Not all high P/E stocks are going to justify growth and not all low P/E stocks are value buys. We might do a lot better as investors if we don’t use P/E as an initial screening parameter but as one of the many final screening parameters.
I have nothing more to add . As said Mr Munger.
This argument always comes up in this thread that you should always invest based on merit of the individual businesses and ignore market p/e. I bet that for most folks on this forum, part of the portfolio that they built buying stocks after October 2017 (when we last met NIFTY 10K) is probably experiencing loss. Why make fresh additions when market p/e is so high? Ignoring market p/e puts the entire investment portfolio at disproportionate risk when compared to the potential reward.
To give a cricket analogy, how many top batsmen can really say they will score well irrespective of pitch conditions, opposition bowling strength and their batting order? So also, only mad geniuses can consistently pick the most valuable businesses irrespective of market conditions. Circle of competence is not just about understanding and valuing businesses and sectors you are familiar with, its also about choosing market conditions that you thrive in.
PS: If you bought and sold stocks for a profit within this short period (Oct-Mar), you are a good trader. Traders don’t need low p/e, they need volatility to make money. I am neither discussing nor discouraging trading here.
Leaving all subjectivity aside, plain and simple…
Nifty PE 24.38
Therefore, EPS 410
Nifty has spend 48.90 % of all trading days below PE 18 (Mode, Median)
Therefore, considering PE of 18 and Current EPS as 410, pegs Nifty at 7381.
In short, the median or average value for Nifty is 7381.
You would have made lot of money investing in a company like Infy, M&M, Biocon etc even in Oct.
Nifty PE is aggregate of all companies but there are always undervalued companies available.
There can be an argument that they are cheap/undervalued for a reason. But same argument can be extended for whole market.
At lower PE levels margin of safety is higher and one has lots of choices.
We miss biggest driver of PE which is interest rates. A PE of 18 will be incredibly expensive if we were to get into a hyperinflation phase and interest rates of say 20%.
We always tend to take data from 1990s onwards for PE but we tend to ignore the interest rate. 1990s was period of very high interest rates.
A good measure would be look at PE x Cost of Equity (i.e. Interest rate + Risk premium)
I like a few wise sayings of Jeff Bezos, the world’s richest man and most successful entrepreneur. One saying goes “Be stubborn on vision and flexible on details.” The vision is to buy only when markets are not overvalued (cheap) and stocks are available at a fair value (bargain). P/E of 18, inflation of 7, GDP of 7.5, interest rates at 6 etc. are details and we should be flexible with them. Stars may not align to bring about those exact numbers in the near future.
Let’s not dumb investing down by looking only at past statistics. Past statistics only go so far in foretelling future events. Some veterans have already shown statistics that the difference in returns when you invest at the market tops vs bottoms is only 2-3% in the long run. Now, who is comforted by that observation from past when their portfolio tanks 50%? Who can guarantee that next 20 years will be same as previous 20?
There comes a time in your investing life when you are anxious about preserving your wealth more than fear of missing out on making more money. Only then you will understand Buffett’s two rules of investing. If you aren’t already there, you will get there eventually. All the best.
You mean that the interest rates have been reducing since the 1990s therefore the average PE levels should be increasing. Logic being that cost of capital decreases, resulting in decreased interest cost and hence increased profits.
However, I believe the exact opposite is happening. The index is getting heavier defeating the above theory, however correct it may appear.
No it is not just interest burden. That only affects companies who need to borrow and not low/zero debt companies.
But, ultimately Valuation = Present value of all future DCF. And for calculating DCF you need interest rate. Higher is interest rate lower is PV of future cash flows and vice versa.
So PE means nothing without interest rate.
So, I am not unduly worried about 20% higher PE if I am holding quality companies.(It is just 4-6 Qs of earning catch up game).
I am more worried about the fact that interest rates have risen 10-15%. I am really scared if globally we are have lived in falling interest scenario for 4 decades, is that trend reversing permanently. If our interest rates follow similar trend, we are in for more de-rating.
I am anxious about that every awake moment, but I have learnt to live with it and cautiously move ahead.
Infy was no brainer buy for me at 950. I am currently buying ITC. I base my buying only on individual companies valuation and outlook and ignore index levels.
I would like your inputs about these.
Found following posts relevant for the thread, hence posting here.
Great insights from venerable @pattu
If one invests at a NIFTY PE level of 25 and above, it would take about 5 years to get a small but positive return! On the other hand, there’s no correlation between buying at very low p/e and corresponding returns. In short, buying in expensive market guarantees poor returns (for 1-5 years), however buying in cheap market does not necessarily assure extraordinary returns. One should definitely avoid buying at high market p/e. Also, no point waiting for NIFTY p/e of 18 or 12.
Adjusting equity/debt allocation based on NIFTY P/E levels results in (rolling) returns comparable to (or bit higher than) market returns at half the (rolling) risk associated with index investing.
Hi, can you suggest a source to get the historical lending rates so that we can add that to the calculations. Thanks in advance
Check this out
Tracking Nifty PE is of paramount importance for a pure Index investor. For others, it also serves a purpose.
Ketan Parikh follows a concept called “Speculative Growth”. When there is too much of it in the market, it is “Frothy” and the long investor is best advised to let it settle. Essentially, if Nifty PE is High means people participation is high in the Entire market, not just the Index. We are currently in a Euphoric phase, a few stages ahead of plain 'ol “Frothy”.
This is important for me because I believe it is the biggest SIN to buy high. I may miss opportunities, but the habit of buying high will spell doom in the long term.
Some investors are able to predict a company’s future growth as they are closely in touch with its industry dynamics. Much to my chagrin, I do not find myself in such a position of advantage. Hence, have to resort to grosser tools.
To me, a favorable environment for investing is when there is a general dislike for the markets. This happens when Nifty is hovering a little lower than average. At that time, especially the non-Index scrips show a sharp investor neglect in their share price. There have been very few such instances since 2003, at least not prolonged ones. But, this is likely to change in the near future. That, I believe, will be a proper opportunity to make investments.
As a long term investor, now is clearly a time to book profits. Not to add to positions.
@pattu’s study concludes that if one invests at a NIFTY PE level of 25 and above, it would take about 5 years to get a small but positive return. Other than that, there wasn’t a strong correlation between NIFTY levels and returns. In fact, there have been only 3 occasions (2000, 2007-08, 2010) that NIFTY PE has breached 25 between 1999 and 2014…so the study still isn’t entirely conclusive. That’s a very small sample. Still, it makes sense (to me) to avoid buying when Nifty PE is very high.
If buying only when Nifty goes below average, booking profits when Nifty is high is your game (and you stick to it), more power to you. Wishing you all the best!
Had done an analysis in parallel to the one you mentioned. But if one is investing in the index it’s not worth at 25 pe or above imho (2nd table below). I have always believed that a successful investor is either a good stock picker or a good timer in order to be able to make some money. Else we lose.
Have a look at the following tables/charts.
The returns in purple are over 7% (risk free rate in my parlance)
a view of pe, pb and div yield.
What would be estimate of current nifty PE and PB?