When is a good time to invest?

When is a good time to invest?

When the markets are high, people are concerned. When the markets are low, people are concerned.


– Investors always ask this question.

As a young student of finance more than 15 years back, I always wanted to know an answer to this question.

How does share price emerge?

This is an underlying thought of whether this is a good time to invest or not.

In quest of answering this question, I started reading books on investing. Fortunately, came across a book “Intelligent Investor” by Benjamin Graham.

This line in the book answered my question and changed my perspective on the stock market:

“In the short run, a market is a voting machine but in the long run, it is a weighing machine.”

In the short-term, mood of the market defines where the prices would be going. However, in the long-term, company’s performance defines the performance of share price.

Can there be an analytical tool to assess the market mood?

Let us look at how you can assess the current mood of the market. This factor does not predict the future but focuses more on the present state i.e. whether the market is over or under-bought.

Earning yield + Dividend yield – 10 years government yield

A positive number indicates that market is undervalued; else, you are better off in bond investing. At any point in time, the portfolio may be maximum 75% in equity and minimum 25% in equity.

If you would have followed this strategy for the last 18 years, using purely 10-year government bond yield and Nifty 500 index, the return would have been 15% per annum. Except 2008, for all the rest of the past 18 years, the return was positive. This way you can plan your portfolio better and manage your investment psychology better.

The analysis indicates that current market is overvalued, finding investment opportunities may be a challenge and you are better off parking majority of your investments in bonds.

Here are the investment rules I follow in my firm:

1. Assess the market using the analysis provided above. I use NSE500 as a proxy for equity, dividend yield as 1.57% and current 10-year government bond yield.

2. When my model indicates +2% factor, perform fundamental analysis on selected companies that are deeply discounted. This touches upon the long-term view, “market as weighing machine” analogy.

Where do you find deeply discounted value? A company that is fundamentally strong but has a lot of negative news around it. 52 weeks low is more relevant than 52 weeks high 🙂

3. If the factor is less than 2%, a combination of ETFs, short-term debt funds and a mutual fund may be used. Finding deeply discounted equity is a challenge in this zone.

I like sitting on cash i.e. being invested in bonds if I do not see any opportunity in the equity market. I do not like chasing returns; I like managing my risk better.

Please stay away from people who tell you that they will chase a certain return for you.

No one in the world can predict where the equity markets will go. However, smart investors always know that they can always manage their risk better and returns are generated over a period of time.

The consistency of return while managing portfolio risk is more important than high returns during bull-run.

Interestingly, print and TV news focuses on figuring out the short-term view of the market. There are not many options to get information without opinions. You will be better if you do not read or watch at all than getting opinionated about the markets.

Just keep it simple and manage your portfolio peacefully so that you do not lose sleep!

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