Learnings from Shyam’s column – Part 1 of 3

I visited Shyam’s Column just because it appeared on some other value investing website’s must-read.

And boy, was I taken aback! Extreme learnings at a very quick pace, they call it. This is a post where I try to summarise some of his thoughts (and my learnings) and I’ll look forward to a way where I can integrate these learnings to both my concentrated as well as my diversified portfolio.

1) A simple rule for deciding when to invest in the stock market can be developed based on the ‘Price-to-Earnings Ratio’ or ‘P/E Ratio’ of the Index (Nifty). The power of the P/E ratio (of the Index) is that it acts as an indicator of how expensive (overpriced) or how cheap (under priced) the market is. A logical extension of this is to set a lower limit for the P/E ratio, below which you can invest in the stock market and an upper limit, above which you can start selling your holdings. With some backtesting (for 10 years), it was found by investing in the stock market when the P/E is below 15 (Bottom Band) and liquidating your investments when the P/E is above 25 (Top Band) you would have not only protected your wealth but also reaped above average return on your investment. However, my thought process suggests it might be more prudent to relate it to P/E (or inverse of yield) for long term Debt (10 yr GoI) on the lower end [Currently, yield is ~8%. P/E would be 1/8 = 12.5].

2) Invest in NIFTY BeES (Benchmark Exchange-traded Scheme) – one of the largest and most liquid exchange traded funds (ETF) in India. What’s the benefit in buying the NIFTY Index? The NIFTY Index (similar to the Bombay Stock Exchange’s Sensex) is the flagship index of the National Stock Exchange of India – the largest stock exchange in the country in terms of number of transactions. The value of the NIFTY Index represents the weighted-average share price of some of the largest companies listed on the Exchange. These include pretty much all the front-runners of our economy. The 50 stocks that constitute the NIFTY Index represent 21 sectors of the economy and make up nearly 70% of the total market value of all stocks listed on the Exchange! Buying the NIFTY Index is equivalent to buying the shares of all these 50 companies put together. The NIFTY BeEs helps you do just that but with minimal investment. There is no entry or exit load for the NIFTY BeES, and the annual expense ratio at 0.5% is among the lowest compared to other mutual funds. The other advantage is mutual fund investments can be made only based on the day’s closing NAV. Exchange traded funds can be bought or sold at any point during the day at prevailing Index levels. What’s more – most of the times, index funds from fund houses have tracking errors much largers than the BeES ETF. All reasons to invest in Nifty BeEs.

 

 

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  1. #1 by Stable Investor on January 9, 2012 - 11:13 PM

    We agree with first point that PE of overall market gives a clear indication of overall market valuations & sentiments.
    We did an analysis at http://www.stableinvestor.com/2011/12/pe-ratio-of-indian-markets-long-term.html, which may be helpful in deciding whether its prudent to invest in a market with a given PE or not.

  1. Learnings from Shyam’s Column – Part 2 of 3 « Kiran Learns to Value Invest
  2. Learnings from Shyam’s Column – Part 3 of 3 « Kiran Learns to Value Invest

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