that we might take core-satellite approach for Dead Monk’s Portfolio (Why this name?). After giving it a second thought, we think that instead of going for 1 Core + 1 Satellite approach, we can take 1 core + 2 satellite approach.

Core

  • This part can account for 70% of portfolio size and have stocks which have a good and consistent record of paying generous dividends (if possible, increasing year on year).
  • Stocks in core part should be bought when markets are down (markets trading at low multiples of PE, PBV & Div Yield)
  • Stocks themselves should be trading below their average historical PEs, close to their 52/104/156W lows, below their book values.
  • This part may consist of stocks which are generally referred to as Boring stocks.
  • We are still pondering whether it (even) makes any sense to bother about capital appreciation of this part of portfolio?

Growth Satellite

  • This part can account for 20% of portfolio size and can be populated with companies which offer above average growth potential in long term. These may or may not be doling out generous dividends.

Special Situations + Miscellaneous Satellite

  • This part can account for a maximum of 10% (ideally 5%) of portfolio size and can have stocks which are in midst of certain extraordinary situations. Frankly speaking, this would form the speculative part of portfolio.

This is second in a series of our thoughts on developing a framework for long term portfolio (DMP). You can check Part-1 here.

May the Dead Monk give us wisdom 😉

 

Thoughts on starting a new portfolio – Part 1

In our post on changing Stable Investor’s approach, we mentioned that we plan abandoning our existing portfolio (Monk’s Portfolio). We also plan to start a new portfolio named Dead Monk’s Portfolio (DMP). Reason for choosing this name is given in next few lines.Why Dead?

We want our portfolio to be so easy to maintain that even a dead person is able to do it, i.e., without much thought and activity. 🙂

Why Monk?

For us, monks are ultimate symbols of calmness, serenity, stability and longevity. These are some of the terms which we want our portfolio to be associated with.

Note – The topic may seem a bit haywire as it documents a loud thinking session.

Here are some of our thoughts –

  • Dead Monk’s Portfolio (DMP) can follow a Core –Satellite approach in which core could account for 60-75% of portfolio and Satellite the rest 25-40%
 
j
  • Core can be made up of high dividend yield large cap stocks OR low PE, average to good dividend yield large & mid cap stocks OR low to average PE, good to average dividend yield large and mid cap stocks, trading below their book values OR any other combination of parameters and concepts like Magic Formula.
  • We prefer companies which pay regular & increasing dividends as the proceeds can be used to buy more stocks or as a source of passive income. Also these stocks are stable and less risky. But according to experts, this stability comes at the price of lower returns. And as stable long term investors, we are ready to accept non-astronomical returns.
  • Satellite can be made up of companies which offer long term above average growth and which may not be doling out dividends. Such companies generally prefer to invest profits back into the company which may be growing at rates higher than company’s cost of capital OR for novices like us, higher than overall market growth rates.
  • But how do we find stocks which offer stability as well as good dividends? There are many ways of finding such stocks. One is to check the indices that track dividends. Another is to check lists of highest dividend yielding stocks. But such lists throw up names which we are not comfortable investing in : so it would be a good idea to take such lists and add a filter or two like market cap, profitable in last 5 years, etc).
  • Another approach can be to use stock screeners with conditions like large and mid caps, dividend yield of more than 3%, consistent & increasing dividend payouts in last 5 years, trading close to 52 week lows, low PEs  etc. 
  • We are compiling a list of good stock screeners for this purpose and would share them shortly.
  • Another question which has been raised is that does it even make sense to bother about capital appreciation of the Core portion of such a portfolio?
These are just some of our preliminary thoughts and we are still not done with our analysis. We are also exploring other ideas which have not found mention in this post. Let’s wait till the time we finalize the first version of our new portfolio approach (with blessings of the Dead Monk in the grave). 🙂

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 😉

Poker and Stock Markets

Regular readers would be surprised to see the word Poker (a game known for gambling), being used for title of a post on Stable Investor, which is all about stability and anti-speculation. But a further reading would be helpful in understanding a few obvious similarities between Poker and stable investing.

People may consider Poker to be a game of luck & gambling. But this is quite far from the real truth. Luck may play a part but rules, principles, odds and proper money management are the largest components of Poker, as well as investing.

A little introduction about poker would be helpful here.

Poker is a game of decisions based on having a sampling of the general information. It is all about having an ability to cut losses in risky situations by calculating odds, using a skilled memory and taking quick decisions under pressure. (Wikipedia offers all basic information about Poker and its variants).

Now the similarities between Poker and Stock markets are –

You can start small. But if you are sure, be ready to take bigger bets

Most poker players enter the game at ease. They place small bets until they have a fair idea about playing styles of other players & their own ‘luck’. Stock markets also allow one to start small. It helps in knowing whether one’s investment philosophy is profitable or not and whether same can be replicated with bigger bets or not. Poker allows one to raise bets if one is confident. Stock markets also allow one to increase their bets depending on confidence or overconfidence.

Controllable Vs Uncontrollable

Just like in Poker, there are only two factors in stock markets– Controllable and Uncontrollable. One must respect the fact that there are bound to be things that cannot be controlled. For example, in Poker one can neither control other player’s emotions nor the cards being dealt. Similarly in investing, one cannot control the overall markets or various events taking place which have an effect on stocks. But that does not mean that one should leave investments at market’s mercy. It means is that one needs to have a greater awareness about his environment.

In poker, a player knows that there are times when luck may not favor him. However, instead of playing blindly, he focuses on what can be controlled: his own reactions. For investors, it means knowing what is going on in the world and knowing how these things could affect one’s investments. So when a political, economic or social event occurs, you know how to react to save your investments.

Knowing when to Fold

In poker, the players who stay in the game the longest (& reap the biggest rewards) are those who know when to fold. One should understand that, not every bet may be favorable. It is better to cut losses and wait for a better opportunity. Same is the case with investments. Not every investment is going to have a high return. Some may fail. To avoid losing more money than usual, one should learn when to pull out of an investment.

There will be another opportunity

In both the games, there will always be another opportunity. So its better to wait for it to take a bigger bet. Its saner to live today and fight (play) tomorrow.

All-In can be the last decision you make

You put all your eggs in one basket and you risk losing everything. In investments too, a focused diversification is more advisable than single point focus.

Human Psychology

Poker requires skill in reading one’s opponents. A player must understand when other player has a really good hand or is merely bluffing. Otherwise he will always end up losing money. One must also be sensitive about how others perceive him. This in turn can be used to one’s advantage. Markets also bluff when some stocks go up in prices because of speculation or manipulations. Knowing the true value of a stock is based on knowing how humans think and rationalize.

Evening out the odds

Both poker and stock markets require a proper strategy, which is in synch with a player’s real self. Luck can only do so much in the way a game turns out. A poker player must know how to read the odds. He must know when to raise the bets and when to call a bluff. He must know which cards to keep and when to fold. Likewise, an investor has to know when to cut his losses and wait for another opportunity to score big. It in essence requires a long-term strategy based on solid facts rather than emotions. A stock market investor must always ask the question – What are the odds that a stock is going to rise? More importantly, one must ask the question -What are the odds that this stock would go down? And by how much? What is the worst case scenario?

In long-term poker play & long term stock market investing, somebody who has no strategy is as good as broke and one who merely goes with the flow is as good as busted.

Successful investors like Warren Buffett are regular Poker players. Just like in his investing, he is known to focus on players rather than the cards. He once remarked that –

 If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.

All in all, the number one goal in poker as well as stock market investing is to preserve capital (return of capital is more important than return on capital).  At the same time, the player must be willing to place big bets when the odds are favorable.