Caution – Five year returns do not follow the same pattern as 3-Year returns. Even on investing at foolishly high PE of more than 24, data shows that one can earn close to 26% pa for the next 5 years. Though data is correct and calculations have been thoroughly checked, we think that this should not be taken as a general rule. This is more of an outlier (due to high returns in Dot com boom and great Indian Bull run of 2003-2008). The fact is that investing in high PE markets increases the chances of low (and negative) returns. A graph below shows that PE Ratio and returns earned over 3-5 years period are inversely proportional.
![]() |
PE Ratio & Returns (Click to enlarge) |
P/B Ratio (What is P/B Ratio?)
Caution – Like in case of P/E Ratio, it is found that five year returns do not follow the same pattern as 3-Year returns. On investing at high P/B of more than 4, data shows that one can earn close to 23% pa for the next 5 years. This is foolish! Though data is correct and calculations have been thoroughly checked, we are not convinced with this result. Investing in markets trading at high PB levels increases the chances of low (and negative) returns. A graph below shows that P/B Ratio and returns earned over 3 year periods are inversely proportional.
![]() |
P/B Ratio & Returns (Click to enlarge) |
Dividend Yield (What is Dividend Yield?)
Caution – Like in previous two cases, five year returns do not follow the same pattern as 3-Year returns. But rest assured, investing in markets trading at high dividend yields increases the chance of (very) high returns. A graph below shows that Dividend Yield of index and returns earned over 3 year periods are directly proportional to each other.
![]() |
Dividend Yield & Returns (Click to enlarge) |
So how can one benefit from these historical trends at present? As already said, we first need to get the current values of the 3 parameters. These are taken from NSE’s website.
- An investment at PE = 17 will give returns of 13% pa for next 3 years. (We are intentionally omitting 5 year returns data as we are not sure of its relevance – Read Caution Statement in part pertaining to PE Ratio above).
- An investment at P/BV = 2.9 will give returns of 27% & 37% pa for next 3 & 5 years respectively.
- An investment at Dividend Yield = 1.62 will give returns of anywhere between 6% to 26% (We are giving a range because thought the DY=1.62 lies in bracket for 26% returns, the fact remains that it is also very close to lower bracket of Below 1.5, which has a return of close to 6%)
*By investment, we mean investment in an index (via Index Fund or ETF) and not any particular stock in the index.
Though readers are free to draw their own conclusions, we thought that we would put down a few of ours –
- If you invest in markets trading at lower multiples (PE<16) OR PBV2.5, you are bound to make some serious money in a few years time.
- If you have some money which you want to park (at one go) in some index fund or ETF which tracks the index, we suggest that you should wait for levels when most of the markets health indicators discussed in this post are in your favor.
- But if you are one of those disciplined investors who avoid timing the markets, then you should continue investing on a regular basis without any regard to bull or the bear markets. But you need to pray that when you need your money, it should be during the reign of bulls 😉
fantastic analysis ….
Was unable to understand the P/B ratio part. All in all a superb work again by Stable Investor.
Long term investors should try to be fearful when others are greedy and greedy when others are fearful.
All in all superb analysis.
@Anonymous
Thanks
@Vaibhav
Thanks Vaibhav. You can check sites like Investopedia for more information on P/BV ratio
@Anonymous
Bang on target. Thats the essence of investing 🙂
very good analysis
@Manoj
Thanks Manoj!
i feel for developing nations like India P/E can get higher…as these are post recession tables.. thanks!
@13ca7458beba0e3d76d4c70b62189d2a:disqus
You are right that developing nations do command higher PEs than mature markets. But the tables used in above post are based on data of last 12-13 years, which covers both pre- and post- recession periods.
Dear Stable Investor,
Gr8 article. After reading the article, one thought immediately came to my mind. Such low PE levels (in range 12-16) are not sustainable for long periods of time because savvy investors will take long positions in large numbers. To prove my point, I did an analysis on NSE data for past 13 years. The result is pasted below–
It shows that these ratios alone cannot accurately guide investors as to when to plunge into the market or leave the market.
Please let me know your views about this.
NSE Data—
@e8b6ee53551268660e6a5cc9de944243:disqus
Interesting thoughts Hemant…
But as you rightly said, such low PE levels are not sustainable. One has to be sure about when to take a big bet. As Warren Buffet rightly said, one has to back his COURAGE with CASH in times of CRISIS. 🙂
PS – You have rightly pointed out that savvy investors will take long positions, which in turn increases the average PE ratios of bad years like 2008-09.
@e8b6ee53551268660e6a5cc9de944243:disqus
We have tried answering you in comment below.
if i take dividend yield from BSE it is very different from that on nse for the broad market (not merely Sensex and Nifty indices). Espacially during the 2012 cy. BSE shows a dip in div. yield during 2012 but nse does not! Any ideas?
@disqus_G3jFUHVwEM:disqus
Generally speaking, it should not happen for individual stocks. Yield will only be different in case there is a difference in CMPs of the 2 exchanges.
Can you elaborate a little on what exactly do you mean when you say BSE, NSE? Or can you share the source of the data?
It is irritating me because according to BSE indications are that markets are going to make a sharp upmove and I was planning to punt on it. Since Nifty and not BSE – Sensex is actively traded in derivates, I cross checked it at NSE and this is baffling. NSE indicates that upmove wouldnt be sharp. Any inputs would be appreciated.
I took data from bseindia and nseindia websites for dividend yields. http://www.nseindia.com/products/content/equities/indices/historical_pepb.htm
and
http://www.bseindia.com/indices/IndexArchiveData.aspx?expandable=3
I am trying to paste the results below and also attaching graph of the following data. Dividend yields according to bse100, nse 100 for first day of the months are –
Oct-11
BSE100 – NSE100 div. yld.
-0.03
BSE 100 –
1.49
NSE 100 –
1.52
Nov-11
BSE100 – NSE100 div. yld.
-0.01
BSE 100 –
1.42
NSE 100 –
1.43
Dec-11
BSE100 – NSE100 div. yld.
-0.01
BSE 100 –
1.52
NSE 100 –
1.53
Jan-12
BSE100 – NSE100 div. yld.
-0.01
BSE 100 –
1.63
NSE 100 –
1.64
Feb-12
BSE100 – NSE100 div. yld.
-0.05
BSE 100 –
1.44
NSE 100 –
1.49
Mar-12
BSE100 – NSE100 div. yld.
-0.08
BSE 100 –
1.4
NSE 100 –
1.48
Apr-12
BSE100 – NSE100 div. yld.
-0.07
BSE 100 –
1.43
NSE 100 –
1.5
May-12
BSE100 – NSE100 div. yld.
0.13
BSE 100 –
1.64
NSE 100 –
1.51
Jun-12
BSE100 – NSE100 div. yld.
0.13
BSE 100 –
1.77
NSE 100 –
1.64
Jul-12
BSE100 – NSE100 div. yld.
0.13
BSE 100 –
1.63
NSE 100 –
1.5
Aug-12
BSE100 – NSE100 div. yld.
0.12
BSE 100 –
1.65
NSE 100 –
1.53
Sep-12
BSE100 – NSE100 div. yld.
0.1
BSE 100 –
1.66
NSE 100 –
1.56
Oct-12
BSE100 – NSE100 div. yld.
0.11
BSE 100 –
1.53
NSE 100 –
1.42
Nov-12
BSE100 – NSE100 div. yld.
0.13
BSE 100 –
1.56
NSE 100 –
1.43
Dec-12
BSE100 – NSE100 div. yld.
0.11
BSE 100 –
1.5
NSE 100 –
1.39
Jan-13
BSE100 – NSE100 div. yld.
0.09
BSE 100 –
1.47
NSE 100 –
1.38
Feb-13
BSE100 – NSE100 div. yld.
0.09
BSE 100 –
1.45
NSE 100 –
1.36
@disqus_G3jFUHVwEM:disqus
Not sure how to answer your query. May be we are unable to understand since we aren't into derivatives or technical analysis.
But, what is the point of calculating the difference between the Dividend Yields of 2 separate indices over a period time? Does it offer some kind of insights? We are asking because both indices may have different constituent stocks and also the stocks are regularly added or removed from individual indices.
Dear team
I came across this website recently and would like thank you for the great work done. I have been reading all articles one by one. This particular article is a great one which will definately help the small investors. Since I am new to equity investing, i have the following questions –
1. PE /PB/ DY values for the index are taken from NSE website. How is the calculation of PE / PB done for an index as it constitutes a number of stocks with different weightages ? Merely taking average PE of all stocks in the index would be incorrect as each one of them has a different weightage. I tried to get answer to this in NSE website but cound not get it.
2. Are there index funds for each of the NSE index ? for example, i want to invest in NSE midcap index . But i could not find any ETFs for this index. Is there any other way to invest in an index other than ETFs ?
Could you please anwer this ….. Once again thanks for the great blog
Thanks for the nice words Ananth. 🙂
This article tells us why it makes sense to learn from the past. Once a person is familiar with past trends, it helps in avoiding markets when they are heated up.
As for your first question, you can use following logic:
P/E = Price of share / Earning Per Share
If we multiply both numerator and denominator by same number, the ratio would not change. Therefore we have,
P/E = (Price of share * No. of shares ) / (Earning Per Share * No. of shares)
which is same as,
P/E = (Market Capitalization)/(Net Profits) of the company
The above example is true for an individual company. The same can be extended for the index.
P/E of index = (Market Cap of all companies) / (Net profit of all companies)
This would give a approximate value of index's P/E ratio, or for that matter P/BV and Dividend Yield.
For your second question, I would try to do a detailed post.
Hope the above example addresses your concern.
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hi Dev, i recently came across your blog and started reading and liking its analysis. I have 5 L surplus to invest in markets, but after reading your site and looking at current sensex PE, PBV, DY it looks that levels are not favorable, I am ready to wait for appropriate time to put this fund in market, but until that time should I put this in liquid fund or just keep in saving a/c? I can wait for 1 year till find right levels to enter, let me know.
Very useful information, definitions and examples r good to understand easily.thnx sir