Tuesday, 3 July 2012

Puzzling Valuations: Varying Timeframes

I’m a bit of an attention butterfly, I tend to slit from one idea to another, and quickly lose interest when too much time is spent on the same topic. So this will probably be the last post where I look at valuations for a while at least.

Just to recap: looking at the Straits Times Index, I plotted forward 12-mth returns versus PE ratios and PB ratios. Both support the idea of ‘buy low sell high’ albeit to varying degrees and the relationship looked clearer in the case of PB ratios.

The question now is what happens if I plot varying time frames? Say short term (3 months) and long terms (24 months), bearing in mind, the data set starts at end-2008 and ends in May-2012, so I can’t do much longer than 2-years of rolling returns.

If I look at 3 month forward returns, here’s how it varies with PE ratios…
 And 24 month ratios…

The general observation seems to be that you’re got far better chances of making money buying low selling high if you hold for 24 months than if you held for 3 months. Referring back to an earlier post, 24 months might be better holding period than 12 months, since observations of positive returns are 1) more numerous and 2) higher in 24 months than in 12 months.

Then again this all based on historical data, which is never a guarantee of future returns. Still…it’s as far as I can tell the only thing I have to base any future projections on. So reader beware, we plunge further onward into historical data.

Now for PB ratios, starting with 3-month forward returns…

And 24mth forward returns…

Again, the historical data seems to support the notion that holding for 24-mths (and even 12mths) is more likely to make more money than a 3-mth timeframe if you enter at low valuations. At high or in-between levels, returns seem far more modest.

So what does this all mean?

Firstly, “buy and hold” works with “buy-low-sell-high”.  This is based on historical data, and the general common sense that if you get in when valuations are low, you’re far more likely to make money in the long-term (24mths), than in the short-term (3mths).

Secondly, long-term isn’t the same as forever. Often, 12mths is all you need to see your investment turn in a decent return if you enter at low valuations. Although some would prefer you buy and hold like Warren Buffett, (i.e. forever) the reality is that for the STI at least, 12months seems a reasonable holding period to see positive returns.

The pity is data isn’t easy to come by, so most individual investors are at a disadvantage unless they happen to have access data.

Um, that’s a different sort of Data.

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