Nifty Sensex PE

Hi,

I am S.Karthikeyan, a newbie.

Would like to thank all the great people, who contribute a lot in maintaining this highly informative forum.

I am new to stock markets.I have been reading a lot on the web and kindle abt stock picking and when exactly to buy and sell.

Some say that when the PE of Sensex/Nifty touch 23, it is time to start exiting. Fresh buying can start only when PE falls below 18, in their opinion. Now(9/10/2015), PE of Sensex is 22.84 and that of Nifty is 21.97. Going by this school of thought, one should not buy now and wait till price corrects strongly. If PE of Nifty has to go below 18, we have to wait till index falls well below 7000, which seems quite unlikely.

I am confused and would like to hear from the experienced traders.

Thanks,
S.Karthikeyan

 

Hi Karthikeyan, welcome to the forum.

Personally, I think the logic that one should pay attention to the Sensex or the Sensex P/E is flawed. The Sensex is made up of several companies from various sectors. It has metal and commodity stocks which are presently in a bear market cycle, it has Pharma and I.T. stocks which are presently in a bull market cycle, it has PSU banks which are reeling under a NPA crises, it has oil and gas stocks which are troubled owing to the low crude prices and so on.

So, if you choose a stock, say a Pharma stock, on the basis that it has good prospects and is available at reasonable valuations, how does the state of the Sensex matter to you?

The proper course of action is to first choose a sector that is enjoying tailwinds. This is called the "top-down approach". The Pharma, Info Tech, Textiles etc are presently enjoying a tailwind while the oil & gas etc sector is facing headwinds. Then, within the sector, identify the stocks that appear to have the best chance of succeeding, based on the management bandwidth, cash flows, expansion plans, valuations etc. This is called the "bottoms up" approach.

In other words, focus always on specific stocks and never on the overall market or on broad macro issues. If you get your stock selection right, nothing else matters.

 

Thanks a lot for the detailed reply. I learnt a lot from your comment, something, I couldn't after browsing through tons of volumes.

S.Karthikeyan

 

There is a classic talk by Warren Buffett where he emphasizes that we should focus on finding a "wonderful business" and not pay attention to macro factors. Buy a wonderful business and focus on "what will happen" and not "when it will happen". Also, focus on issues that are "important and knowable" and not on factors that are "important but not knowable".

 

Sir,
Thanks for this wonderful video. Hope to learn a lot, by going through the content in this wonderful website.
S.Karthikeyan

 

Dear Kartikeyan _I don't deny we need to focus on specific stock.But it is also fact that market also runs on sentiment.PE certainly denote sentiments. If market PE is lower than it is possible that many of stocks will be under priced or reasonably priced If market PE is higher it shows bullish sentiments .At that time it is possible that majorty of stocks will be more than their fair value. So greater market PE should be used for caution and to book some profit and lower market PE should be used for good bargain hunting and deploying your cash.But this is a general statement and can not be used in stock specific case.

 

Sir,
Thanks for sharing your perspective. I like the last sentence- "this is a general statement and can not be used in stock specific case". Stock specific approach is the must and the sensex PE may be used in a spiritual sense.
S.Karthikeyan