Decoding the PE ratio of a stock

At a glance Price-Earnings or PE is the most widely valuation metric by equity market investors However, arbitrarily shifting PE levels and differences across industry groups mean it’s hard for an investor to utilize it in his decision-making The conservative interpretation of PE should be “the number of years of earnings it will take to pay back your cost of buying a share” Additionally, PE is an indicator of the market’s expectations of earnings growth over a sustained period of time. Working out that expected growth number provides an investor additional information on the suitability of a purchase Ask a

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Three value investing lessons from Graham and Dodd

Security Analysis by Benjamin Graham and David Dodd is probably the most “mentioned” book when it comes to value investing. First published in 1934, it was used as a required reading textbook in the course by the same name at Columbia Business School (apparently, now only the excellent preface to the 6th edition by Seth Klarman “The timeless wisdom of Graham and Dodd” is compulsory). The immense value of the book is in that it remains relevant, as a framework to think about investments, over 80 years after it was first published. Having heard all the revered references to this book, I first dived

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Predicting market returns? Not so fast!

“Be careful – you are using the same data to predict as the model itself. You used past data to determine how stocks have behaved 1 year in the future based on the P/E that the index had (average ranges). Then you plot the “prediction” of that past data as a backcasted chart. Obviously it will show the same curve, because you used the very same data to determine the ranges in the first place :)” – Deepak Shenoy Excellent comment on my last post: Predicting stock market returns, by one of the most prolific analytical finance practitioners in India. (If you

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3 charts that sum up Indian equities in 2014

1. An “exuberant” 2014 Both key benchmark indices up by 30% December so far has seen the only significant correction in 2014 2. A “can’t go wrong” 2014 Every sub-index provided positive returns, some more than others with returns ranging between 10% and 70% Metals, Oil & Gas, IT, FMCG and Power under-performed the broader index Small caps, Consumer Durables, Mid caps, Auto & Capital Goods offered 50%+ returns 3. An “Expectations ahead of Earnings” 2014 Indian markets currently trade just above 21x earnings (For every ₹1 in earnings, you pay ₹21) Unless earnings show significant growth in the next quarter or two, historical data over 15 years suggests you’re more

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