- 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).
|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.
|Click to enlarge|
- 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|
- 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.
- 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! 🙂
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?)
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?)
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.
- 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 😉