Archive for the ‘Market analysis’ Category.


I typically do not invest based on the market cap of companies. Though I have a cutoff of 100 crs for market cap when filtering for investment ideas, I do not give it anymore importance than that.

I have been reading a few articles that the midcap sector of the market seems to be performing poorly as compared to the index. As I hold several midcap stocks in my portfolio, I decided to check the validity of this view.

I checked on the performance of the midcap index and compared it with the nse nifty. Since april, the midcap index been in a bear market and has dropped by around 2-3% whereas the nse nifty is up 7-8 % (see under statistics section of the nse india website)

In addition, my stock filters seem to be turning up a few good ideas in the midcap space.

The above thought does not mean that I am planning to rush out and buy midcap stocks indiscriminately. However the small cap and midcap space is now a good place to look for new ideas

You can find are recent post on market breadth
here on


I have been reading this book : Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street.

I have found this book quite good especially if one wants to learn about odds, betting etc.

I am just halfway through the book. The book discusses about the kelly’s formula.

F = edge/odds. I have written about this formulae earlier (see here).

I found the above formula intersting although I have yet to figure out, how to use it directly in investment management. The formulae works well for betting situations like blackjack, horse betting which have limited outcomes. Its diffcult to work out mathematically the value of edge and odds in a common stock situation.

I have also been doing some analysis on the NSE data and have the following data

The above is the distribution of PE ratio for the last 7 years. It clearly shows that the only for around 8% of the trading days has the PE ratio been higher than 22.

If we take the above numbers as proxy for probability of occurrence and multiply that with the gain/ loss ( current PE – PE of the particular day / current PE) for each day, the expected value is around –19%.

To cut a long story short, the market seems to be overvalued by historical measures (which may not mean that the market is overvalued if the future performance is better than expected). Overall, I am planning to be more cautious especially in investing in the index (via index funds or ETF)

update : 8-Jan : Found this interesting discussion thread on the Berkshire board on MSN on the same topic. For those interested in kelly formulae, i would recommend reading the thread


It’s difficult to miss that the sensex is at 10K. Frankly, I personally think that 10K is no different than 9900 (ofcourse it is 1% higher). Fundamentally nothing much has changed when the sensex rose from 9500+ to 10K. But at the same time with the index at these levels, I updated my worksheets and generated the graphs above. What does the data tell (and everyone will have their own interpretation)

– ROE is 20% +, highest in the last 15 years. This clearly shows that the cost cutting and restructuring that indian companies went through, has paid off.
– Earnings which were roughly flat between 1997 and 2003, have exploded since then. The reason is not diffcult to see. Good economic growth, higher efficiency due to the restructuring, low interest rates etc etc.
– P/E ratios do not appear very high, but have to be seen with reference to the ROE which is above the past averages and the earnings growth has been very high.

So does the data give me an insight into what is likely to happen in the future?

ROE appears high and may come down a bit in the future to the average levels. But on the other variables like PE (which is dependent on market psychology) and earnings I frankly don’t have any special insight. My guess is as good as anyone else’s. For now, I am not doing much in terms of buying or selling.

But the price levels on some of the individual securities which I own, are now in the ‘alert’ range. What I mean by alert is that once the price crosses my upper estimate of intrinsic value, I relook at the scrip and start selling slowly (around 5% for every 2-3 % price increase). Why 5 % for every 2-3% increase. Nothing scientific or smart about it. I have developed this approach so that if the price keeps increasing I am able to sell at a higher average price and don’t feel regret of losing out on the gain. Conversely if the price starts dropping, then I end up doing nothing (as the scrip is now below my estimate of intrinsic value).