Explained – Nifty Indices (Nifty50, Nifty Next 50, Nifty 500 & 10 Others)

There are many popular indices in Indian stock markets. You already know Nifty50 and Sensex and you regular lookup for Nifty live or Sensex live data. But these aren’t the only indices as many of you already know.

There are several others as well – like Nifty100, Nifty Midcap 50, Nifty 500, etc. In fact, the NSE maintains around 13 broad market indices. These are:

  1. Nifty 50
  2. Nifty Next 50
  3. Nifty 100
  4. Nifty 200
  5. Nifty 500
  6. Nifty Midcap 50
  7. Nifty Midcap 100
  8. Nifty Midcap 150
  9. Nifty Smallcap 50
  10. Nifty Smallcap 100
  11. Nifty Smallcap 250
  12. Nifty LargeMidcap 250
  13. Nifty MidSmallcap 400

Wow! It can be confusing. And there are many more indices like the strategic ones. But let’s try to see how all the above-mentioned 13 indices are related to each other and fit into the broader index Nifty 500.

Below is shown the index hierarchy published by NSE (here) as shown below:

Nifty Index Broad Market India

Let’s try to understand the structure above:

NIFTY 500: This index sits at the top. It represents the top 500 companies based on full market capitalisation from the eligible universe. In a way, you can say that it includes all the other 12 indices within itself.

NIFTY 100: This represents the top 100 companies (i.e. from 1 to 100) from within the NIFTY 500. This index basically tries to track the performance of companies having large market caps.

NIFTY Midcap 150: This index represents the next 150 companies (i.e. companies ranked from 101 to 250) within the NIFTY 500. As is obvious, this index tries to measure the performance of mid-cap companies.

NIFTY Smallcap 250: This index represents the remaining 250 companies (ranked from 251 to 500) in the NIFTY 500. And you guessed it correctly; this index measures the performance of small-cap companies.

So as you see, the index Nifty 500 is basically made up of the following 3:

  • (1 to 100) – Nifty 100
  • (101 to 250) – Nifty Midcap 150
  • (251 to 500) – Nifty Smallcap 250

Nifty 500 Index constituents

Now, these 3 major indices themselves are made up of other individual indices.

The Nifty 100 has two parts:

Nifty 100 constituents

The Nifty Midcap 150 has two parts too:

  • NIFTY Midcap 50: This includes the top 50 companies from within the NIFTY Midcap 150 index.
  • NIFTY Midcap 100: This includes all the companies from NIFTY Midcap 50 above. The remaining companies are selected based on average daily turnover from NIFTY Midcap 150 index.

Nifty Midcap 150 constituents

The Nifty Smallcap 250 has the following two parts:

  • NIFTY Smallcap 50: It represents the top 50 companies selected based on average daily turnover from top 100 companies selected from the NIFTY Smallcap 250 index.
  • NIFTY Smallcap 100: It includes all companies from NIFTY Smallcap 50. And the remaining companies are selected based on average daily turnover from the top 150 companies selected from NIFTY Smallcap 250 index.

Nifty Smallcap 250 constituents

So till now, you have seen that at the top of the index hierarchy is the all-encompassing Nifty 500. From that we have 3 indices derived – (i) Nifty 100 (which is made up of Nifty 50 and Nifty Next 50); (ii) Nifty Midcap 150 (which is itself made up of Nifty Midcap 50 and Nifty Midcap 100) and (iii) Nifty Smallcap 250 (which is itself made up of Nifty Smallcap 50 and Nifty Smallcap 100)

Let’s check the remaining ones

NIFTY 200: This is basically made up of companies belonging to Nifty 50, Nifty Next 50 (or call it NIFTY 100) and the NIFTY Midcap 100.

NIFTY LargeMidcap 250: This includes all companies from NIFTY 100 and NIFTY Midcap 150. It intends to measure the performance of the large and mid-market capitalisation companies.

NIFTY MidSmallcap 400: This includes all companies from NIFTY Midcap 150 and NIFTY Smallcap 250. It intends to measure the performance of the mid and small market capitalisation companies.

Sounds complex no doubt. But if you once again have a look at the image below again, it seems quite logical:

Nifty Index Broad Market India

As per NSE, the calculation for the broad indices such as NIFTY 50, NIFTY Next 50, NIFTY 500, NIFTY 100, NIFTY Midcap 150, NIFTY Smallcap 250, NIFTY 200, NIFTY Midcap 50, NIFTY Midcap 100, NIFTY Smallcap 50, NIFTY Smallcap 100 and NIFTY MidSmallcap 400 are done online on all days that the National Stock Exchange of India is open for trading and disseminated through trading terminals and website and while that of NIFTY LargeMidcap 250 is computed at end of the day.

If you wish to read more about these individual indices, then click the links below:

  1. Nifty 50
  2. Nifty Next 50
  3. Nifty 100
  4. Nifty 200
  5. Nifty 500
  6. Nifty Midcap 50
  7. Nifty Midcap 100
  8. Nifty Midcap 150
  9. Nifty Smallcap 50
  10. Nifty Smallcap 100
  11. Nifty Smallcap 250
  12. Nifty LargeMidcap 250
  13. Nifty MidSmallcap 400

In addition to the above broad-based indices, NSE also has tons of other indices like NSE Sectoral Indices (about 11 indexes), NSE Thematic Indices (about 20 indexes) and finally NSE Strategy Indices (about 25+ index).

You can check out the fact sheets of all the above indices in once place here – Nifty Index Factsheets. And if you wish to track the Nifty live index data, then you can use this link – Live Nifty Index Data.

The idea of sharing these details is nothing to do with promoting Nifty and its indexes 🙂

It is rather to show how many other important indices are there which get overshadowed by the Nifty50 and Sensex. Atleast if you read the above details even casually, you will get an understanding of how these indices are related to one another and parts and sub-parts of each other.

And as the idea of index funds gradually gain acceptance in India, you will see more and more index funds being launched for various above-discussed indices.

The ones like Nifty 50 Index Funds and Nifty Next 50 Index Mutual Funds are already available and gaining popularity. The others ones like ones for Nifty 100 index fund, Nifty 100 equal-weight index fund, Nifty Midcap 100 index fund, Nifty Midcap 50 index fund, Nifty Smallcap 100 index fund, Nifty Midcap 150 index fund, Nifty 200 index fund will be launched by various fund houses in times to come.


State of Indian Stock Markets – July 2019

This is the July 2019 update for the State of Indian Stock Markets. This update includes the historical analysis (since 1999, i.e. about 20+ years) and Heat Maps for the key ratios like P/EP/BV ratios and Dividend Yield for Nifty50 and Nifty500.

This time (and going forward) a new section on the last 12 month’s index movements and PE dynamics during the said period will also be analyzed. The analysis will be done on a rolling basis. That is, it will include monthly analysis (for each of the last 12 months) as well as analysis for specific periods like the last 1 month, last 3 months and last 6 months. This is being done to highlight (if any) the changes which become evident in market sentiment from a data perspective.

Before we move forward, please remember a few things:

  • The numbers shown in the analysis and tables below are averages of P/E, P/BV and Dividend Yield in each month (unless otherwise stated). Neither Nifty50 heat maps nor Nifty500 heat maps show the maximum or the minimum values for each month.
  • National Stock Exchange (NSE) publishes index level PE ratios based on standalone numbers and not consolidated numbers. It would be ideal to use consolidated numbers as many Nifty companies now have subsidiaries that have a significant impact on overall earning numbers. This has a much larger effect now than it would have had in yesteryears. And more importantly, this will matter more and more going forward. But NSE (as of now) continues to publish Nifty PE using its own set of criteria and decisions and sticks with standalone figures.
  • Its possible that at times, some of the sectors in index get far more weight than is prudent to give. And its also possible that at the very same time, their earnings may be unexpectedly high or low. If and when this happens, the index level earnings will be impacted accordingly due to higher-than-necessary sector weight – which in turn may skew the PE data at that point of time.
  • Similar to the point discussed above, it is also possible that at times, some (or few) individual index constituents might have high earning or market cap at an individual level(s) which might, to some extent, skew the PE data at the index level as well. The possibility of this happening is rare but still non-zero as the period under consideration is generally long term here.
  • Caution – Never make any investment decision based on just one or two ‘average’ indicators (here’s Why?) At most, treat these heat maps as broad indicators of market sentiments and a reference of market’s historical mood swings.

So here are the Nifty 50 Heat Maps…

Historical P/E Ratios – Nifty 50 (Monthly Average)

Historical Nifty PE 2019 July

P/E Ratio (on the last day of July 2019): 27.42

And if we were to look at the movement of Nifty’s PE in the last 12 months, then here is a graph depicting the same:

Nifty 12 Month PE Trend 2019 July

Now, let’s have a more detailed look at how the last 12 months have panned out when it comes to Nifty movements and its implications (alongwith earnings’) on PE ratio of the index.

I suggest you spend some time on the table below (which shows month-wise data cuts) to gauge its importance in highlighting the trends in the last 1 year:

Nifty Price PE Trends 12 Months Aug 18 Jul 2019

Now from month-wise depiction, let’s have a look at more aggregate time periods in the last few months. Let’s analyse the above-highlighted data points when period under consideration in aggregated to 3-months and 6 months (plus a 1-previous month for more comparative analysis):

Nifty Price PE 1 3 6 Month Trends Jul 2019

Now with PE of Nifty50 analysed in various cuts, let’s move ahead to the analysis of P/BV and Dividend Yields of the Nifty50

Historical P/BV Ratios – Nifty 50

Historical Nifty Book Value 2019 JulyP/BV Ratio (on the last day of July 2019): 3.45

Historical Dividend Yield – Nifty 50

Historical Nifty Dividend Yield 2019 JulyDividend Yield (on the last day of July 2019): 1.33%

That was all about Nifty50 – the more popular bellwether index of India.

Now let’s do a historical analysis of the larger space, i.e. Nifty500 companies…

As the name suggests, Nifty500 is made up of top 500 companies which represent about 96.1% of the free-float market capitalization of the stocks listed on NSE (March 2019). Nifty50, on the other hand, is an index of 50 of the largest and most frequently traded stocks on NSE. These represent about 66.8% of the free-float market capitalization of the NSE listed stocks (March 2019).

So obviously, Nifty500 is a much broader index than Nifty50.

So let’s see…

Historical P/E Ratios – Nifty 500

Historical Nifty 500 PE 2019 JulyP/E Ratio (on the last day of July 2019): 29.25

Historical P/BV Ratios – Nifty 500

Historical Nifty 500 Book Value 2019 July

P/BV Ratio (on the last day of July 2019): 3.14

Historical Dividend Yield – Nifty 500

Historical Nifty 500 Dividend Yield 2019 July

Dividend Yield (on the last day of July 2019): 1.29%

You can read the previous update here. The State of Markets section has also been updated with new Nifty heat maps (link).

For a detailed analysis of how much return you can expect depending on when the actual investments have been made (at various P/E, P/BV and Dividend Yield levels), it is strongly suggested that this article may be read and referred to regularly:

Strong Early Returns Vs Strong Late Returns

You already know that the markets don’t go up or down in straight lines. What this means is that if an investor gets an average return of 12% in 10 years, it doesn’t mean that he will get:

12%, 12%, 12%, 12%, 12%, 12%, 12%, 12%, 12%, 12%

It instead means that he will get something like this:

-5%, 22%, 4%, 13%, -17%, 57%, 10%, 19%, -12%, 29%

Or let’s put it this way:

Average Vs Actual Returns in Stock Markets

Related to the actual sequence of return an investor gets in real life, I came across an interesting post that talks about how the end-portfolio size differs depending on whether the investor gets strong early returns vs strong late returns.

What is the difference you may ask…

This simply means that in one case, you get good returns in early years while in other, you get good returns in later years.

Does it matter?

Yes indeed… as you will see soon in the remainder of this post.

Let’s consider a simple example.

Suppose you are 30-year old planning to save for retirement at 60.

You have decided to invest Rs 20,000 per month or let’s say Rs 2.4 lakh every year for the next 30 years.

Now consider 2 different cases:

  • Good Later Years – You earn 7% every year in the first 15 years and 14% every year during the next 15 years, on your investments.
  • Good Early Years – You earn 14% every year in the first 15 years and 7% every year during the next 15 years, on your investments.

What will be the value of your portfolio after 30 years in either case?

  • Rs 5.81 crore after 30 years (for sequence 7% followed by 14%)
  • Rs 3.95 crore after 30 years (for sequence 14% followed by 7%)

That’s a large difference of about Rs 1.86 crore!

And that too for the same ‘average return’ during the 30 year period. Isn’t it?

Many of you may have guessed the reason.

It is because of the Sequence of Returns you get. That is, the order of annual returns that your portfolio is subjected to.

Strong early vs Strong Late returns

In the first case (where portfolio grows to a larger Rs 5.81 crore), you get strong late returns – due to which, a bigger corpus earns better returns (14%) in the later years. Whereas in the second case (where portfolio grows to a comparatively smaller Rs 3.95 crore), you get strong early returns – due to which, a smaller corpus earns better returns (14%) early on while the bigger corpus earns lower returns (7%) in later years.

And how do these two cases compare with the actual average return (10.5%)?

Here is how different the 3 scenarios end up looking, even though all have the same exact average returns:

Strong early vs Strong Late vs Average returns

And this is exactly what I wanted to highlight.

The sequence of returns that investor gets has a big impact on the final overall portfolio size.

You may be hoping to get a portfolio size based on your average return assumption. But the actual size may vary even though average returns are same, due to a different sequence of returns your portfolio undergoes. Averages and Actual differ (River Depth example).

And let’s take this a step further.

Let’s see how the actual investment in Sensex in the last 20 years fared when compared to the reverse sequence of returns.

In this scenario analysis, Rs 2.4 lakh (or Rs 20,000 per month) is invested in Sensex every year during the last 20 years. The sequence of returns that are given in the second column in the image below are the actual Sensex returns in the last 20 years. The value of portfolio changes as depicted by the green line in graph below. Also, a portfolio that runs on the basis of the reverse Sensex returns (the returns have been reversed in the third column) is shown as the blue line in the graph. 

Sensex last 20 years actual vs reverse returns

As you can see, depending on the different sequence of returns considered (one real other reversed), the portfolio value varies every year and also, the final values are different.

So the sequence of returns does matter a lot.

All said and done, can anything be done for this?

To be honest, it’s difficult.

You don’t get to decide what sequence of market returns you get in future.

I repeat.

You don’t get to decide what sequence of market returns you get in future.

This simply but unfortunately means that we have no control over the sequence of returns in the markets.

It is possible that some of you may get better markets early in your investing career and worse ones later. Or if powers above favour you, then you may have not-so-great market returns during initial years but super returns in later ones. This is the very reason why young investors should pray for bad markets in initial years. It may be painful and may not be for everyone, but it’s a wonderful thing for real long-term investors.

But even though we cannot control the sequence of returns, we can manage the risk to some extent.

At times, using market valuations as an indicator can help you estimate the possibility of a weak or a strong market in the coming years and rebalance your portfolio accordingly. By doing this, only a part of the portfolio may be exposed to market returns when required tactically.

This is not exactly a perfect strategy but works often as is proven by this detailed analysis of Market Valuations Vs Future Returns.

So to more practically manage the Sequence of Return Risk, you should be slightly conservative in your return expectations. It’s better to have lower return expectations and save more than having higher return expectations and saving less but getting shocked later on when it is already late to do anything.

State of Indian Stock Markets – February 2019

This is the February 2018 update for the State of Indian Stock Markets and includes historical analysis and Heat Maps of Nifty50 as well as Nifty500‘s key ratios, namely P/EP/BV ratios and Dividend Yield.

Please remember that these numbers are averages of P/E, P/BV and Dividend Yield in each month. Neither Nifty50 heat maps nor Nifty500 heat maps show the maximum or the minimum values for each month. Also, note that NSE publishes PE ratios based on standalone numbers and not consolidated numbers (Read why this may matter too).

Caution – Never make any investment decision based on just one or two ‘average’ indicators (Why?) At most, treat these heat maps as broad indicators of market sentiments and a reference of market’s historical mood swings.

So here are the Nifty 50 Heat Maps…

Historical P/E Ratios – Nifty 50 (Monthly Average)


Historical Nifty PE 2019 February

P/E Ratio (on the last day of February 2019): 26.32 P/E Ratio (on the last day of January 2019): 26.26

The 12-month trend of P/E has been as follows:


Nifty 12 Month PE Trend February 2019 And here are the average figures of Nifty50’s PE for some recent periods:

Nifty Average PE Trends February 2019


Historical P/BV Ratios – Nifty 50


Historical Nifty Book Value 2019 February

P/BV Ratio (on the last day of February 2019): 3.41 P/BV Ratio (on the last day of January 2019): 3.37

Historical Dividend Yield – Nifty 50


Historical Nifty Dividend Yield 2019 February

Dividend Yield (on the last day of February 2019): 1.25% Dividend Yield (on the last day of January 2019): 1.25%

Now, to the historical analysis of Nifty500 companies…

As the name suggests, Nifty500 is made up of top 500 companies which represent about 95% of the free float market capitalization of the stocks listed on NSE (March 2017).

Nifty50 on other hand is an index of 50 of the largest and most frequently traded stocks on NSE. These represent about 63% of the free float market capitalization of the NSE listed stocks (March 2017).

So obviously, Nifty500 is comparatively a much broader index than Nifty50.

Historical P/E Ratios – Nifty 500


Historical Nifty 500 PE 2019 February

P/E Ratio (on the last day of February 2019): 29.23 P/E Ratio (on the last day of January 2019): 29.13

Historical P/BV Ratios – Nifty 500


Historical Nifty 500 Book Value 2019 February

P/BV Ratio (on the last day of February 2019): 3.17 P/BV Ratio (on the last day of January 2019): 3.15

Historical Dividend Yield – Nifty 500


Historical Nifty 500 Dividend Yield 2019 February

Dividend Yield (on last day of February 2019): 1.17% Dividend Yield (on last day of January 2019): 1.16%

You can read the previous update here. The State of Markets section has also been updated with new Nifty heat maps (link).

For a detailed analysis of how much return you can expect depending on when the investments have been made (at various P/E, P/BV and Dividend Yield levels), please have a look at these 3 posts:

State of Indian Stock Markets – January 2019

This is the January 2018 update for the State of Indian Stock Markets and includes historical analysis and Heat Maps of Nifty50 as well as Nifty500‘s key ratios, namely P/EP/BV ratios and Dividend Yield.

Please remember that these numbers are averages of P/E, P/BV and Dividend Yield in each month. Neither Nifty50 heat maps nor Nifty500 heat maps show the maximum or the minimum values for each month. Also, note that NSE publishes PE ratios based on standalone numbers and not consolidated numbers (Read why this may matter too).

Caution – Never make any investment decision based on just one or two ‘average’ indicators (Why?) At most, treat these heat maps as broad indicators of market sentiments and a reference of market’s historical mood swings.

So here are the Nifty 50 Heat Maps…

Historical P/E Ratios – Nifty 50 (Monthly Average)

P/E Ratio (on the last day of January 2019): 26.28
P/E Ratio (on the last day of December 2018): 26.26

The 12-month trend of P/E has been as follows:

And here are the average figures of Nifty50’s PE for some recent periods:

Historical P/BV Ratios – Nifty 50

P/BV Ratio (on the last day of January 2019): 3.37
P/BV Ratio (on the last day of December 2018): 3.40

Historical Dividend Yield – Nifty 50

Dividend Yield (on the last day of January 2019): 1.25%
Dividend Yield (on the last day of December 2018): 1.24%

Now, to the historical analysis of Nifty500 companies…

As the name suggests, Nifty500 is made up of top 500 companies which represent about 95% of the free float market capitalization of the stocks listed on NSE (March 2017).

Nifty50 on other hand is an index of 50 of the largest and most frequently traded stocks on NSE. These represent about 63% of the free float market capitalization of the NSE listed stocks (March 2017).

So obviously, Nifty500 is comparatively a much broader index than Nifty50.

Historical P/E Ratios – Nifty 500

P/E Ratio (on the last day of January 2019): 29.13
P/E Ratio (on the last day of December 2018): 29.61

Historical P/BV Ratios – Nifty 500

P/BV Ratio (on the last day of January 2019): 3.15
P/BV Ratio (on the last day of December 2018): 3.20

Historical Dividend Yield – Nifty 500

Dividend Yield (on last day of January 2019): 1.16%
Dividend Yield (on last day of December 2018): 1.14%

You can read the previous update here. The State of Markets section has also been updated with new Nifty heat maps (link).

For a detailed analysis of how much return you can expect depending on when the investments have been made (at various P/E, P/BV and Dividend Yield levels), please have a look at these 3 posts:

Nifty P/E Ratio & Returns: Detailed Analysis of 20-years (1999-2019) Updated

Like previous years, I have once again revised the Nifty PE-Ratio & Return analysis to include fresh data (up to December 2018). Now, this analysis has data spanning from early-1999 to late-2018, i.e. full 20 years.

This analysis uses one simple valuation metric (P/E Ratio of Nifty50) and attempts to correlate it to the returns achieved across various time periods (rolling-periods ranging 3 to 10 years) when investments were made at different PE levels of the index.

The purpose of this analysis is simple.

To arrive at some sort of conclusion and see how well or not-so-well correlated are the two things – the market’s current valuation and its future returns.

This time, I have tried to make this analysis more comprehensive and have included a few additional updates that weren’t part of the previous years’ PE vs Return analysis. So even if you have read the earlier ones, I suggest you go through this one again. My guess is that you will find it incrementally useful.

But before we get to the findings, let me say this upfront that this is not a sure-shot method to make money.

Just because we can find some trends in past data doesn’t mean that the same trends will be replicated in future. Markets are dynamic and the history is no guarantee of the future. In markets, the history is known to rhyme but it is never exactly the same.

The sole purpose of this analysis is to highlight that there exists a relation between the broader market valuations and returns you can achieve.

If you buy low (valuation wise), chances of earning good returns increase and vice versa.

How to Analyse PE Vs. Returns?

What I have done is that I have calculated returns earned on investments made at all Nifty PE levels starting from the year 1999. The time periods of return calculations are 3-year, 5-year, 7-year and 10-years.

Let’s use a simple example to understand this.

Suppose you had invested money in the index Nifty50 on 24th-February-2004 when its PE was 19.97 (actual data).

Now in the next 3-year, 5-year, 7-year and 10-year period (starting from 24th February 2004), the CAGR returns would have been 29.3%, 8.5%, 17.0% and 13.0% respectively.

Using the above-described approach, I have done the return analysis for each and every trading day since 1st January 1999 (the day from which the Nifty PE data is available publically). Obviously, I had several thousand data points for each of these periods.

The days that do not have forward returns for 3-years have not been considered in the analysis of 3-year returns. Same is the case with 5, 7 and 10-year studies. For example, data for 15-July-2013 is used for calculating 3-year return (as data is available for July-2016) and 5-year return (as data is available for July-2018). But the same is not used for 7-year and 10-year returns as data is naturally not available for July-2020 or July 2023 (at the time of writing of this study).

To simplify the findings, I have been grouping Nifty PE into 5 groups earlier.

But to provide more granular data this time, I have decided to present my finding in a larger 7-grouping set.

Nifty-50 PE Ratio and Investment Returns

The findings are based on 4243 data points for 3-year analysis, 3751 data points for 5-year analysis, 3250 for 7-year analysis and 2509 for 10-year analysis.

And here is what has been found after updating the dataset:

Nifty PE Ratio 1999-2018 Detailed Grouping

Due to the choice of intervals in the PE range, the figures differ slightly if I revert back to the old PE-range choice. Here is the same summary on the basis of the old grouping:

Nifty PE Ratio 1999-2018 Grouping

Essentially, both tables tell you the same thing – when you invest at low PEs, your expected future returns are comparatively higher.

Remember, these figures are based on past data (of the last 20 years).

The trends no doubt are easily evident here. But they may or may not repeat in future. There are no guarantees that the future returns will follow similar patterns.

Markets won’t behave as you expect them to behave just because you have found its rhythm. You will not get returns just because you want them.

But the above data set and relying on a common-sense based approach to investing tells that investing at low PEs is difficult but profitable.

So let’s say if one had the courage to invest in Nifty when PE was less than 12, the average returns over the next 3, 5, 7 and 10 year periods would have been an astonishing 39%, 29%, 22% and 18% respectively! Unfortunately, it’s very rare to find days where Nifty is trading at such low valuations.

On the other hand, if investments were made when Nifty50 was trading at PE ratios of above 24 and above 27 (which are the supposed overvalued territories), the chances of earning decent returns in (atleast) near term are pretty low. This shows that if you invest in high PE markets, your chances of low (and even negative) returns increase substantially.

Investing at lower PEs can give bumper returns! But it is not easy. It takes a lot of courage, cash and common sense to invest when everybody else is selling (in times of crisis). This is what the 3 C’s of proper investing is all about too. It is very easy to sound smart and quote things like ‘be greedy when others are fearful’. Unfortunately, very few are able to be actually greedy when others aren’t.

Before we further slice and dice the dataset to find out more interesting things, let me highlight a few important points about using index data here:

  • The Nifty PE data is published by NSE (here) and is currently based on Standalone numbers. This means that actual earnings (that includes those from subsidiaries, etc.) in consolidated figures are higher than what the standalone numbers would suggest. And that also means that current actual PE may not be as high as that suggested by the standalone ones.
  • The constituents of Nifty50 keep changing. The index management committee that is responsible for maintenance of the index regularly brings in and moves out companies from the index. The Nifty composition of 2008 was quite different from that of 2018. Similarly, the index composition of 1999 might also be very different from that of 2008 and 2018. Try to understand it like this. If the index is made up primarily of companies that are low PE-types, then index at the overall level will tend to have low-PE. Whereas if the index is made up of high-PE companies, it will tend to have a high PE. So actual definition of high and low PE will be different for both type of companies, and so in turn for the index. A PE of 15 for a low-PE company might be very high whereas for a high-PE company might be very low. This is an important factor that should be kept in mind. I have addressed this to some extent in the latter part of this analysis by comparing returns while changing the periods under consideration from 20 years to 15 and 10 years.

Moving on, let’s address another important aspect here:

Risks when dealing with Average Returns

The table above gives a very clear relation between P/E and Returns.

But the above numbers are just ‘averages’. And that can be risky if you solely invest on basis of averages.

To explain this more clearly, let’s take an example.

Imagine that your height is 6 feet. Now you don’t know swimming. But you want to cross a river, whose average depth is 5 feet. Will you cross it?

You shouldn’t – because it’s the average depth that is 5 feet. At some places, the river might be 3 feet deep. At others (and unfortunately for you), it might be 10 feet.

That is how averages work. Isn’t it?

So this needs to be kept in mind…always.

To counter this, we need to analyze a few more things. So…

Adding More Data points to PE-Analysis

A better picture can be painted if in addition to the average returns, we also consider the following:

  1. Maximum returns during all the periods under evaluation
  2. Minimum returns
  3. Standard deviation
  4. Time spent in at a given valuation band

Have a look at the tables below now:

Nifty PE Ratio 3 Years Average

I want to spend some time here to highlight what all this means. I will also visually depict this using a small graph.

In the graph below, I have plotted PE ratios on X-axis and 3-year CAGR returns on Y-axis for all available data points in the last 20 years. As you can easily see, the trend is clear – returns are higher when investment happens towards lower PEs.

Nifty PE Return 3 Year Scatter

But you don’t always get the average returns that the preceding table shows. You can get anywhere between the MAX figure and MIN figure and the difference is huge.

Sounds confusing?

Let me try to segregate the above chart into PE-bands to highlight this:

Nifty PE Return 3 Year Detailed Scatter

As you can see, within each PE band, the actual returns are all over the place.

Focus on the first green block of PE12-15 band.

The red circle is the position of average return (38.7%).

But as the two text bubbles show, the Max and Min returns are very different from the average returns. Refer to the table above and you will find that max is about 58.1% and min is about 5.9%. And all this with a standard deviation of 14.6%.

What this means is that even though the average figure might tell you something, the actual returns can vary a lot.

I hope you get the drift of what I am trying to show you here…

Let’s now see the data for 5, 7 and 10-years:

Nifty PE Ratio 5 Years Average

Nifty PE Ratio 7 Years Average

Nifty PE Ratio 10 Years Average

Spend some time studying the above tables.

By now, you would be clearly noticing that there are big differences between the minimum and maximum returns for almost all periods.

So even though the average return figures will tell you one thing, the fact is that the actual returns that you get will depend a lot on when exactly you enter the markets and what happens afterwards.

Two different investors entering the markets at same valuation levels (let’s say PE=17.5) but at different times would have got 7-year returns ranging from 7.7% to 26.1%. Check the table for 7-year return above and you will know how.

For a lack of better word, the difference is shocking.

What this means is that even though the average return for 7-year period in the example taken above (PE17.5) is 16.2%, the actual returns have ranged from 7.7% to 26.1%.

This is equity investing for you. Welcome!

The statement that I made a couple of paragraphs before, ‘returns that you get will depend a lot on when exactly you enter the markets’, does sound like trying to time the markets. But this is a reality. I cannot deny it. For those who can, timing the market works beautifully.

Hence even though the average returns give a good picture for long-term investors (look at the table for 10-year analysis), its still possible that you end up getting returns that are closer to the ones that are shown in minimum (10Y Returns) column and not the Avg. Returns. 🙂

This is another reason why I introduced the column for standard deviation in all tables above (see the last column of the table above).

Analyzing standard deviation tells you – how much the actual return can vary from the average returns. So higher the deviation, higher will be the variation in actual returns. For completing the scatter analysis, here are the 3 remaining scatter plots for 5, 7 and 10-year returns:

Nifty PE Return 5 Year Scatter

Can You Catch the Markets at Right Investible PE?

Ideally, and armed with the above insights, it makes sense to buy more when valuations are low. Isn’t it? Buy Low. That is the whole idea of investing.

But real life is not that simple.

It is very difficult to catch markets on extremes. It’s like a pendulum – it keeps oscillating between overvaluation and undervaluation. It is almost never perfectly valued.

So should you wait to only invest at low PEs? Though it might make theoretical sense to do so, it is still very difficult to wait for low PE markets. And extremely low PEs are extremely rare.

Just have a look at this 5-year table I shared earlier in this post:

Nifty Time Spent PE Levels

Look at the column ‘Time spent by the Nifty in PE band’ at Below-PE12 levels.

It is just about 1.5% of the time since 1999 that markets spent below PE12. This is extremely rare.

For common investors, it’s almost impossible to wait for such days. In fact, such days might be spaced several years apart!

So the best bet for common people is to keep investing as much as possible, via disciplined investing (like SIP in equity mutual funds). It is not perfect (like buy low sell high) but it is your best bet given all the constraints. And once your portfolio grows in size, make sure you rebalance it periodically to adhere to proper asset allocation and manage risks appropriately.

Long-Term Investors have Better Chance of Doing Well

Another insight that this study gives is that as your investment horizon increases, the expected returns more or less are reasonably OK-ish to good enough, even when one invests at high PEs.

Have a look:

Long Term Investing PE Returns High

So, even if an investor puts his money in the index at PE above 24, the historical average returns are more than 8 to 10%. That’s quite ok I guess. Atleast it’s much better than being in losses.

The longer you stay invested, higher are the chances of not losing money in stock markets…even if you have entered at comparatively higher levels.

Caution – I know that’s a dangerous statement to make but to keep things simple, please read it in the right spirit and get the drift.

Now let’s compare this with someone who is thinking to invest at high PEs (above 24) for less than 3 years. Have a look at the table below:

Short Term Investing PE Returns Low

There are un-ignorable chances that the person will not do well. Chances of losing money are fairly high if you see the average figures and Minimum returns for PE24-27 and PE>27 bands.

But let me touch upon an important point now.

Will this Result change if only the more Recent Data (and not last 20 years’) is considered?

That is no doubt an interesting and fairly valid point.

In last few years, it does seem (and I repeat ‘seem’ – may be due to our recency bias) that average PE levels are much higher than what they used to be in earlier years. The Reason for this may be many:

  • One of them can be that unlike earlier years, the constituents of Nifty50 are companies which in general have high PEs. So obviously there is a case for slightly higher average PE figures as the new normal.
  • The PE figures are based on standalone numbers of constituent companies of the index. If we consider the consolidated numbers, then chances are that the earning would be higher and lead to lower (calculated) PE figures. Earlier, the difference between standalone and consolidated figures wasn’t much as Indian companies did not have large subsidiaries that would distort the figures. But as Indian companies grow and so do their subsidiaries, the consolidated figures will be incrementally bigger than standalone ones.

To accommodate these facts, it makes sense to give more weight to consolidated figures. But NSE publishes data on the basis of standalone numbers till now. So we live with it for time being.

Another option is to reduce our period in consideration from 20 years to a more recent one – like last 10 or 15 years – where the comparative difference in the nature of index constituents in not as stark as what might be (like) 20 years ago.

Ofcourse the number of data points would reduce. But we can atleast have a slightly more relevant comparison if not a perfect one. So I wanted to try out the above analysis with different (but more recent time periods).

As a first case, let’s consider the last 10 years data, i.e. Jan-2009 to Dec-2018.

Do note that the beginning of this period coincides with the depth of the last severe bear market. So numbers will change. Let’s see:

Nifty PE Return Analysis 3 & 5 Year (10 Year)

You would agree that the trend remains the same. At higher valuations (PE), the future returns reduce.

I have not done the analysis for 7- and 10-year period as the period under consideration (i.e. 10 years) is too small to have any sufficient number of data points for the 7- and 10-year analysis.

But how does this compare with our previous analysis where period under consideration was 20 years? Let’s see:

Nifty PE Return Analysis 3 & 5 Year (10 20 Year)

Spend some time comparing the above 2 tables. The left one is based on the analysis of the last 10 years and the right one is based on the analysis of the last 20 years.

The basic conclusion once again is the same.

But the extent of these returns changes when we the period under consideration is changed.


Focus on the red arrows for now. The returns for PE12 case moderate from 38.7% to 23.0% (for 3-year) and from 29.2% to 18.4% (for 5-year) when we change the analysis period from 20-year to 10-year.

Now focus on the green arrows. The returns for PE18 and above (i.e. PE18 to 21 to 24 to 27 and beyond) increase somewhat for both 3-year and 5-year analysis when we change the analysis period from 20-year to 10-year.

This might be getting slightly number heavy but what I want to highlight here is that depending on the data set I chose, the return figures change to some extent (increase and reduce for different PE bands).

The overall conclusion still remains the same. But the expectations need to be revised when we give more weight to the recent past (last 10 years) than what we gave to the full last 20-year period.

You might feel that by choosing the last 10-year period, I am missing out on the Bull Run between 2004 and 2007. And rightly so.

So let’s consider a different period now:

The last 15 years (from Jan 2004 to Dec-2018).

This period takes into account the great bull run of 2004-07, the big crash of 2008-09 and the upmove since then 2009-2018.

Let’s see what the data tells here:

Nifty PE Return Analysis 3 & 5 Year (15 Year)

I may sound repetitive here – but the overall trend is still the same.

But once again, what changes though is the extent of returns in each case.

Let’s now compare 3-year and 5-year investment returns for each of the PE bands when different analysis periods of 20, 15 and 10 years are considered:

Nifty PE Return Analysis 3 & 5 Year (10 15 20 Year)

As is clearly evident, the figures moderate if we reduce the analysis period to data of the last 10 years instead of 20 years.

To be fair, there is no perfect answer as to which one should be used or which shouldn’t be. But this moderation analysis proves that we should revise our expectations to more rational levels. Due to various factors (like increasing difference between standalone and consolidated earnings and PE figures, change in index constituents and their normal valuations), we may have to keep a range of outcomes in our mind when making investment decisions. It was never black and white. It was always grey. Now it has even more shades of grey!

For the sake of completeness, I am tabulating the full findings for everything below. This includes 3-year, 5-year, 7-year and 10-year Nifty return analysis compared across various PE levels and after considering data for different sample space of 10, 15 and 20 years:

Nifty PE Return Analysis 3 5 7 10 Year

Also, note one more thing – this analysis is based on one time investing at specified PE levels.

If you are a SIP investor, then returns will obviously vary as your investment would be spread out across time and PE ranges. You cannot and should not expect to receive lumpsum-like returns on your SIP investments. The mathematical concept of average doesn’t allow that to happen.

Asking Again – Whether This Approach works in all kinds of investing?

My answer is that no one strategy can work in all conditions.

Knowing the broader market PE gives a fair idea about the valuations of the overall markets. It tells you when the market is overheating and that you should take cover (reduce equity in line with asset allocation). This, in turn, helps reduce the chances of making mistakes when investing.

Similarly, this knowledge of PE-Return Relationship also helps in identifying when markets are unnecessarily pessimist. If you are brave at such times, you can make some serious money.

And please don’t think about investing in individual stocks just because Nifty PE is low. Individual stocks have their own stories and need more in-depth analysis.

I have been doing this analysis now for several years. If you wish to access old ones done in the year 2017, 2016, 2015, 2014, 2013 and 2012, then please access the archives. But I think its best to stick with this current analysis as it’s the latest and most comprehensive one till date.

I regularly update PE and other ratios of Nifty50 and Nifty500 on State of the Indian Markets page.

What Should You Do as a Common Investor?

I am assuming that you are not Warren Buffett. 🙂 But jokes apart, the fact is that most people do not have the skill or time to get into deep investing.

So what should such people do?

First thing is to simply stick with a regular disciplined way of investing (easily achievable through MF SIPs). A proper way to do it is to first find your real life goals that require money (use this free excel) and then stick to Goal-based Investing. This is more than enough to begin with.

And once your corpus size grows, you should regularly rebalance your portfolio to de-risk it when needed and to position it for better risk-adjusted returns in future.

With that taken care off, you should try to invest more when market valuations are low. This will help increase your overall returns in the long term.

This is easier said than done but this is what really works in the market.

To sum it up…

There is a reasonable (but not guaranteed) correlation between the trailing PE and Nifty returns. And this study proves it and provides some useful insights. If we were to go by the historical data, the Nifty delivers higher return (in long-term) whenever investment is made at low PE ratios. On the other hand, it tends to deliver low to negative returns whenever investment is made at high PEs and when the investment horizon is short. You as an investor can use this insight as a backdrop to take your investments decisions.


I hope you found this detailed and comprehensive PE-Return analysis useful.

I will try to revise this study with new data points and other insights as and when practically feasible.

My Interview Stable Investor

My Interview with Stock & Ladder

My Interview Stable Investor

Recently, I got interviewed by Ravichand of Stock & Ladder. The interview was originally published here (at Investing Chat with Dev Ashish).

It covers my background, investment philosophy (and how it has evolved over the years), how I invest and other related aspects. I thought it would be useful to publish it here as well, for the benefit of existing readers of Stable Investor.

This investing chat is a long one at about 6000 words and may require some time. But I hope you find it useful and worthy of your time.

So here it is…


Ravichand (S&L):  Hi Dev, Firstly a big thank you for sparing some time to share your thoughts with the readers of Stock and Ladder. First up, please tell us something about yourself especially the part about how you got into the world of investing and Personal finance.

Dev: Thanks Ravi, for considering me worth interviewing.

My story isn’t very inspirational or anything like that. I am just a regular person.

Being born in a family of lawyers and doctors, chances were high that I would take a similar path. But I have been the odd-man-out in my family. Maybe it was because of the powers above which had a very different plan for me and so, I began my journey in a completely different direction.

Currently, I am a practicing SEBI-registered Investment Advisor.

But even though I had a noticeable interest in finance since I can remember, I still went ahead and did my engineering. Later, I joined a government sector oil company and got posted in a remote location.

After working there for a few years, I made a conscious decision to gradually align my life and work towards my area of interest – which was investing in particular and finance in general.

This, however, was not going to be easy as for doing that, I would have to quit my safe government job. It was a tough decision but my family and then-friend-now-wife backed me fully for the decision.

So I quit, did my MBA and then joined a private bank. After a few years, I got a very good job offer from a startup. I was no doubt happy with the offer in my hand.

But I spent some time contemplating whether it was actually what I wanted to do. In the end, it didn’t seem like it. I realized that if I had to do something on my own, I had to take a call sooner or later.

So after having several rounds of discussion with wife, parents and a few people I consider to be my mentors, I quit my job and decided not to join the startup.

I decided to take a plunge into what I really wanted to do. I must mention here that I had sufficient savings by then to make this decision.

I took a license from SEBI to start my Investment Advisory practice and that’s what I am currently doing. After having worked in metros and other cities, I returned back to my hometown Lucknow, where I currently stay with my family.

Though my target eventually is to achieve financial independence, I think I can safely say that I will never actually retire, as is the norm in our family of doctors and lawyers.

As for my interest in investing, it got kindled when I was quite young. My father and grandfather had money invested in shares of a few MNCs. So every now and then, we used to get dividend cheques from these investments.

On enquiring, my father explained that these cheques were dividends – which he was being paid to hold pieces of paper (physical shares then).

This attracted me like anything. I just fell in love with the idea of getting a regular flow of passive income without going to work for somebody else! This was as clear a case of money working for you (rather than the other way around) that there could be.

So you can say that there wasn’t any one single moment when it happened for me. The seed was sown very early on and I tried to gradually align my life towards investing and working for my own self.


Ravichand (S&L):  That’s wonderful Dev. Not everyone can make their passion the means for their paycheck and many usually end up spending their lifetime helping someone else build their dreams.

Mark Twain’s golden words come to my mind “Twenty years from now you will be more disappointed by the things you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.”

Let’s get into investing proper. Tell us something about your investing philosophy and how it has evolved over the years?

Dev: I am 33 but have been investing in markets for about 15 years now. But initial few years are a grey area from investment philosophy perspective. Consciously or unconsciously, I was trying out several things then.

And to be honest, I did not even have a philosophy in those initial years. I simply went after ideas where I felt the probability of making money was reasonably high. Luckily, I have had this inherent bias of being a little conservative when it comes to stock picking. So more often than not, I gravitated towards good companies with proven businesses (this is an approach that I am still loyal to).

I am not exactly sure why I have had this conservative bias. Maybe it was due to my family’s history and me as a child having observed that most of the investments were in mature, dividend-paying safe stocks.

But whatever it was, I still made decent money. Maybe I got lucky in several cases. And I cannot ignore that I was amply helped by the rising tide of our great Indian bull run of 2004-07.

Thankfully, I have had an inquisitive mind that tries to look for answers to how things work. Not just in finance but everywhere. And one of the things that I really wanted to understand (after a good experience during the Bull Run) was what actually made the stock markets work and behave as they do.

So this pushed me into reading about markets and investors. Luckily, I got exposed to Warren Buffett and his philosophy at the start itself. And Mr. Buffett led me to Benjamin Graham.

The more I studied these value investors, the more I felt that value investing was best suited for me. Here I must say that I have nothing against other schools of investing. 3 plus 7 is 10 and so is 5 plus 5. So there are several ways of making money. It was just that value-conscious investing attracted me the most.

So from then on and for many years, most of my investments were based on valuation attractiveness. And I loved investing in dividend plays. Being valuation sensitive, my process was numbers driven.

But slowly I started realizing that just focusing on numbers wasn’t enough. Why? Because I was regularly missing out on other attractive opportunities that were not attractive valuation-wise.

So in due course of time and after having missed many good money making opportunities, I decided to gradually tweak my way of investing.

Valuations still mattered for me. But I was now willing to pay up (more than what I was earlier comfortable with) if I could find businesses that were of high quality, had good conservative (or let’s say non-adventurous) management, predictable growth runway and manageable debts which gave them some ability to suffer for extended periods of time.

So from a pure valuation’s guy, I became a valuation conscious investor who was willing to embrace growth. Not too much but still ready to pay up to an extent.

So instead of focusing on the cheapest stocks available, I was going after comparatively higher quality cos. which were not very cheap.

Along the way, I continued buying good companies when they faced temporary bad events. So in a way, I was and still operate as a virtual bad news investor.

This reminds me of a good analogy about why we should stick to good companies. Tennis balls are costlier than eggs. And both the egg and the tennis ball will fall occasionally. But only the tennis ball will bounce back. As for the egg, you know what fate does to a falling one. So when buying businesses, buy tennis balls. At least they will bounce back when they fall.

As of now, my approach is a little more structured than what it earlier was.

  • I run a core portfolio of about 20-25 stocks. But to ensure that I bet convincingly in my main picks, about 80-85% is allocated towards the top 12-15 stocks.
  • Remaining are ideas that I am either still working on and/or where I am yet to build full conviction about. I generally try to ensure that none of the stocks hold more than 12-15% of the overall portfolio.
  • A majority of the stocks in the core portfolio belong to the top-150 universe. So you can say that I am a conservative investor when it comes to stock picking.
  • Many people think that large caps cannot make money. I don’t agree but I don’t try to convince anyone now. Large caps have worked wonders for me over the years. So I stick with them.
  • I also run a smaller (call it satellite) portfolio where I enter into short-medium term bets. This is more to take advantage of temporary mispricing and other low hanging fruits.
  • Of course, it is easier said than done and chances of being wrong here are immense. But that’s fine. It’s my way to tackling my urge of doing something every now and then and trying to be the next Buffett.
  • And luckily, the results haven’t been bad and provide for more money to be pumped into the core portfolio.
  • I also maintain a watchlist of stocks where I keep an eye on businesses that I wish to buy but which still aren’t in my portfolio for some reason or the other.
  • Over the years I have realized the power and option that cash brings in times of distress. So I ensure that I regularly put aside some money in suitable debt instruments to act as a Market Crash Fund.
  • You never know when the market might throw up some interesting opportunity. So better to be prepared. This way, I will not miss having CASH, when there is a CRISIS and I have accumulated enough COURAGE to venture out in tough times.
  • The above point, as you might have guessed, refers basically to the idea of sitting on cash. And I swear it is extremely difficult to do. More so when I see people around me making easy money.
  • But in the long run, I think restricting the number of bets I make in most convincing ones (in my view) is how a larger part of the wealth will be created. So I try to sit on cash and do nothing if there is nothing to do.
  • Apart from direct stocks, I have a goal-specific investment portfolio that has equity funds, debt funds, PPFs, deposits, gold, etc. One of my major life goals is to become financially independent by 40. So these investments are aligned towards that goal.

There is one thing that I have learned over the years. And maybe this is because I still pay my respect to valuations.

A good investor knows that it is only occasionally that he has to do something. And when the time comes, he has to and should do that ‘something’. And then, there is no need to do anything else. Money will be made in most such cases.


Ravichand (S&L):  Dev, that was the most detailed way someone has ever shared their process. That’s a great blueprint on which we can build our own investing framework.

As regarding to the way you have gravitated towards value investing, I remembered what Seth Klarman said “It turns out that value investing is something that is in your blood. There are people who just don’t have the patience and discipline to do it, and there are people who do. So it leads me to think it’s genetic”

From philosophy let’s move on to putting the philosophy into action. Tell us, what are the criteria’s or characteristics you look for in a business for it to be considered investment worthy?


Dev: I don’t have a very long checklist.

But broadly, I check stocks around 3 things – quality of the actual business, quality of the management and price in relation to my view on valuation of the stock.

Obviously, there are several things to check within these 3 broad heads.

Quality of business is all about doing the typical number-oriented analysis like examining sales and profit growths, margins, etc. – for the company and the industry peers.

Analyzing how industry and economy-specific environmental variables have impacted company’s trajectory in the past. And that of its competitors. Cost and capital structures and power that suppliers and customers have on the company or vice versa.

Then a good return on equity and return on capital are no doubt important. A less leveraged balance sheet is preferable as it makes business more robust in trying times.

I prefer sticking with businesses that have some barrier to entry that is not evaporating at least in the medium term. These are just some of the factors that I try to assess the company on.

Then there is that grey area of having a view on future growth of the business and more importantly, longevity of this expected growth. There is a big possibility to get this wrong but you need to have an objective and unbiased view on this to make your bets.

I will be honest that the quality of management is a difficult one to judge. And quality not only means their business sense but also their integrity.

So no matter how deep I go with analyzing these factors (from various sources), there will always be a chance of being completely wrong. But that’s fine. Sticking to what information is available and what signs the management is sending via annual reports and other ways is what I stick to. I really cannot get it right every time.

Even after several years in the market, I regularly end up feeling like an amateur when it comes to picking stocks. I am improving but there is a lot to learn.

I do run excel models but none of them are extremely complex or fancy. That’s because I feel that if I need a very complex model to prove a stock as a worthy of investment, then maybe it’s not that good after all.

Also, businesses are run by people and not excel spreadsheets. An Excel model cannot be an alternative to thinking. And that is where our subjectivity and biases come.

I think that good investment ideas are very simple. And to be fair and acknowledging the limitations of my ability to analyze any and everything, I would say that a stock idea has to be so good on just a few parameters that it should just jump out and find me rather than me trying to find it out.

And last but not the least, and extremely important… there is valuation. It is very subjective and what is undervalued to me might look overvalued to someone else and vice versa. But that’s how it is.

The stock should be in a comfortable valuation range for me to buy it. I generally start buying in small lots and accumulate over a course of time. I am not very comfortable buying large quantities in one go.

Here I will say that I generally avoid talking about the stocks I own or am contemplating owning. It puts unnecessary pressure on me as an investor to defend my position every time there is a news (which may or may not be relevant for me as a long-term investor). The ability to ignore and filter out the short-termism is I think necessary to operate well as a long-term investor. And there is no competition. So I try to reduce the stress to the extent possible.

Generating alphas is in itself so difficult, so why take on additional stress to justify your picks to people who may have different investment horizons or risk taking capacity. Isn’t it?

Remaining silent is all the more important as a valuation-aware investment strategy does not work all the time. Markets don’t and won’t always agree with you.

So going through extended periods of under performance is necessary and fine with me. I am more than willing to have return-holidays if I can get better longer-term returns.  As they say that as a real investor, you should be willing to be misunderstood in short-term to be right in the long-term.

Talking of investment criteria’s I think I should also share my views on the somewhat related and important aspect of cycles.

Over the years, I have come to appreciate the importance of mean reversion. Or let’s say how cycles play out. I don’t have any expert advice to offer on this front as this topic tends to tread in the territory of market timing.

But I believe that we can improve our long-term investment returns by adjusting our portfolio in line with cycle requirements.

Talking of cycles, think of it like this – when recent market returns are high, the attitude of the masses towards risk changes. People forget what their real risk tolerance is and get comfortable taking more and more risk in search of better returns.

This is exactly what sows the seed for future declines. And when the time comes and the delicate balance is disturbed by some external event, it pushes the market off the cliff. That is where the cycle turns.  So if one learns from the past data, then there are indicators which highlight when people are getting irrational. The same case can be built around people’s unreasonable fear after the market falls.

It is at such junctures that some level of portfolio adjustment (by re-balancing or taking cash out or bringing it in the portfolio) can improve future returns.

This requires operating against the herd. This is about being contrarian in real sense and not just for the heck of it. Which is easier said than done but with each passing year, it becomes not too difficult.


Ravichand (S&L):  Completely agree on the point of simplicity and thinking of simplicity, Peter Lynch’s famous quote comes to my mind “Never invest in an idea you can’t illustrate with a crayon”.

You also brought up the important topic of market cycles which I believe to be a topic that every aspiring investor should be familiar with. Howard Marks book Mastering the Market Cycle: Getting the Odds on Your Side is an excellent read on market cycles.

From checklist let’s talk rules. If there were to be “Dev’s 5 rules for successful investing” then what would that be?

Dev: I feel there are no perfect rules out there for successful investing. Any day it is possible that the bets we make due to all our successful investing framework (that we are proud of) and where we have the maximum conviction, turns out to be super bad.

But if I had to list down few important realizations that I have had, then here are my rules:

  • Stick with good businesses run by capable and trustworthy management, which have the ability to survive bad years comfortably and operate in industries having clearly visible and reasonably long growth trajectory. As simple as it sounds, this I believe is the most effective filter to reduce the number of potential stock ideas.
  • Valuation should not be ignored at any cost. But be ready to pay a fair price for good businesses. Every now and then, the markets will surprise by offering unbelievable deals on a platter.
  • You may have the courage to go out, but if you don’t have the cash, forget about taking advantage of such few-in-a-lifetime events. So be prepared with surplus funds to the extent possible. It will test your patience. But that is the price that you should be willing to pay.
  • There is a time to be brave and there is a time to not be brave. Don’t try to be brave all the time. Protect and secure what you have earned. Remember Buffett’s 2 rules about losing money. Be willing to be laughed at for your investment ideas. But that is when it will work. In investing, you want others to agree with you…but later.


Ravichand (S&L): Great set of rules, Dev. The importance of protecting your investing capital cannot be emphasized enough. When you read the investing rules of super investors, the point that return of money is more important than return on money becomes obvious. 

Next let’s talk mistakes. Mistakes are sometimes referred to as “unexpected learning experiences”. Can you share any investing mistake(s) you have made and what were the learning?

Dev: Let me talk about my mistakes.

One of my major mistakes (and I repeat it) has been to not average up when I entered in a good stock early on. You can say that I got anchored to the price I got in first. The result is obvious. I could have made a lot more money in absolute terms than what I made when you look just at the CAGR figures.

Selling early is also one of the crimes I regularly commit. The reason might range from increasing overvaluation to change in unintended negative signals that the management might be sending. But selling early has cost me in past. It’s like waiting for that elusive 20- or 50-bagger. For that to happen, you need to stay put and go through 5x, 10x, 15x and so on sequentially. You cannot jump straight to the 50x. Isn’t it?

At times, I did not pay attention to valuation when deciding to buy a stock. Very often, it backfired. One thing that we should not forget is that it’s not just what you buy that makes for a good investment.

It is also about what you pay for it. Valuation is something that really cannot be ignored. At least not for me. And you know what the biggest problem apart from these mistakes is?

keep repeating these 3 all the time. The frequency is reducing. But maybe I can just never eliminate these fully.


Ravichand (S&L): To be honest, I believe that these mistakes you have mentioned would have been committed by every single investor. It’s only with experience and spending time in the market that we can avoid these potential investing landmines.

From Mistakes let’s talk on the skills required to succeed. What do you believe are the skills one need to hone for becoming a better investor?

Dev: I am not too sure about how to answer this question. But I feel that investing is unnecessarily made out to be too complex. It is in essence pretty simple. Some are born great investors. For others, I think they should do/have the following:

  • Basic understanding of how businesses work and make money. Before investing, think of how you would be running the business of which you are planning to buy the stock. Have an owner’s mindset.
  • fair idea of finance, accounting and what numbers are telling or what they are ‘forced’ to tell or what they are hiding.
  • A growing understanding of how the market works and more importantly, how market participants (and not just investors) behave under different market conditions. This isn’t exactly a skill but for this, there is a need to study market history.
  • Reading is essential. To learn about how others have successfully invested and also because you will need to read annual reports, etc. if you are serious about investing.
  • Now this isn’t exactly a skill but eventually, one needs to understand that just being right or wrong doesn’t mean anything. As they say, amateurs want to be right but professionals want to make money.
  • So allow me to invoke George Soros here who rightly said that it’s not whether you are right or wrong that’s important, but how much money you make when you are right and how much money you lose when you are wrong that’s important.
  • You may call it skill, insight or art… whatever. But this is required to grow the portfolio.


Ravichand (S&L): Cannot agree more on the importance of reading in the life of an investor. Munger famously quipped “In my whole life, I have known no wise people who didn’t read all the time- none, zero” From skills required we move onto lessons learnt.

What has been the most important investing lesson(s) you have learnt from your time in the market?

Dev: You ask tough questions Ravi!

There must have been several important things that I must have learnt along the way. And to be honest, I may be still too young and inexperienced to know which one is the most important one for me.

But in recent years and as the portfolio size grows, I have come to realize that it’s not just important to push portfolio to grow faster. It is also important to start protecting what one has.

This may sound like being conservative at times. But that is what is necessary. As I said earlier, there is a time to be brave and there is a time not to be brave.

Of course when one decides to become aggressive and when one switches over to being conservative is fairly subjective. Mean reversion and how cycles work in the market is something that should be respected here.

We may not feel any urgent need to accept the cyclicity in market behavior when we start investing. But I think cycles are inevitable and more importantly, are heightened by the investor’s inability to remember the past.

Investor’s attitude toward risk also goes through a cycle. Of course the speed and timing of the cycle matters, but I hope you get the drift of what I am trying to say.

You need to position yourself and your portfolio after giving a deep thought to the cycle. Cannot ignore it. And that’s because at the extremes of the cycle, things can get really strange and uncontrollable if you don’t know what hit you or you aren’t positioned correctly.


Ravichand (S&L):  Loved the lessons especially the one on the need to be brave and act decisively when needed. All the bookish knowledge like “Be greedy when other are fearful” or “Buy when there is blood on the streets” etc. are not useful if we are not going to act on this knowledge. Brian Tracy put this beautifully “Think before you act and then act decisively. Fortune favors the brave.”

From lessons let’s move on to advises. What has been the most important investing advice(s) you have received on investing? How has it influenced your investing process?

Dev: I admire a lot of famous investors as they have provided the intellectual base for my investing life. And I am grateful and lucky to be influenced by them early on.

But I think the most important investing advice I received was from someone whom I regularly interact to discuss ideas. He is a not-so-small investor but likes to remain in hiding.

What he told me (and keeps repeating) is that if I wanted to make good money in the long run, I needed to have a thick skin. And I needed to become deaf.


Because successful investing is all about being contrarian and making people agree with you…but later.

So in between, you will have to listen to all the reasons from others about why you are wrong and why they are right. But assuming you have done your homework before taking the position, you need to ignore all the pressure that is coming to you.

And for that, you need to have a thick skin and turn deaf. If you watch the movie ‘The Big Short’, this is exactly what Christian Bale playing Michael Burry is symbolic of.

Being contrarian isn’t easy. If I see some good opportunity to invest and the market seems to ignore it, then chances are that the particular opportunity exists because the conditions aren’t favorable for it yet. Or else price would have moved up already.

So if you have a thick skin and you are deaf, then you can be comfortable with people misunderstanding you in the short term. Eventually and in long term, you will be right and make money.

I know that there is always a risk of being arrogant if you do so. Who knows and it’s possible that you may be wrong in your judgment and others might actually be right. But that is fine. In investing, even if you are right 4-6 times out of 10, then you can make serious money (depending on your position sizing).

Other important advice is more on the personal finance front. My father has always been of the view that the allure for more wealth is an unhealthy obsession. It’s unnecessary and it’s not worth it.

He has time and again told me that we don’t need a lot of money to feel good. Having enough money and free time is more important. And as I age, I agree with him more and more.


Ravichand (S&L): John Neff described the essence of contrarian investing nicely “It’s not always easy to do what’s not popular, but that’s where you make your money. Buy stocks that look bad to less careful investors and hang on until their real value is recognized”. Indeed a contrarian strategy is highly rewarding as long as we take care of few key things about contrarian investing approach.

Next we move from advice to influencers. Is there any particular investor(s) or author(s) who have had a significant influence in your investment thinking?

Dev: I read a reasonable amount of text (and not just books). But as years pass, the incremental benefit I get from reading new books keeps getting smaller.

Nevertheless, the investors/authors that have had an impact on me are Benjamin Graham, Warren Buffett, Charlie Munger, Peter Lynch, Howard Marks, Seth Klarman, Nassim Taleb and Daniel Kahneman.

But I must say here that one should read a lot. We really don’t know which idea in which book might influence us in ways we can’t even imagine. And who knows what learning we get from any particular book might be used for our life decisions.

And we are always just one decision away from a completely different life. So keep reading. It’s your mind’s software update mechanism.


Ravichand (S&L):  Reading is a theme which gets emphasized by all the guests I chat with. Munger put it best “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” Next up is one of my favorite question.

Let us say a bunch of enthusiastic beginners approached you for advice on how to be a better investor then what would your advice for them be?


  • It is very important to study great investors and also about companies that survived and ones that did not survive.
  • The market does not reward activity. Others will tell and push you to do something or the other at all times. But money is made by not doing anything most of the times. So be ready to do nothing 95% of the time.
  • Since you will have a lot of time, be willing to read a lot. And I mean a lot. And use this time to upgrade yourself with core knowledge as well as practical insights about how various industries actually work and make money.
  • Market cycles and investment behavior influence each other. Spend time learning about this aspect. For this read up on market history across cycles.
  • As you keep investing and learning, slowly build up your checklist of factors that you should judge a business and its stock on. No book or no one can teach you what comes from putting your money on the line.
  • So begin investing and learn in parallel. Losing hard earned money on your bets is the best teacher. It gives you a perspective that nothing else can.
  • Luck plays a lot bigger role in investing than you may attribute it to. Be humble and grateful and more importantly, acknowledge (at least privately) if you made money due to luck and not skill.
  • Have a thick skin but don’t be arrogant. This won’t come easy. So give yourself time to go through the process of growing a thick skin. Jokes apart, what I am trying to say is that be ready to take a contrarian stand and be ready to take brickbats for it.
  • But also be willing to acknowledge and backtrack if you have made a mistake. You are here to make money and not prove whether you are right or wrong. Bury that ego in a flowerpot.
  • This is difficult – as the years pass, try to be unemotional about investing. I don’t know how as there is no perfect recipe. But you have to gradually and intentionally reduce the role of emotions in your investing life.
  • If you are a beginner then you will not understand the gravity of this advice. But it is far more important than what people will ever realize.
  • You will only appreciate a good market when you have been through a bad one. So be ready to face the bad one sooner or later. It will humble you and help later in life when your portfolio is larger.
  • On a personal front, realize that time and health matter more than your wealth. And please do remember that you always know how much money you have, but you never know how much time you have. So act accordingly.


Ravichand (S&L): I think that’s a great set of advice for beginners. On studying great investors, that is precisely what Stock and Ladder is focused on. I also think your point on time and health is very important but we rarely bother about it when we are beginners. On health, I like what Jim Rohn said “Take care of your body. It’s the only place you have to live” Next question is on my favorite activity – reading. If you have to recommend 5 books that every investor must read then which ones would that be?

Dev: To answer your question specifically, here are the 5 books:

Also, re-read these books (or ones you respect) every few years. You will gain new insights from the same books as by then, you would have gained more experience. Also because you could relate the information in these books to various other texts that you must have read elsewhere in between your re-readings. I must mention here that reading is fine. And necessary and there is no substitute for it.

But reading alone is not enough. Don’t expect to be rich and happy just by reading a lot of books. You need to read, adapt and use the understanding to invest and live well.


Ravichand (S&L): Wonderful reading list and a great point on applying the knowledge as Aristotle put it “The mind is not only knowledge but also the ability to apply that knowledge in practice”. Even good things need to come to an end like this wonderful conversation and here’s the last question: Outside your passion for stock market and investing, are there any other interests / activities which are close to your heart?

Dev: I like to travel. And I am lucky my wife shares this interest too. We try to visit a new place every 6 months or so.

Also, I believe that I am an ancient mountain soul! So every year, I just have to spend at least a couple of weeks in the hills or mountains. That you can say is my indulgence.

As you might have already guessed, I also like to read. Not just books on money but a lot of other stuff as well. My interests lie in space science, science fiction, aerodynamics, ancient civilizations, etc.

Walking is something that I do a lot. No particular reason for it. I just like it.

Formula 1 is my longtime favorite sports. So almost 20+ weekends a year (that’s the approx. number of races) are booked to watch it. My wife hates F1 as they take up the weekends at odd hours.

Other obvious sports interest is watching cricket. I don’t play but spend a lot of time reading up on cricket records now.  Socializing a lot is not my cup of tea. But I am lucky to have a few good friends and we meet often. That’s it.

Thanks Dev, it was a very enlightening, interesting and insightful conversation. Wishing you the very best in your career and life.

Picking a Fund with 15% p.a. in 10 years Or a fund with 25% p.a. in 3 years?

That’s an interesting problem.

Neither 15% nor 25% can be called as bad returns. After all, risk free rates are at 8% or even less. But ofcourse, we are greedy and we prefer higher returns. Isn’t it?

I recently wrote an article for MoneyControl titled:

‘Which fund should you choose: A 15% annual return for 10 years or 25% annual return for 3 years?’

Here is a short snippet of the article…


To be fair, both 15% and 25% average annual returns are pretty decent.

And let’s accept that the former is more achievable than the latter in the long run. At least for those who know their fund managers aren’t Warren Buffett.

But jokes apart…


You can read the rest of the article by clicking the link below:

[Click to read] – Pick an MF with 15% p.a. in 10 years Vs an MF with 25% p.a in 3 years

Hope you find the article useful.