How Stock Markets will Behave in 2017?

Stock Trader Gazing in attempt to predict the market

Dear Friend!

Thanks for asking the question that is constantly on the minds of a large number of investor population, “How the stock markets will behave in 2017?” Unfortunately the answer is not a simple yes or no but complex and length one as that the:

1. Markets are unpredictable
2. Predicting tolls like the technical charts are nothing but hocus-pocus
3. Making investing decisions based on market predictions could be highly dangerous
4. Value investor never attempt to predict market behaviour
5. Good investments can be made and money can be made during all market conditions

Great value investing gurus have repeatedly emphasised that it is futile to predict the markets. Investment decision have to be made based on the valuations (affordable prices) of stocks of excellent companies under various market conditions. If shares are available at a good discount to their intrinsic values buy them. Similarly, if scrips are traded at very high premium to the intrinsic value of the shares you bought at a discount, sell them.

Let us take the example of NMDC in our academic Portfolio 2K15 and analyse buy, sell or hold decisions under various scenarios as follows:

Table Shows Calculation of the Intrinsic Value of NMDC Share

As on 10th January 2017, the current market price (CMP) is Rs.138.05 and the decision is Do not Buy but hold as the share is not available at a discount and the CMP of Rs.138.05 is not too high compared to the intrinsic value of Rs.113.34 as well as our average holding cost in the portfolio of Rs.105.38.

If the CMP hypothetically was Rs.82.50 we would have bought the scrip as it is available at a discount of 27.21%.

On the other hand if the CMP hypothetically was Rs.282.50 we would have sold the scrip as it is trading at a huge premium of nearly 150%.

So my dear friend this is how value investors react to market conditions rather than predicting how the stock market will behave in the new calender year 2107.

Suggested Further Reading:

• How to Find The Fair Price of A Stock?
• How to Calculate the Intrinsic Value Shares?
• Predicting the Market Versus Reacting To It

Thank you,

With Best Regards

Anand

What Stocks I invested in January 2017 and How I Selected Them

In this article I shall describe the stocks I have invested in yesterday for January 2017 and how I ended up selecting them. While the theme for investments in the last few months had been buying assets at a discount, this month the theme is “Balance”. The balance is between ‘Price to Book Value’, ‘Price to Earnings’ and the product of the first two. We are already familiar with the thresholds for these three parameters but still let us list them:

1. Price to Book Value (P2BV): Not more than 1.5
2. Price to Earnings (PE): Not more than 15
3. Product or combination of the above two ratios (P2BV*PE): Not more than 22.5

The stocks evaluated on the above criteria were all the 15 serious, individual shares figuring in our ‘Portfolio 2K15’, other than the exchange traded funds.

As there are three parameters or criteria, the investible sum had been determined as a multiple of three. It could have been Rs.900, 1800, 2100, 2700 and so on. I had selected Rs.21000. This figure suits many middle class wage-earning Indians. I allocated this sum of Rs.21000 equally among the three criteria at Rs.7000 each.

Kindly note that no efforts were either invested nor required for calculating the P2BV and PE Ratios of the stocks; they are readily available on many financial websites. I have taken the figures from “Economic Times”.

The three criteria are individually and independently applied to the said 15 stocks as follows:

Price to Book Value Ratio:

Criterion: P2BV; Threshold: ≤ 1.5	Max permitted	Current P2BV Ratios	Discount in P2BV	Weightage (% of individual scrip discount to total of positive discounts)	Allocation of Individual Investible Amount Rs. 7000 as per the weightage
1	NHPC	0.95	0.55	7.63%	534
2	PFC	0.45	1.05	14.56%	1019
3	REC	0.43	1.07	14.84%	1039
4	NMDC	1.77	-0.27
5	CAIRN	0.93	0.57	7.91%	553
6	SJVN	1.12	0.38	5.27%	369
7	Neyveli Lignite	0.89	0.61	8.46%	592
8	ONGC	0.93	0.57	7.91%	553
9	NALCO	1.32	0.18	2.50%	175
10	MOIL	1.84	-0.34
11	HZL	2.84	-1.34
12	OIL	1.22	0.28	3.88%	272
13	GE SHIP	0.68	0.82	11.37%	796
14	VEDANTA	1.44	0.06	0.83%	58
15	SCI	0.43	1.07	14.84%	1039
	Sum of Positive Discounts		7.21	100.00%	7000

A close examination of the above table reveals that those stocks that are not offering a positive discount in the P2BV (the positive number obtained from deducting the current P2BV from 1.5) are eliminated and their negative discounts excluded from counting the total discount of 7.21. The individual weightages are arrived at by dividing the individual discounts with the total of positive discounts, of 7.21. The investible sum set a part for the P2BV criterion of Rs.7000 has been allocated to each individual scrip based on this weightage.

In simple terms we have allocated maximum amount to the scrip offering maximum positive discount and least sum to the share offering the least discount.

Price to Earnings Ratio:

A similar exercise is carried out with the ‘Price to Earnings (PE) criterion and the results are as follows:

Criterion PE; Max permitted PE = 15	Scrip	Current PE	Discount in PE	Weightage	Allocation of Investible Amount Rs. 7000
1	NHPC	10.46	4.54	11.47%	803
2	PFC	5.08	9.92	25.07%	1755
3	REC	2.16	12.84	32.45%	2271
4	NMDC	15.79	-0.79	0	0
5	CAIRN	96.59	-81.59	0	0
6	SJVN	9.16	5.84	14.76%	1033
7	Neyveli Lignite	13.13	1.87	4.73%	331
8	ONGC	16.98	-1.98	-5.00%	0
9	NALCO	21.21	-6.21	0	0
10	MOIL	40.88	-25.88	0	0
11	HZL	15.39	-0.39	0	0
12	OIL	14.04	0.96	2.43%	170
13	GE SHIP	11.98	3.02	7.63%	534
14	VEDANTA	14.42	0.58	1.47%	103
15	SCI	33.82	-18.82	0	0
	Sum of Positive discounts		39.57	95.00%	7000

1. Again the stock trading at the lowest PE multiple and therefore offering the maximum discount to the maximum permitted PE multiple of 15 had got the maximum allocation of the investible sum.
2. For example REC with the lowest PE of 2.16 and maximum discount of 12.84 (15-2.16) got the maximum allocation of 32.45%; Vedanta with maximum PE multiple of 14.42 and the least discount of 0.58 ended up with the least allocation of 1.47%.
3. Those scrips trading above the maximum permitted PE Multiple of 15 got totally eliminated.
4. And finally some scrips got allocation under the criterion of P2BV did not get any allocation under this PE criterion – example CAIRN.

PE*P2BV Ratio:

Value Investing principles require that besides the above two criteria independently applied, the combined effect or the result of the above two criteria shall not exceed 22.5 (15*1.5 = 22.5). I applied this third condition, ascertained the discount (22.5 – actual PE*P2BV number), made the allocation based on the discount percentage and the results are as follows:

Criterion PE*P2BV; Max permitted  = 22.5	Scrip	Actual PE*P2BV Value	Discount	Weightage/ Discount %	Allocation of Investible Amount Rs. 7000
1	NHPC	9.937	12.563	11.07%	775
2	PFC	2.286	20.214	17.81%	1246
3	REC	0.9288	21.5712	19.00%	1330
4	NMDC	27.9483	-5.4483		0
5	CAIRN	89.8287	-67.3287		0
6	SJVN	10.2592	12.2408	10.78%	755
7	Neyveli Lignite	11.6857	10.8143	9.53%	667
8	ONGC	15.7914	6.7086	5.91%	414
9	NALCO	27.9972	-5.4972		0
10	MOIL	75.2192	-52.7192		0
11	HZL	43.7076	-21.2076		0
12	OIL	17.1288	5.3712	4.73%	331
13	GE SHIP	8.1464	14.3536	12.64%	885
14	VEDANTA	20.7648	1.7352	1.53%	107
15	SCI	14.5426	7.9574	7.01%	491
	Sum of Positive Discounts		113.5293	100%	7000

Sum of the three allocations:

Having completed the assessments based on the three criteria as above, we now sum-up the three amounts allocated for each scrip. Next the number of shares that can be bought is ascertained by dividing the allocated sum by the current market price of the share. Once this quantity was available I just placed the order online and bought the shares as follows:



Conclusion:

In the end I had allocated an investible sum for investment in the month of January 2017 and it resulted in the independent assessment based on three fair valuation criteria on the constituents of our Portfolio2K15 resulting in a balanced allocation. Three shares highlighted in red background and white foreground, were totally rejected and the rest 12 had all received provision depending on their merit.