Do Indian Markets Bounce off PE levels of 12 & 24?

Sounds like a title of some Technical Analysis writeup? I don’t blame you. 🙂 But rest assured it is not. Infact, this will be an entertaining post for you if you are interested in giving some thought to PE-Based investing. In previous post, I did a detailed analysis of the PE Ratio of Nifty 50 in last 16+ years.

It does throw up some interesting insights. But what catches the eye is that there are levels, which the Nifty generally fails to breach on lower and upper sides.

There is no doubt that by investing (more) in markets trading at low PE multiples, chances of earning higher future returns increase. Similarly by investing in markets trading at higher PEs, chances of lower future returns increase. It is very simple.

But to say that one can time the market on basis of just Index PE will be an over-simplification.

As we saw in previous post, the mere fact that expected average returns are high does not mean that the returns you (in particular) get, will be guaranteedon lines of the high averages. It does not work like that.

If you are unable to understand this point, I recommend reading the post – especially the example of average depth of river part.

Now I did the following analysis in 2012too. There were clear indicators then, that broader indices had a dislike for staying above or below certain PE multiples. Not much has changed in last 4 years.

Without getting into the statistical accuracy of numbers, the analysis shows that these PE multiples are PE12 and PE24.

Have a look at graph below:

PE Ratio Nifty 12 24

The blue line is actual Nifty level.

The red line is hypothetical Nifty level at PE24 at that time.

The green line is hypothetical Nifty level at PE12 at that time.

Clearly, Nifty seems to have trouble staying above PE24 (considered highly overvalued) and below PE12 (considered highly undervalued).

Whenever it reaches either of these two levels, it seems to bounce off in opposite direction!

Though the chart might look like a screen-grab from a trader’s terminal, it’s a clear display of how fundamental this concept is. 🙂

Buy low (PE). Sell high (PE).

If you think it’s timing, then you are right.

If you think it cannot be done, then you can try this instead:

Buy low (PE). Avoid buying high (PE).

More manageable. Right?

Now ofcourse you can say that I should have used PE25 or PE11 to make it more accurate. But the idea here is not to be as accurate as possible. Rather, the idea is to become cautious when markets start moving in irrational territories. Index PE depends a lot on what are the index constituents and other factors.

So broadly speaking and ofcourse basing my conclusions on past data, PE12 seems like a clear signal that investors are unreasonably pessimistic and at PE24, over optimistic. Both are unsustainable and hence, indicate near term reversion towards mean. Though nobody can guarantee that markets will behave on similar lines in future, chances of that happening are pretty high.

Those who think that, ‘this time its different’ – have not had much success when it comes to investing. 🙂

My analysis and conviction is based on the fundamental assumption that India is a growing economy (atleast for next decade and a half). And I believe that markets are highly undervalued around PE12 and highly overvalued as they approach PE24.

But ofcourse, you may choose to differ on this and invest accordingly.

So instead of getting into this debate, lets come back to the title of the post – Is it safe to say that index bounces off PE levels of 12 and 24?

It seems to be true. But note that markets don’t stay at such low/high levels for very long time.

So inspite of being sure to invest when PE12 is crossed on the downside, you might find yourself lacking enough firepower (cash) to take advantage of the situation.

Have a look at times the index has spent at various PE levels:

PE Ratio Nifty Time Spent 1
Now lets aggregate these PE bands into smaller groups:

PE Ratio Nifty Time Spent 2

Just 1% of the time – market has stayed below PE12. Can you catch it?

Chances are high that market will catch you unaware. And believe me, market is capable of doing that beautifully. 🙂

So what should one do?

Its simple, you cannot wait for markets to fall to PE12. But you can become (more) interested at it crosses PE15 on the downside. That is more manageable. By ‘becoming interested’, I mean that you should have a thought process like this:

“Market just came down to PE15. It looks attractive. But what if it falls lower? Do I have the money to buy more if it goes down to PE12-13? I guess I should be alert and start preparing myself.”

You might ask that why am I telling you all this when PE is neither near 12 nor 24 (Currently 19)? It is because you won’t listen to me when markets are booming (PE24) or when everybody else around you is selling and running away from markets (PE12). 🙂

So keep this in mind.

P/E Ratio Analysis of Nifty – February 2016 Update

Note – I have updated this analysis in 2017 here.

I had been working to make this analysis more useful. Like all previous updates, this one too has index (Nifty 50) analysis of 3, 5, and 7 years. But this time, I have also added an analysis of 10-year returns. Since most readers of Stable Investor are interested in long term investing, it made sense to add an analysis for a longer tenure.

In addition to that, I have also incorporated few more tracking points to give a more comprehensive P/E based picture. The details will become evident as you go through this analysis.

In case you are interested in reading previous years’ analysis, then you can access them here: 2012, 2013, 2014 and 2015. (The latest summaries are available in tab named State of Market)

So what exactly is that this analysis tells?

To put it simply, it tells that it makes sense to invest (if possible, more) when general indices are trading at lower PEs. This statement is based on last 17 years’ worth of analysis.

But mind you, there is ofcourse no guarantee that the trends might continue in future.

So this analysis tells about the possible returns one can get when the money is invested (in index) at various PE ratios.

Let’s go ahead with the updated findings…

Nifty PE Analysis 2016

The table above clearly shows that if one is investing in markets where PE<12, the average returns over the next 3, 5, 7 and 10 year periods are astonishing 39%, 29%, 23% and 19% respectively. Now this is something remarkable. The money is doubling every 2-4 years.

On the other hand are PE ratios above 24. These are levels that are considered to be highly overvalued, in market terms. And returns on money invested at these levels, for the next 3, 5, 7 and 10-years are (-)5%, 3.4%, 9.6% and 12%.

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

And for your information, we are currently trading at close to PE 19.

So as you saw, investing at lower PEs gives bumper returns. But does it mean that it will always be so?

The answer is No.


Because the above numbers are ‘averages’. To explain this more clearly, lets 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. And to handle this point, I have also found the maximum and minimum returns during all the periods under analysis.

Nifty PE Analysis 3 Years
Nifty PE Analysis 5 Years
Nifty PE Analysis 7 Years
Nifty PE Analysis 10 Years

As you can see, there is a big difference between the minimum and maximum returns for almost all periods. So the returns that you will get will depend a lot on when exactly you enter the market. Yes, it sounds like timing the market. But this is a reality. For those who can, timing the market works beautifully.

But point is that most people can’t – And this is the reason why they shouldn’t try it either.

Hence even though the average returns give a good picture for long-term investors (look at the table for 10 year), 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 average returns. 😉

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

Analyzing standard deviation tells you – how much the actual return will vary from the average returns. So higher the deviation, higher will be the variation in actual returns. I strongly recommend you read this post on importance of Standard Deviation by Prof Pattabiraman here.

Now, lets touch upon a very important point. Buying low makes sense. So should you wait to only invest at low PEs? Though it might make theoretical sense to do it, fact is that it is very difficult to wait for low PE markets.

Look at the time spent by the index at sub-PE12 levels.

It is just about 2% of the time since 1999 (Ref: Column name ‘Time Spent in PE Band’ in tables above).

Markets at below PE12 are extremely rare. For common investors, it’s almost impossible to wait for such days – that might be spaced years apart.

Another useful thing to note here is that as your investment horizon increases, the expected returns more or less are good enough, even when one invests at high PEs.

So, even if an investor puts his money in the index at PE24, the expected average returns are more than 12%. That’s pretty good enough.

And what about the maximum and minimum achieved since 1999?

At 13.8% and 10.5% respectively, these are not bad either. This is what really shows that if you are investing for long term, equity is your best bet for wealth creation.

The longer you stay invested, higher are the chances of making money in stock markets….even if you have entered at higher levels. On the contrary, if someone was thinking to invest at high PEs (above 24) for less than 3 years, then I am almost certain that this person will lose money.

Recommended Reading:

  1. Becoming a Value Investor using Nifty PE Ratio
  2. A Small Guide I refer to when investing in Stock Markets

Now you might be tempted to ask – what is it that I do with my own money (after knowing all this since I have been doing this analysis for past many years)?

The answer is that I have tried to keep my financial life simple.

I have few base SIPs running all the time. I don’t disturb them whether it’s a low PE market or a high PE one.

Since I am also interested in giving booster shots to my long-term returns, I invest additional amount when I feel comfortable with valuations on the lower side. I also keep a Market Crash Fund that I use every now and then. I have covered about it in detail here, hereand here. But I don’t recommend that approach to anyone. It’s for people with time and intent to track markets closely.

For most readers, knowing the market PE gives a broad idea about the valuations of overall markets. It helps ensure that you know when the markets are over-optimistic and hence, it reduces the chances of making mistakes when investing. It also helps in knowing when the overall mood of the market is down and probably, full of more than necessary pessimism. Let your base SIPs run irrespective of market levels. But see if you can benefit from some of the insights that analysis like above provides. 🙂

Reminder: I am talking about index-valuations here and not individual stocks.

A reader had asked me to create a PE chart to show monthly changes in Nifty valuations. Heat Map below shows monthly Nifty valuations – based on index’s monthly average PEs.

Nifty PE Analysis Long Term

How changes in Index Constituents impact Index PE Ratios and PE Based Investing?

I was working on a more comprehensive P/E Ratio analysis of Nifty and Sensex when I thought about bringing this important point to everyone’s notice.

In December 2015, Sensex underwent few small changes. Two companies in the 30-share index were replaced. Adani Ports & SEZ and Asian Paints were added to the index and Hindalco and Vedanta were removed (source). I am sure that weak performance of the two outgoing companies combined with a bleak outlook for the metals sector in general, must have necessitated this change.

Now this is not unusual. The index management committee regularly reconstitutes indices to (and I guess) take index to newer heights by only allowing companies with better incremental earning potentials. 🙂

So what will happen when two low profit (or loss-making) companies are removed from the index?

By replacing these companies with profits-making ones, the total earnings of Sensex will increase. This would mean a lower PE ratio, which is calculated by dividing the total market cap of the constituent companies in the index by their total net profits.

And as we can see from table below, the immediate impact of this change was that PE came down on the day of change, inspite of index going up.

Sensex PE Ratio 2016

So this particular fall is PE is not because of fall in share prices. It is purely because the index constituents have changed and consequently, earnings have increased. For those who thought that markets have come down suddenly in valuations, this is something to make note of.

This change will also have an impact on Sensex valuations based on future earnings estimates. That is another matter the estimates are at best, estimates. 🙂

I wanted to highlight this because I regularly make references to link between returns and market PEs and how one can use this indicator to broadly assess market valuations.

Extend this concept of change in index constituents and you will realize that when comparison of index’s PE in 2016 is made with say of year 2001, then essentially, two very different indices might be getting compared.

To put it simply, the index of 2016 would be quite different from that of 2001. Sensex of yesteryears might be giving more weightage to metal and cement companies. In comparison, index of today might be more biased towards sectors like FMCG and IT. So when we compare historical PE ratios with current ones, then we need to acknowledge that we are not exactly comparing apples to apples. Due to law of averages, its also not like apple-to-orange comparison but its still not the same apples we are talking about. 🙂

Another thing that worries me is management framework of the index. I am sure that the index management committee would be doing their jobs honestly and carrying out required due diligences, when including and excluding companies in indices. But I am not sure whether there are any SEBI norms governing them or index changes.The indices traded on stock exchanges are owned (not sure) and managed by separate legal entities that do not come under the direct supervision of SEBI. I think there is a scope of increasing regulatory oversight here.

P/E Ratio Analysis of Nifty in 2015 (Since last 16+ Years)

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, 2013and 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 1st 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.

P/E Ratio of Indian Markets in July 2014 – Is It Telling Us Something?

I regularly monitor index ratios like price-to-earnings, price-to-book values to gauge overall market sentiments. I know it’s a very crude way of doing it. But still it provides a decent picture of what is happening in markets.

Now here is something interesting what happened on July 7th, 2014.

Nifty 50’s P/E multiple crossed 21 after almost 3 years. Surprisingly, last it stood past 21 was also on July 7th (2011). That’s exactly 3 years back!

Long term analysis (starting end of 1998) of Nifty’s P/E ratio tells the following story…
PE Ratio India 2014
We all know its common sense to buy low (Low PEs) and sell high (High PEs). And we also know that its difficult to do it. So if you go out and buy the index as whole when P/E multiples are less than 12 (quite low), then on an average, your probable 3 year and 5 year returns will be 39.5% and 29% respectively.

Similarly for index-buying during P/E multiples being in between 12 and 16, the 3 and 5 year returns are 28% and 25% respectively.

But we are currently in the band of 20-24. And this is not a cheap market at all. As per past data, your 3 year returns and 5 years returns look bleak at 4% and 7%. 

So does it mean that we sell all our stocks and put money in bank deposits?

The answer is I don’t know.

The above numbers are based on data of past 15 years. And there is no guarantee that past performance may be repeated. Or whether this time it might be different.

The last instance of PE21, for which 3 year returns data is available (May 02, 2011), the market gave a return of 5.3%.

Similarly for last instance of PE21, for which 5 year returns data is available (June 11, 2009), the returns were 10.3%. Not bad considering the superiority over returns given by safer ones, but also not eye-popping considering the optimism we have for next 5 years.
Now we are all quite hopeful that the new Indian government, if permitted by external uncontrollable like oil-shocks, natural-disasters, wars, etc… would be able to provide a conducive environment for India’s return to high growth days.

But having said that, I also beg to differ with those who believe that this would be achieved overnight and Sensex will hit 40000 by end of 2015.

As for the current markets which are rising everyday, it seems that they are now running ahead of the actual ground realities. But it is this over-optimism that gives us, the long term investors a chance. Isn’t it? 🙂


Latest P/E Ratio Analysis of Indian stock markets

The markets are falling. Experts all over are painting the picture of India’s economic future with dark colors. People around you are selling shares and stopping SIPs in mutual funds.

So what exactly is happening? We tried answering this question in one of our previous posts titled What’s happening to stock markets, economy & your portfolioMany people known to us are exiting markets because markets have not produced any return for last 5 years. In fact, it has gone into negative territory in this 5 year period. But this very fact should have forced a sensible investor to think rationally and stay put in market. We did a small study some time back and came up with a conclusion that “If returns in last 5 years have not been great, chances of making higher returns in next 5 years are quite high.”

In fact, we started this website with posts evaluating traditional valuation parameters like PE etc for Indian markets. And surprisingly, we found a really interesting pattern which showed that Indian markets have a tendency to bounce between PE multiples of 12 and 24!!(see how here).

So we decided to see where exactly are Indian markets placed in terms of PE multiples when compared to historical levels.

As of now, Nifty (a benchmark index) has a P/E Ratio of 15.7. Now when compared with past data, this is not expensive at all (considering growing nature of Indian markets). But this time around, problems surrounding us (& lack of solutions) are forcing us to question the very nature and sustainability of India’s growth. Therefore, this PE Ratio of 15.7 cannot be considered to be cheap either.

So does it mean that markets will go down more? Does it mean that Indian markets are going to be re-rated soon? Frankly, we don’t have answers to such speculative questions. But yes, times ahead do seem to be tough and only tough and robust businesses will survive.

Nevertheless, we ran up some calculations and found that there is some correlation between overall market PE levels and return which you can expect to earn over a 3 or 5 year period. Table below shows the same and is quite self explanatory –

15 year Analysis of Indian market’s P/E Ratio (1999 – 2013)

To summarize, lower the overall PE levels of market, greater would be your return over a 3 year or 5 year period.

Assumptions – This analysis is based solely on Nifty’s past data. Same may not be repeated in future. But chances of repetition are quite high. Returns offered by individual stocks may wary quite a lot from this data.


IDFC – A long term investment worthy business

From a high of 185 in January 2013, IDFC has grinded down to 128. That’s a fall of close to 30% for a large cap financial institution.

We like IDFC as a good long term portfolio pick. So this 30% correction has tempted us to do an analysis of the company. And with Banking Licenses being the hot topic, we give our two cents that it is quite possible that IDFC may get one by next year. But what we just said is mere speculation. Don’t believe us. 🙂 This is because there is a high probability that someone on the inside knows something about the licenses and hence the stock has corrected so much(!)

So, for the time being, we keep aside IDFC’s banking foray and look at its existing businesses and valuations compared to historical averages.


IDFC is an infrastructure finance institution providing end to end financing and project implementation services. The company also provides advisory, PE and AMC services to name a few.


Company grew at a fast pace during the last decade. Its sales have increased from 424 crores in 2003 to around 6100 crores in 2012. That’s a CAGR of around 34%. Company came out with its IPO in 2005 at Rs 34 per share. Since then, sales have increased at a similar rate of 35% per annum.

IDFC Net Sales
IDFC – Net Sales (2003-2012)


During the same period, profits have grown from 180 crores to 1600 crores at rate of 27% plus.

IDFC Net Profits
IDFC – Net Profits (2003-2012)

EPS & Dividends

Earnings (per share) have moved up from 1.8 to 10.3 in 2012. In line with EPS, dividends have started increasing in recent past and now (in 2013) stand at Rs 2.6 per share. In last 5 years (barring 2009), company has continuously increased its dividend per share (1.2, 1.2, 1.5, 2.0, 2.3, 2.6).

IDFC EPS Dividend Per Share
Earnings & Dividends Per Share (2003-2012)

The dividend payout ratio has also stabilized in the band of 20-23%, which is decent considering the high growth rate of company’s business. A detailed comparison between EPS, DPS and their respective growth rates can be found in table below-

IDFC EPS Dividend Per Share
Detailed EPS & DPS Data – Growth Rates & Assumptions

IDFC is a financial institution and hence it makes more sense to analyze company’s Price to Book Value to gauge how over- or undervalued the company is.

Price/Book Value & P/E Ratio Analysis

Company has grown its book value from 16 to 81 in last ten years. That’s a CAGR of more than 20%.

IDFC Book Value
Book Value Per Share (2003-2012)

We analyzed historical data to check the P/BV multiples at which IDFC has traded. Average P/BV after listing (in 2005) for IDFC stands at close to 2.3. Also it has oscillated in a P/BV range of 1.0 to 5.0. At present, the stock is available at a P/BV of 1.6. That itself points to a 30% undervaluation from historical averages perspective.

If you look at Price to Earnings multiple too, average PE commanded by IDFC is close to 16. The stock currently trades at a PE of less than 11 (TTM). And if you are enterprising enough to consider future earnings, then stock is available at a forward PE of 9.2 (FY 14) & 7.7 (FY 15)! And a PE of 8 is considered apt for a no-growth company. 🙂

Below graphs show how IDFC is currently positioned on parameters like P/E & P/BV when compared to its historical averages and FY 14 & 15 estimated figures.

IDFC Price to Book Value PBV
P/BV Comparison – Current, Historical Average & Estimated (2014,  2015)
IDFC Price to Earning Per Share PE
P/E Ratio Comparison – Current, Historical Average & Estimated (2014. 2015)

Final Words

The company, though well managed and growing at a decently fast pace, seems to be undervalued. We have not analyzed management, business, etc as this post was more to do with valuations based on simple historical parameters. But being headed by Deepak Parekh and his team, it is assumed that management would be doing a decent job. In case you are interested in understanding more about the business, management and other factors, we suggest a simple Google search. It will throw a plethora of brokerage reports analyzing the same. You can also access company’s latest Annual Report here.

Now with a sustained ROE of close to 15%, a business like IDFC’s should command a multiple higher than what it currently trades at. And though we love dividends, we don’t expect IDFC to dole out generous dividends to its investors due to its fast growth. Even then the stock is currently available at a decent yield of 1.8%. And with dividend growing year on year, this Yield-On-Cost is bound to increase in future.

But remember one thing, IDFC is interested in getting a banking license. And there are high chances that it might get it. But we cannot be sure of this unless we are in RBI’s decision making committee. 😉 So if you do invest in the company, be ready to accept volatility in its share prices due to negative or positive news flow.

Disclosure – No positions in IDFC.


Buy Low, Sell High – How to use market’s P/E ratio to profit from this strategy

In our previous post Do Indian stock markets bounce off PE levels of 12 & 24?, we found that there was some degree of truth in this statement. Indian markets do seem to bounce off PE levels of 12 and 24. And we also found that an average investor can use this information to make money (read more than 25% pa) by buying at low PEs and selling at high PEs (click hereto see summarized results). As already mentioned towards the end of that post, we decided to check market returns for other PE combinations as well. The reason for choosing multiple bands will be given later. We eventually selected 5 different sets of PEs –
  • Buy at PE12 & Sell at PE24
  • Buy at PE13 & Sell at PE23
  • Buy at PE14 & Sell at PE22
  • Buy at PE15 & Sell at PE21
  • Buy at PE16 & Sell at PE20

Before we give the results, we would like to share the methodology we used for our calculations. In first case, starting with Rs 10,000, we invested in index when it first touched PE12 and sold out completely when it first touched PE24. Now we waited for markets to once again correct to levels of PE12 and invested all proceeds from our previous sale. Again we sold off completely at PE24. The process was repeated as long as possible. And this process was repeated for all the above mentioned PE combinations. The results are as follows –

As you can see, the returns are somewhat above average. 🙂 The lower you buy and higher you sell, better are the returns. We also did not feel that it was a good idea to keep PE bands smaller than 4 (PE16-PE20 range). It would have only resulted in an increase in number of buy-sell transactions (and reduction in returns).

It should also be noted that though highest returns are achieved in band 12-24, the markets are generally not available in those ranges for long periods. For example, markets spent less than 5% of the time below PE levels of 13 in last 13 years. An investor may not get ample opportunity to invest at such low valuations. Also seen from graph below, markets do not spend too much time in the extreme areas. They correct themselves. Indian markets spend most of their time in PEs ranging from 17-21. This is the reason we decided to use PE bands which provide an investor with more opportunities to enter and exit the markets.

Percentage of time spent by Indian markets at various PE levels – Last 13 years
We had also planned to assign lesser weightage to returns earned in 2003-2008 bull phase as we believed that same irrational momentum may not be repeated in future. But we decided otherwise. The reason is that whatever weight (less than 1) we would have attached to this period, it would have been based on assumptions, which in turn would have been biased and subjective. It would have resulted in reduction of returns to more normal levels and would have also increased the mathematical complexities of these results. You can very well reduce these results by 50% and still get market equaling returns. But purpose of this post is not to give the exact returns upto two decimal places but to prove that buying at lower PEs and selling at higher PEs is a (once again) proven approach of earning good (if not market beating) returns.

Caution – The results may look amazing but beware that these are theoretical results. They may differ significantly from real world results.


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