Why long term investors should not enter NIFTY Stocks now?

Some Basics – We all know

Stock Price (“P”) is a multiplicative function of

Fundamentals of company (represented by earning per share “E”)

Liquidity chasing that stock (represented by “L”)

P α L * E

Volatility in “P” is primarily attributed to “L” (liquidity) as “E” (earning) takes time to

improve or deteriorate

P/E ratio is a good indicator to measure the “Chase”

Who’s the Chaser?

There are primarily 2 sets of people who are part of the Chase (or “L”)

1. FII – Also known as “Smart” investors. They pretty much move the market with their sheer

size of investments. They are all over the news channels with their research analysts, news

columns, as investment Gurus etc. creating sentiments of fear OR euphoria.

2. Normal Investors – Also known as “Retail” investors. People like you and me, investing

directly through our trading accounts or indirectly via Mutual Funds, ULIPs, PFs, SIPs,

Insurance companies etc. We are the audience of the news, research analysts and

other media sources.

Who’s buying from Whom?

FIIs buy when Retail Investors Sell. (and vice versa)

When does Retail Investor Sell ?

Retail investor sells when there is panic, recession, markets are falling apart and most importantly

when people on news channel including research analysts and Big Investment Gurus

recommend that “This is the end” or “Markets may fall another 25-30% by year end” or “Stay

away from market” or “Cash is King”. This is when the “Smart” guys are buying

When does Retail Investor Buy ?

Retail investor buys when there is euphoria (India Shining or 2004 election results or MODI’s magic

wand), all the guys on TV channels are giving new levels for Sensex, markets are breaking all

time highs and all the analysts and Gurus are saying “Markets to be up another 20% in next few

months”. This is when “Smart” guys are selling (or dumping)

Why does that happen?

Retail Investors are sentimental investors

They base their views by gauging the sentiment of the market by watching news, reading reports etc.

They get carried away by the euphoric picture being painted by almost all the people in the media (or panic picture as the case may be)

They are shown a greedy picture of future returns

Smart Investor (FIIs) are technical investors

They have access to all the systems, algorithms and high frequency trading tools. Also, they are the ones who are directly/indirectly creating and feeding news to Retail Investors.

They buy when there are no Chasers (no liquidity) in the market - at low P/E ratios. They keep dumping bad news in the market so that Retail Investors stay away. They exit when P/E ratios hit high threshold levels.

How to stop being Sentimental?

Simplest Approach

Follow the Smart Guy and not the news/reporters/analysts

Buy at low P/E and Exit at high P/E

Hmmm. So what’s a low or a high P/E?

Nifty trades in a PE range of 10.5 to 26.5.

95% of the times Nifty trades in the PE range of 12.0 to 24.0

Here’s how Nifty PE has been for last 14 years (from Jan’2000 to Oct’2014)

Nifty PE – The walk since Jan’2000

There are five zones in this chart

1.) Euphoric zone – PE of 24.5 to 28.5

Market never stays here. SMART guys never BUYhere

2.) Built up zone – PE of 21.5 to 24.5

Market never stays here too. SMART guys PUMP

the stories here. They don’t buy here either.

In last 14 years, Nifty touched 21-22 range 20

times in uptrend and fell 16 times. Remaining 4

times it fell within next 3-6 months

3.) Home Zone – PE of 16.5 to 21.5

No man’s land

4.) Fear Zone – PE of 13.5 to 16.5

This is the zone where Smart Guys start linking

the market and start Buying. Retail investor

keeps selling as there is lot of pessimism

5.) Panic Zone – PE of 10.5 to 13.5

Market never stays here too. ONLY SMART guys

are Buyers here as Retail guy in PANIC mode

Nifty PE on 31st Oct ‘14 “21.58”

Source: NSE

Good time for long term investor ?

Nifty PE on 31st Oct’14 was 21.58

In last 14 years, NIFTY has spent 86% of its time in a PE

range of less than 21.58

16 of the 20 times NIFTY has corrected from these levels

significantly

Remaining 4 times, NIFTY could stay there only for 3-6

months and reversed to mean of 18.5 PE

SMART guys are selling across the GLOBE. Institutions

are selling more than buying and as usual Retail

Investors are net buyers.

QE program which was fuelling the rally across all the

markets (and FIIs) has been stopped and that should

further reduce Institutional Buying.

No. of days spent in PE range by NIFTY in last 14 years

86%

Markets can surely go up from here, but is the return worth the risk???

Smart Guy would say “Hell NO!!!”

Disclaimer: The views in this report are entirely personal and you should do your own

research before basing any decision on the facts presented in this report.

Otherwise also, you should do your own research before investing.

Smart Guy is doing that!

Author : Piyush DwivediEmail: dpiyush@gmail.com