When a stock falls, it opens up deeper arbitrage opportunities during a 'falling knives' scenario. This discount attracts a rapid influx of fresh cash until the arbitrage opportunity gap is filled (i.e the market stabilizes) to the point of 0 alpha. 
Earnings yields is mostly stable and smooth curve. It's the stock price that fluctuates due to sentiments, liquidity, news cycle, perception etc.
Let's say the long term earnings yield was growing at 9%. If you bought at
(A), your returns = 5%.
(B), your returns = 15%
Let's say the long term earnings yield was growing at 9%. If you bought at
(A), your returns = 5%.
(B), your returns = 15%
If you track yield, you'll get better entry points and get better bang for buck. If you track only price, there's a risk of getting trapped at (A) where all technical indicators are bullish.
A real life example : Page Industries
April 2020 EPS : 350rs/share
Stock price : 18,000rs
Yield : 1.95%
July 2021 EPS : 305 rs/share
Stock price : 30,000rs
Yield : 1.01%
You were getting nearly double the yield last year. A ~100% reward simply for tracking the right metric.
April 2020 EPS : 350rs/share
Stock price : 18,000rs
Yield : 1.95%
July 2021 EPS : 305 rs/share
Stock price : 30,000rs
Yield : 1.01%
You were getting nearly double the yield last year. A ~100% reward simply for tracking the right metric.
The same yield logic also works with Bonds. If you time your entry in bonds right, you can earn extra over and above the interest rate that the bond offers.
https://twitter.com/techlunatic/status/1345989459884396544
How to time these entries in equity and bonds?
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https://twitter.com/techlunatic/status/1301011923425611777
"Do I need to aim for 10% yield on stocks?"
No. With just 2% yield, compounding at 20%, you get a 7x in 10y and 50x in 20y. i.e 100% yield in 2040.
If you invest X rupees today, you'll get X rupees of earnings *every year in 2040.
No. With just 2% yield, compounding at 20%, you get a 7x in 10y and 50x in 20y. i.e 100% yield in 2040.
If you invest X rupees today, you'll get X rupees of earnings *every year in 2040.
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