Buying Cheap or Buying Early

A couple of days ago, I read a blog post by a Distributor of Mutual funds showcasing the difference of what FII’s are doing and what DII’s are doing (in terms of buy / sell) since the beginning of this year. As has been the case most of the time (and even historically), most of the time, DII’s do opposite of FII’s. So, in months where FII’s are buying, there is a high probability that the sellers are DII’s and vice-versa.

In fact, since April 2007 to Dec 2015 (105 months), only in 29% of the months have both been on the same side (16 Months when Buying and 15 Months when Selling). The writer of the blog using the data of the recent past hypothesizes that Mutual Funds are “essentially bargain hunting; probably buying quality stocks at low valuations.”. In other words, the author seems to believe that FII’s are selling cheap (Idiots probably) while the funds are lapping them up (Intelligent folks, eh?).

Before we go further, lets first check what FII’s and DII’s were doing as the market tumbled in 2008. Yes, its true that we did recover from that fall (and unless the world is going to end), probability is very high that we shall recover from every fall given enough time, but if you were a investor during those times, its tough not to remember that many funds actually lost way more than what the Indices lost.

So, while its true that they eventually recovered and made it up, any investor who invested or was invested fully during those months had a wait a very long time before he could see the NAV’s he saw before the crash.

The above picture depicts the amount of selling and buying by FII’s and DII’s from Novemeber 07 – March 08. As can be seen, other than in December 2008 when both ended up being buyers, in all the other months, FII’s continued to dump which was picked up by the DII’s even as Nifty tumbled from 6350+ to a low of 2252 in October (a loss of nearly 64% at the bottom).

The next question is, are we expensive. If you are a reader of this blog, you will know that while I have many a time said that we weren’t extremely expensive, we aren’t cheap either. That was based on my reading of the PE ratio (I know, I know, its not accurate to depict the future given the changes it frequently goes through and is hence a broad indicator) of the Nifty 50.

The last year and half has been more about Mid and Small Cap than the Large Cap. While I have no data, I wonder if like in 2000 when IT funds were all the craze and in 2007 when Infrastructure funds were able to accumulate a lot of assets, this time I wonder if Mid Cap funds have got a pretty large amount of inflow given the strong 1 year returns most of them were able to generate.

Lets hence first look at the PE chart of Nifty MidCap 100

Nifty Mid Cap 100 Price Earnings ratio at the start of the year was at a all time high – a high well above the one we saw in 2008 and even after the current fall, it has just come back to its 2 Standard Deviation. Now, valuation in itself doesn’t mean anything. After all, high growth companies command a very high PE and still provide returns to investors (Example: Page / Eicher in the last few years). But are companies in the Nifty MidCap 100 Index growing at 25%+ is the question one needs to definitely ask.

Because if they are not growing, the future returns (even in the best case scenario) are pretty bleak. So, before we move to Nifty 50 PE chart, would you consider the above to be Cheap / Distress Selling??

Compared to the Nifty Mid Cap 100 PE chart, this is a bit more pleasing to the eye. We haven’t touched any of the peaks that we touched in previous rallies and in that sense, its good. But as I have emphasized earlier, we aren’t cheap even today. In fact, unless you believe there has been a lot of good things that happened since the coming of Modi, why should a investor pay anything more than what he paid earlier?

The reason to utilize charts is because we are clueless when it comes to the future. But historical insights give us a clue on what could be expected of the future (all being nothing more than probability).

In one of my earlier posts, I commented that just sipping month on month without accounting for market valuations will get you average returns. There are times you should buy more and times you should actually sell. Buying all the time is good for everyone other than your own finances as average returns means that you need to invest more to achieve a return which could have been achieved with just a little tune up in terms of how much to be invested at current juncture.

Investing all the time helps the distributor get his commission, but is he really hand holding you and informing you about the risks of investing (even in SIP) at high levels and investing the same amount when markets are historically cheap?

Caveat Emptor should be how you look when investing since bad advise / investments can take away many years of toil.