Signals to buy low and sell high

In an article for Business Standard, Devangshu Datta highlights key financial indicators for stock investors to watch: Index growth rate, Dividend Yield, Price-to-Earnings and Price-to-Book Value.

The average PE of the Sensex has been about 17 since 1996. The market has rarely been able to sustain PEs ranging beyond 20 and it has rarely seen dips below the 13 PE levels. Single-digit PEs have been rare. Every time the market has dropped below 13 PE, it has been a good buy. It's trading at around 12 PE now.

Similar number-crunching with respect to price book value leads to the conclusion that the market is a good buy whenever the PBV is below 2.5. It's hovering around 2.5 levels right now. Similarly, a dividend yield of over 1.5 per cent is usually a reliable buy signal. The current yield is at 1.9 per cent.

...Another interesting thing is that it is equally easy to build a set of sell signals from this basic data. You get a sell signal if the CAGR is over 19 per cent. You get a sell signal if the dividend yield is below 1 per cent. You get a sell signal if the PE ratio is over 20. You get a sell signal if the PBV is over 4.5. In combination, these sell signals have been correct an overwhelming majority of the time.

Equities Anyone?

At a time when serious questions are being raised about the performance of equities as an asset class globally (see here and here), Economic Times provides a primer on why investors should bother with this asset class in the Indian context.

Though its risky and volatile in the short-run, all kinds of long-term gains from equity, including capital returns and dividend income, are tax-free . In fact, as the investing period gets longer, dividend becomes a significant part of gains from the equity investment and it provides investors with a consistent flow of tax-free income.

...Equity outdoes other asset classes not only because of the lower tax incidence, but also due to much higher pre-tax returns. To ascertain the extent of the out-performance, let us say, an individual had invested Rs 100 each in the Sensex, bank deposit, commodity index and gold on January 1, 1991. The sum of Rs 100 invested in equities must have swelled to Rs 965.4 on December 31, 2008. During the same time period, the investment in bank deposit, commodity index and gold would have swelled to Rs 499, Rs 158.7 and Rs 225.7, respectively. This shows that equity has outperformed other asset classes by leaps and bounds. Not only that, at the peak of equity market, the value of Rs. 100 would have swelled to Rs 2,031.6.

...The combination of high pre-tax returns and lower-tax incidence make equity perhaps the best asset class to invest in. However, there is a caveat here as the equity investments are subject to much higher fluctuations, hence, only on a longterm basis that an investor should expect high returns.

(Emphasis mine)

“This time it’s different”. Really?

Amit Trivedi has a philosophical take on the stock market crash of 2008 in this Moneycontrol.com article:

The market crash was inevitable. It was destined. The reasons that we hear are only the instruments of a much bigger force, called the market. Some of the justifications that we hear today from many experts seem so logical and obvious that sometimes we wonder why we did not see it coming. If this thought has ever crossed your mind, please do not worry. You are not alone. The same experts that give the reasons today were silent then. Unlike the medical profession, in securities markets, there are a lot of experts who can do post-mortem, but very few who can do a correct diagnosis. We get perfect knowledge of the disease after the patient is dead.

The bull market, which may come in the future, is also destined. We will once again come out with the stories justifying why the market started to go up. And those stories will seem very logical and obvious.

But do we learn from the episodes of the past? My understanding is that years from now, once again all the lessons of the current crash will remain of academic interest only. The practitioners will start to take risks once again as there will be pressure to increase return on capital. There will once again be some new instruments, new markets, and new phenomenon that will catch the investor's fancy. The euphoria will be justified with the age old words, “This time it’s different” – the four words described as the most dangerous in financial markets by legendary investor Sir John Templeton.

(All emphasis mine)

How the "experts" fared in 2008

Prateek has an interesting post on this at ApnaPaisa:

Miss 1: India is decoupled and will continue to grow in excess of 8% (GDP growth) - Well not only did the economist pack get this one wrong, our very own economic agencies and the infamous ministers got their expectations horribly wrong. The only saving grace has been that the various economists have been fairly quick to revise their numbers while the others are still arguing that the next few months are tough but then we will bounce back just like a baby on a trampoline.

Miss 2: The classic market trap - 22nd January ‘08 - Sensex @ 17,000 - a life time buying opportunity - Well from the looks of it, the last 11 months have presented more buying opportunities. Everyone including the shoe shine boy at the station had formed a view on the market and 25,000 is the first target of 2008. Fun(d) managers who were on TV boldly stating that any fall in the market should be seen as a buying opportunity, were themselves holding on to cash levels of 25-30% in their funds…strange ?

Miss 3: Oil to boil - Oil, a commodity whose movements are most difficult to predict, saw everyone comment that from levels of USD 100/bl it will cross USD 200 then will peak at USD 250. No one understood the basic economics (Well, I have understood this in hindsight) that a weakening global economy - rising unemployment will see people being conservative thereby leading to demand destruction.

Miss 4: Chinese and Indians eat too much? - World wide there is a shortage of farm land and we Indians with our fellow neighbours are living it in style by eating more than required. This was suppose to keep agriculture commodity (rice, pulses etc) firm. Well, speculation got the better of this pack.

Will Individual Investors Ever Learn - To Buy Low And Sell High?

I created this blog to share my journey - as an individual investor - to create long-term wealth by using the seemingly easy rule of "buying low and selling high". As this article by Harish Rao in The Mint shows, implementing this "rule" does not seem to come easily to most individual investors:

Data released by the Association of Mutual Funds in India (AMFI) shows that Net inflows (Purchases - Redemptions) in 2008 was 3,088 crores, as compared to 18,967 crores in 2007. This is a huge fall in net inflows and reflects the prevailing mindset amongst Indian investors. (What is interesting is that nearly 60% of inflows for 2008 came from ELSS, a tax savings category). The figure for January 2009 is no better. Net inflows into Equity is a negative 35 cr. So 2009 is off to a bad start as well.

...Till Sept 2008, the net inflow into equities was 4,004 crores. However, in the last quarter - when the equity markets tanked and sank to new lows, the net outflow was 916 crores. Thus, despite buying equities during the first nine months of the year, when things became really bad, investors redeemed their holdings.