Monday, March 26, 2018

Can We Still Buy Stocks in the present High Market in March 2018?

Can we still buy stocks in the present high market in March 2018? Many people wonder.

Actual Question:

Do you still buy stock in the current market?


Dear Friend!

I say yes. But there are a few stocks that are still available at fair price. At the beginning of every month, I write a detailed post on what stocks to buy for that month. I have a list of about fourteen stocks which I have thoroughly investigated. To check whether these stocks are available at a fair price, I subject them to a quick verification under four important conditions laid down by the value investing as follows:
  1. 'Price to Book Value (P2BV) Ratio' shall be less than or equal to 1.50
  2. 'Price to Earnings (PE) Ratio' shall be below or equal to 15.
  3. The result of the combination of the above two ratios (PE*P2BV) shall be less than or equal to 22.50
  4. The 'Dividend Yield' shall be above the hurdle rate. Usually, I keep the hurdle rate at 4% but since the stock market is very high I have lowered the hurdle rate to 2%.
The below picture shows which stocks qualify under the four criteria:

Can we still buy stocks? - Criteria for Qualification

You can see that while many stocks qualify under all the four angles, a few pass the test only under one or two conditions. I normally address this such a situation in the following manner. I divide the total investible sum equally among all the four criteria. Those stocks that do not qualify (highlighted by white fonts in the red boxes) will not get any get any allocation under that criterion. I make those that qualify (black fonts in white or green boxes) to compete among themselves and grab the highest allocation based on their merit. For example 'Shipping Corporation of India (SCI)' with P2BV Ratio of 0.44 will get double the allocation of MOIL with a P2BV number of 0.89.

Well did I buy these stocks this March 2018? No. The reason for not buying is not connected to the merits of buying these stocks. The reason is that I wanted to avail tax exemption or deduction under section 80C of the income tax act. We are eligible to make investments up to Rs.1,50,000/- under the various eligible financial instruments. Buying individual stocks does not qualify for the deduction. Only investing in a special mutual fund called 'Equity Linked Savings Scheme (ELSS)' is allowed. The mutual fund manager will invest the money perhaps in the top 50 stocks by market capitalisation. Since the markets are trading high, it is obvious the fund manager will be buying these top stocks at very high valuations. Therefore, I made a token investment of Rs.20,000/- in an ELSS scheme and rest in 'Tax Saving Fixed Deposits' with banks.

So the answer to the question, 'can we still buy stocks under the prevailing high market prices in March 2018' is a definite yes. We can buy the select few stocks listed above.