Continuing from where we left. Let us now understand one of the most important fundamentals of the stock market which is the PE Ratio. PE ratio means Price Earning Ratio. Let us first understand the meaning of Nifty Fifty. The top 50 companies together constitute the Nifty Index. This Nifty Fifty acts as a representative of the entire market. As and how the Nifty performs the entire market follows. Now this Nifty has its own Price Earning Ratio. This Price Earning ratio is described as the amount of price we pay with respect to the returns we get. All the major investors know this secret but nobody tells this openly.
The Price Earning ratio can be of the entire market as well as it can be of any individual company like Reliance, TCS, etc. It is advised to first refer the PE ratio of the entire market before that of an individual company. So if we check the history of the Indian share market, we will find that the range of this PE ratio has always moved between the scale of 10 and 30. Where, 10 denote the minimum value while 30 denotes the maximum value. It can slip below 10 and move beyond 30 too, but has not yet crossed both those above mentioned limits.
Now, when the market is at low PE like for example when the market is at 10, 11, 12 PE; it is advisable to invest more here whereas when the PE is at 28, 29, 30 it is advisable to invest less in the market. The reason behind this is if you invest when the market is at lower valuation, then you can earn excellent returns by investing less here. Whereas, if you invest when the market is at a higher valuation, then the risk involved there is huge and the returns you get are modest. It is advisable to invest less or divest when the market is at a higher valuation. So people don’t even want to learn this simple technique instead they keep looking for tips which are of no use.
The formula for the Price Earning Ratio is simple to understand too. Let us understand this in simple terms: If the PE is 10 that indicate to earn Rs 1 you have invest Rs 10 in the market. On the other side, if the PE is 30 then to earn Rs 1 you are required to invest Rs 30 in the market. Now, you yourself decide to earn Rs 1 you would prefer to invest Rs 30 or Rs 10? If you invest Rs 10 to earn Rs 1, your earning here will be 10% whereas if you invest Rs 30 to earn Rs 1, your earning will be of 3.33% only. Hence, if Nifty PE is at 30 then it is better to invest in Bank FD or sit on cash rather than earning 3.33% yield in the stock market.
Let us see some previous year’s statistics of the market: In the year 1999 when the PE was 12; the returns given by the market were 105%. On the other side, in the year 2003 when the PE of the market was 11; the returns given by the market were 116%. Also, in the year 2008 when the market had crashed and the PE had fallen to 10; the market had given whopping returns of 130%. All this data was of the time when the market was at low PE.
Let us now see the statistics when the market was at a high PE: In February 2000 when the market PE was at 28; the returns given by the market were -53%. Investors had lost more than half of their invested wealth. In January, 2008 before the market crash took place, when the PE was at 28 the market had give a negative return of -64% taking a toll on the investors. Even after knowing the market valuation is expensive, people still invest; thinking this time it will be different. There is a popular British Investor Sir John Templeton who quotes that, “The four most dangerous words in investing are this time its different.” So even then if you wish to invest the invest less.
The mentor of Mr. Warren Buffet as well as the Father of Value Investing Mr. Benjamin Graham says that be it socks or stocks, always buy low and sell high. Always wait till the timing is right because when it is, you will even get the good stocks at low price. Hence, Mr. Buffet stresses that I am 50% Benjamin Graham who is the Father of Value Investing.
Now the question is why you’re Broker, Mutual Fund Advisor, Independent Financial Advisor does or even your Wealth Manager does not tell you about this technique? Firstly, few of them don’t even know about this theory. Secondly, even if they know, they don’t want to tell you about this because if they don’t tell you, you will keep on investing and they’ll keep on earning via the commission they charge you. So when you invest they earn a commission of minimum 2%. And so they don’t want to tell you this secret. This is how the cycle works.
Even I have been saving a part of my earnings and investing it in the market. Once during conducting my leadership funnel, I happened to meet Mr. Bhuushan Godbole who is a SEBI Registered Investment Advisor & Investment Consultant. So he has his own YouTube channel ‘AryaaMoney’ as well as they have an app called ‘AryaaMoney’ too. You can follow them on both these platforms to gain more knowledge about the share market trading and investing. The other question you might have is where to check the Nifty PE, so for that you can go directly to the NSE website or you can download the Aryaamoney app & view it in the app directly for free.
Until our next blog…
Happy Trading, Happy Investing!!!
To invest via Grow App, click on the link below:
To open your Free Demat & Trading Account with Upstox, click here -
To subscribe to our YouTube channel, click on this link - https://www.youtube.com/channel/UCiIpSgZ5N_PhTCyb1uQYfnQ/videos
To watch our video on Stock Market for Beginners, click on this link –
Follow our Official Social Media pages-
Facebook - https://www.facebook.com/aryaamoney/
Twitter - https://twitter.com/aryaamoney?lang=en
Linked In - https://www.linkedin.com/company/aryaamoney/?originalSubdomain=in
To Download Aryaamoney Mobile App (Android Version), Click on This Link - https://play.google.com/store/apps/de...
You can either directly deposit cheque/cash or transfer fund through net banking
in favour of 'BHUUSHAN VISHWANATH GODBOLE' in either of these bank account
Aryaa Money is Investment consultancy and Training Institute engaged in Stock, Commodity,
Forex market trading, training and consultancy services. Aryaa Money : Trading &
Training Institue Is ISO 9001:2015 Certified ISO 9001:2015 is a globally perceived
standard for Quality Management Systems (QMS)
Disclaimer and Disclosure: Share Commodity Currency Mutual funds Investments are subject to Market Risk.