- Returns during last 13 years, when segregated on basis of Dividend Yields are –
- This clearly indicates that at current Dividend Yield of 1.6, chances of earning around 20% per annum for next 3 years are quite high! (Caution – The statement is made on basis of historical data. Past performance is no guarantee of future performance.)
- A graph between Dividend Yields and 3-Year-Returns (CAGR) also shows that there is a high (positive) correlation between the two. Higher the dividend yield, higher the returns over 3 year periods.
|Dividend Yield & Return Since 1991 [Click to Enlarge]|
- But one must understand that market does not give enough chances at higher levels. Our analysis shows that out of 2500 trading sessions in last 13 years, markets spent less than 5% (127 days) at dividend yields of more than 2.5 (which offers maximum returns over 3 year periods).
|Days Spent on various Dividend Yields|
Stable Investor’s note: Today’s guest post by Daniel Sparks of Value Folio covers an important topic of Anchoring Bias in investment decisions.
The study of how psychology affects our investment decisions is, rightly so, becoming more and more important. It has even been given a formal name: Behavioral Finance. Do we have to get an MBA or take a psychology class to understand the implications of behavioral finance on our investment decisions? Definitely not. We will have a huge advantage by simply recognizing and understanding the most threatening psychological bias to every investor: the anchoring bias.
John buys shares at $30. 2 months later the same shares are trading at $25. He holds on to the stock because he remembers that he originally paid $30 a share and he doesn’t want to lose money. He keeps holding and the stock drops to $20 a share. He freaks out and sells.
Exactly 4 years ago, i.e. on 21st January 2008, I bought few shares of Ranbaxy. The day is remembered as one of the darkest days for Indian equities as bell-weather Sensex lost 1408 points in a single trading session. This was first-ever four digit loss for Sensex at close.
And this big cut was just the start. It was followed by another bloody cut of 857 points on the very next day. (Read more about biggest Sensex falls here).
But in this case, I would say that I was quite lucky. Even in 2007-2008, RNRL was widely regarded as a speculative stock and not worthy of holding for long term. It was a stock which was abhorred by long term investors. Luckily for me, markets continued being irrationally exuberant and started making new highs on a daily basis.
Out of my sheer fear of losing profits, I sold all my shares of RNRL at around Rs 200 each in first few days of January 2008. This investment gave a staggering 383 percent in 6 months and made me feel like a Stock Market Super Hero. 🙂
The above is the sequence of events which I personally experienced. And with loads of help from my luck, I made almost 700% in a market which was grinding down every day and was well on its way to crash 50% for the year.
But honestly, it was my sheer luck and nothing else. But this small story also has a few lessons for everyone to learn from market crashes. I have tried to list them out below:
- Always be a big fan of fear in stock markets. When people become over pessimistic, it should be taken as an invitation to make huge profits. Even Warren Buffett says that “We are fearful when others are greedy and greedy when others are fearful.”
- Always be ready with a list of stocks to buy in market crashes, i.e. have list of crash stocks. This list consists of stocks which one regularly tracks and is eager to buy in case prices fall sharply.
- Courage in Crisis, but without Cash is useless. Always maintain adequate levels of cash to take advantage of such crashes. This can be done by using PE ratio as a tool. There is a definite relation between PE Ratios and Market Returns. When PEs are high, chances of correction are high and hence an investor should book profits and hold cash to take advantage of probable (but inevitable) corrections.
|Always Be Ready For A Crash – It will never come announced.|
- Always use corrections to buy fundamentally safe stocks which have the ability to survive major recessions/downturns/corrections. There is no point trying to find multibagger small stocks which have high mortality rates in downturns. And during corrections, market gives us ample opportunities to pick large cap stocks trading at massive discounts.
- Always understand the difference between shares falling due to weakness in broader markets and those falling due to fundamental issues. A stock like DLF fell alongwith other shares in 2008. But it was not jsut because of fall in broader markets. It was because company was fundamentally weak. And it is still languishing in 200s after hiting highs of 1200 in 2007-08.
- Always keep an eye on 52 Week Low List. You may find some really interesting & investment-worthy-companies in the list during market crashes.
In our previous post, we saw that Indian markets are presently trading at PEG ratio of 0.97. We arrived at this figure by dividing current P/E of 16.7 by average growth rate (in last 18 years)of 17.1%.
|Click to enlarge|
- Out of 50 Nifty stocks, we have selected 20 stocks. Basis of selection is our preference for companies which can called as stable stocks and which won’t be in any trouble in case the markets decide to close for next 10 years.
- Before we move further, please make sure that you understand what exactly is a PEG Ratio?
- We have chosen EPS growth rates to represent growth rates of a company. One can also use any other growth rates.
- For each company, we have calculated 3 PEG Ratios –
- Using latest EPS Growth Rates (2010-2011)
- Using Average of all EPS growth rates in last 5 years
- Using least positive EPS growth rates in last 5 years
- Afterwards, we calculated another PEG for each company – Average PEG – which is an arithmetic average of previous three PEGs.
- Normally, a PEG greater than 1 indicates an overvalued company, and less than 1 indicates an undervalued company. But we must understand that PEG is just a ratio and it should always be looked in conjunction with other ratios and numbers.
- For instance, a company like Bharti has an average PEG of 0.33, which is quite an attractive number when looked at on a standalone basis. But if we consider that Bharti operates in a highly competitive industry; has loads of debt due to 3G fee payments and African expansion; has decreasing average revenues per user (ARPU) and has a negative PEG(!) for current fiscal, the number 0.33 may not look so attractive.
- But there are also few companies like BHEL (0.59), PowerGrid (0.83), Tata Steel (0.40) and Tata Motors (0.42) which have considerable moat (competitive advantage & operations in industries having high entry barriers) and can be said to be available at good valuations. But once again, one should understand that stock like Tata Motors are rate sensitive and cyclical. And under current global circumstances, may slip further.
- A company like Sterlite Industries (pegged by few as future RIL) is available at a ridiculous PEG of 0.19 (or 0.25, 0.08, 0.26). But that does not mean that it is going to become a future multibagger. Similarly, Maruti is available at PEG of 0.10(!)
- Then there behemoths like SBI which may be available at outrageous mathematically calculated PEG of 6.6, but are worth investing as there current PEG stands at 0.54. But one should also consider rise in NPAs of SBI and other factors before investing.