This is the archive of all articles and analysis related to the nature of stock market risk and reward
Reinvesting stock dividends can make a huge impact on your wealth over the long term. To illustrate this, we first consider how a total returns index is calculated by assuming dividends are reinvested. Thanks to Prof. Robert Schiller for making monthly S & P 500 data available from 1871 for calculating the Schiller PE with the trailing…
Continue reading →I am not a mutual fund salesmen. Therefore I have no problem in pointing out that a mutual fund SIP, in particular in an equity mutual fund does not reduce the risk associated with the equity market in any way. All a SIP does is buy units at different market levels. Some high, some low. No…
Continue reading →“How can I fund my goal if the market crashes a few years before I need the money?” is a question that I have often encountered. In this post (and the next), I address this issue with some specific examples. An exit strategy is more important than an entry strategy Suppose I can invest Rs. 1,000…
Continue reading →The notion of risk and reward is key to any investment plan. However, our understanding and expectation of risk and reward are often clouded by an inability to distinguish between probability and possibility. Here are a couple of examples that hopefully might bring out the difference. First some book news: Our new book, You can…
Continue reading →It can be extremely educative when the Sensex chart is plotted such that past bull and bears runs can be compared to more recent such movements. This can be easily accomplished by plotting the Sensex closing value as a logarithm. This reveals a fascinating staircase pattern that is discussed in this post. A log chart is…
Continue reading →“Risk comes from not knowing what you’re doing” is one of the many famous Warren Buffett quotes. Risk also comes from an inability to apply context to a (WB) quote! For example, Mr. Buffett has repeatedly stated that volatility and risk are very different from each other. Statements like these have been used to mis-sell and…
Continue reading →The idea of a risk premium is one of the most important investing concepts essential for those who invest in volatile assets and those who shun them as too ‘risky’. The definition of a risk premium is fairly simple. If a risk-free instrument offers say 7% return, what is the return I should expect for the…
Continue reading →The correlation between the Nifty PE and long-term bond yield (10-year GOI bond) is discussed in this post. I had earlier considered the relevance of the Nifty PE for the long-term investor and misconceptions about the Nifty PE. A few days ago, I had asked, what is a high index PE?. There were two interesting comments by Deep and Kamal…
Continue reading →When the markets start to move for a few days, investors tend to look at the index PE to check if the market is overvalued or not. Before we caution ourselves (and others) about ‘high PE’ levels, it would be quite instructive to pause and think about the historical evolution of the index PE . Before we…
Continue reading →A smart beta investment strategy is one in which a stock index is built with specific rules instead of a simple market cap based allocation. The nifty strategy indices are examples of a smart beta investment strategy. In a series of posts, I had covered several of these indices including a rolling a returns tool…
Continue reading →Have you ever wondered what drives stock market returns? Is it linked to the GDP? Is it related to company earnings? Elections? RBI policy decisions? In this post, I list the findings of several studies which have attempted to ask the same question. This is a followup to the last three posts: Why should I…
Continue reading →The Nifty50 Value 20 Index or the NV 20 represents the 20 most liquid value blue chip stocks selected from the Nifty 50 index. The performance of this index is analysed and compared with the performance of actively managed large-cap mutual funds. Nifty50 Value 20 Index Selection Criterion The 50 stocks that are part of the…
Continue reading →‘Mutual funds are for sissies’. Excuse the expression, but I wonder if you have heard that or some version of that from stock investors? Many stocks investors (not all) tend to look at mutual fund investors as children of a lesser god. Not that I care, but I often see extreme generalisations both for mutual…
Continue reading →Why do people time the market? That is, why do they enter and exit the market based on certain signals (moving averages, PE etc.)? Is it for getting better returns? Or is it for getting risk adjusted returns? This is a poll I created in Facebook group Asan Ideas for Wealth. As expected, a majority…
Continue reading →If we ‘hold’ equity for the ‘long term’ are we assured of beating inflation with a real return? Will equity beat all other asset classes if we wait long enough? Will long-term equity investing always be successful? Equity as an asset class is sold to investors with an ‘yes’ to such questions. Sold either directly or…
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