It seems like a season of Excel-based Analysis. You must have noticed that majority of the posts I have been doing in last 1 or 2 months, use Excel-based analysis. Though there is no particular reason for this, here I am back again with another analysis. Don’t worry…it’s not a very complex analysis. It’s simple and very useful…

Regular readers would be familiar with my ‘fetish’ for tracking

**State of the Indian Markets**on a monthly basis. And I make it a point to update the data set every year to update the yearly returns calculations. I have been doing this every year since Stable Investor started, i.e. in**2012**,**2013**and**2014****.**So this post is about analyzing P/E Ratio of a popular index Nifty50 and the returns earned in 3, 5 and 7 year periods, when we invest (theoretically) in the index.

But before I move forward, you might question the rationale of doing such an analysis. And that too, on a regular basis. The reason is very simple. This small effort ensures that I have a broad idea about the valuations of overall markets. It helps ensure that I am not entering markets, when they are over-optimistic. This in turn reduces the chances of making mistakes when investing for long term.

It also helps me in knowing when the overall mood of the market is dull and full of pessimism. In past I have been unable to utilize such times to invest heavily. But I do not want to miss out on such opportunities in future. I hope you understand what I mean… 🙂

So let’s go ahead with my findings…

The data has been sourced from NSE’s website (

**link 1**and**link 2**) and starting from 1^{st}January 1999. Ratio related data prior to this period is not available.So here is the result of the analysis…

The table above clearly shows that if one is investing in markets where PE<12, returns over the next 3, 5 and 7 year periods are astonishing 39%, 29% and 25% every year. That is money doubling almost every 2-3 years!!

But markets with PE below 12 are very rare. To give you an idea about the rarity, the markets have been available at PE<12 on only about 50 days since 1999, i.e. in 4000+ trading days!!

Though as average investors, it’s almost impossible to wait for such days, it shows the power of long term, patient investing for

**those who know when to wait**and when to jump in the markets.On the other end of the spectrum is PE above 24. These are levels which are quite overvalued and returns over the next 3, 5 and 7 year reduces to (-)5.1%, 2.7% and 9.9%.

This shows that if you invest in high PE markets, your chances of low (and even negative) returns increases substantially.

**And for your information, we are currently trading at PE=24**😉

But here is another interesting thing to note here. Even at a costly PE24, if an investor stays invested for more than 7 years, then average returns are still a very decent 9.9%. And this shows that longer you stay invested, higher are the chances of making money in stock markets….even if you have entered at higher levels (Caution: I am talking about index investing here and not individual stocks).

If you are still not convinced with the data shown in above table, I have a few graphs for you. These graphs have been plotted to show the exact Returns against the exact PE on a daily basis (

*though arranged with increasing PE, PB and decreasing Dividend Yields*).Three graphs – one each for 3-Year, 5-Year and 7-Year Rolling Returns:

The left axis shows the PE levels (BLUE Line) and the right axis shows the Returns (in %) in the relevant period (Light Red Bars)

The 3 Year graph clearly shows that lower the PE when you invest, higher are the chances of making good returns in short term like 3 years and 5 years (graph below). Yes… I consider 3 and 5 Years as short term. 🙂

Now, interesting thing about 7 Year graph below is that there are no negative returns. 🙂 What does it mean? It means that it is very difficult to earn negative returns if you invest for long periods like 7 years, 15 years or

**even 30 years**!!Next I will be sharing my findings on a similar analysis for Price-To-Book-Value Ratio, followed by one for Dividend Yield of the Nifty since 1999. Hope to do it in a day or two.

But would looking at PE ratio for index serve in your regular MF investing ? I remember your post (“24 years of Market data proving timing is unnecessary for average folks:)..I believe this will be relevant only in case of index investing or ETFs , but for the vast majority who carry out SIPs , this wouldnt be needed. The real usefulness of this would come when the PE ratio is historically low , say below 13 , that would be a signal to go all -out in equity. I remember when there was fear and panic in July – August 2013 , I checked the PE ratio of the Nifty and found it to be 15 or 17 (dont remember which) and decided to continue my regular investing and not push in all my reserves at that point of time. Which , in hindsight , was a blunder because as we all now know , that marked the bottom and the bull market commenced. So even with the Nifty PE information at my fingertips , it didnt prove useful at that time. (of course , if it had fallen below 13 , I wouldnt have needed any other sign :))

I think irrespective of what the gurus or rather I should say the marketers say, you can always get better returns than SIP if you are an active investor and are able to judge the market sentiment and various other broad indicators of the same. SIP is encouraged because a large percentage of population is not financially saavy and it’s the only way to get them to invest regularly.

Passive investing always relies on the theory that the market will go up in the long term and there will be more ups rather than downs. If somehow that doesn’t happen (although unlikely for a growing economy), you are doomed. Active investing can still net you gains in a stagnant economy that went nowhere in a decade.

Nishant,,awesome observation of author’s previous post !! This shows sometime blod writers just write with one objective and change that with their own will…sad but truth !

This also is a raincheck that never regret ur financial decisions in retrospective (unless you are gambling or day trading) since in whole scheme of things you did what ur mind and heart told u at that time.

This also highlights your consistency (not author’s)!!

I may be wrong, but I think the PB ratio makes more sense than PE ratio. Looking forward to your analysis on PB ratio and comparison with PE ratio during the same periods.

You're doing my favourite kind of analysis 🙂

I used the 3 metrics, P/E, P/B and Dividend Yields to calculate impact on 1 year forward returns and found 4 things (note my analysis was done in Jan 2015 and markets have moved up since):

1. Based on Nifty P/E, historically markets have been more expensive only 20% of the time

2. Completely agreeing your finding, higher the P/E, lower the future returns. In Jan we were at 21x, now we're even more expensive

3. Based on regression analysis, I found P/E and Dividend Yields to be better predictors of return than P/B

4. Lastly, using P/E to predict returns from here, suggest negative returns. Meaning markets in Jan 2016 are likely to be lower than they are now, unless earnings show significant growth

Here's the whole post: http://thecalminvestor.com/predicting-stock-market-returns/

Hi Calm investor,

does these findings helped u in some way to invest? were you able to exploit this new knowledge for ur advantage !! DO share that experience !

In my view since PE can remain above 20 for a long time and staying out of market may cost in a huge way.

It is an interesting academic exercise, but my only concern is whether it would be

Hi Nishanth

This analysis is just to give a broad idea of market valuations and how our returns are impacted depending on when we invest. You are right that for a regular, disciplined SIP investor, this might not serve much purpose, as he is anyways going to invest pre-decided amount. But if there is a way to identify that markets are indeed undervalued (when compared to historical averages), then if funds are available, one can go ahead and invest more. If not in direct

equities, then in MFs.

Having said that, I did another analysis some time back where more money was invested when markets were down (Market Crash Fund). That exercise also pointed out that for average investors, sticking to SIPs is the best option.

hi nishant,

does these findings helped u in some way to invest? were you able to exploit this new knowledge for ur advantage !! DO share that experience !

Ur last paragraph is in striking contrast to author’s comment and observation !! Can u share ur findings that how not investing according to PE and regular investing without caring about PE is more useful ?

I am already working on the PB Analysis….will wait to hear your comments on it 🙂

Will post it in a a day or two.

True Shan…inflation is important. But here I have ignored it as the same inflation would be applicable to returns provided by all other asset classes as well.

Very interesting analysis Anoop 🙂

Thanks for sharing the link to the post and I must say that overlap between the path tracked by Actual Ratios and that of predicted ones is quite a revelation indeed. It would be interesting to extend this analysis for longish periods like 5Y, etc…

Dev while we are on the topic of mutual funds I have a basic question .. I hear that say if we do a 5 year SIP then we can only redeem the investments of the first month in the 61st month, second month in the 62nd month and so on .. that is .. the entire value can only be redeemed in the 10th year.

1. Is this correct?

2. If it is then SIP would require a lot of pre-timing isn't it? Firstly we need to analyse when the market has an appropriate p/e .. then invest for a particular time until the market is expensive .. but since we cannot take the whole money out as it is a SIP, we again stop the SIP and need to wait the whole cycle of expensive to inexpensive to expensive to cash out?

Is the above correct? What am I missing?

hi Saurabh

if this SIP is for close ended scheme then only the rule which u said will apply otherwise u can take out ur money when u want it !

In my view no need to wait for expensive and non-expensive cycle. Just move between Debt and equity when nifty is too expensive i.e above 23. E.g 30% equity and 70% bond when PE > 23. This adjustment need financial planning !! So this was just a guideline!

My advice ..keep investing but change instrument !!

Thanks Dev. Will do the same analysis with 3 and 5 years and see what emerges.

Three things missing in the analysis above – 1) Index returns and individual stock returns could vary. 2) SIP results would vary against lumpsum investment 3) False negatives – Avg +ve return vs Avg -ve return over 3 year period – Like in 2004/2005, it was not cheap however that was a great period to stay invested

no in a 5 year SIP you don't need to wait till end of 5 years to withdraw. In an SIP you can withdraw anytime after investment. But obviously in an equity SIP the benefits will start accruing only after one year and it would be tax free also. so though theoretically you can withdraw any time but you should only after one year for better tax treatment and also returns

How did you calculate the 3Y return% for say PE < 12 as 39.5%?

1. I tried to re-create by collating the data from NSE and here is what i get for example:

For 1Jan 1999, the PE: 11.62, Close:890.8. 3Y return will be calculated based on the close value as at: 31-Dec-2001. which is: 1059.05. So, the 3Y return if one had invested on 1st Jan 1999 is: ((1059.05-890.3)/890.3) * 100 => 18.89%.

2. How did you then calculate 3Y return% for PE < 12? I calculated the average return for PE<12 and it works out to be around 181%. When i convert this to a nominal % over 3 compounding periods (3 Years) , it results around at: 14%.

Never mind. CAGR is the answer 🙂

Thats right Mani 🙂

Very informative and eye opener for individual investor like me who was totally relying on media reports and brokers