Investing in standard low PE stocks can give much higher returns comparing to investment in high PE stocks... Find it interesting, well than read below
I just finished a book by Parag Parikh, Alumnus of Harvard Business School and the chairman of PPFAS (Parag Parikh Financial Advisory Services Ltd). The book is titled "Value Investing & Behavioral Finance". I have shortlisted 2 strategies for further analysis and see if his strategy is true across the board or his case studies are over narrow range. Here I am discussing about the 1st strategy. Mind it this one is for long term investing only.
This is about Contrarian Investment. According to him its better to invest in a company that is having a lower PE in an Index rather than higher PE. He has given an example of companies in Sensex studied between 1995-2006.
Method:
High PE - Spot 10 Highest PE companies in Sensex and invest Rs. 10k in each of them.
Low PE - Spot 10 Lowest PE companies in Sensex and invest Rs. 10k in each of them.
At the end of the year sell all the shares of both PE segments. Then again spot the new 10 highest/lowest PE companies in Sensex and reinvest the received money of each segment.
Say after a year if the value of High PE shares is 90000 (original investment - 100000), reinvest 9000 in each of the newly spotted High PE scripts.
Conclusion:
Value of High PE Portfolio created by above method is Rs. 4.06 Lakh against the initial investment of Rs. 1 Lakh
Value of Low PE Portfolio created by above method is Rs. 5.99 Lakh against the initial investment of Rs. 1 Lakh
As clearly seen the returns of investment in Low PE stocks is way higher than the investment in High PE stocks.
(I know many experts here would feel that the value created is much lower in both the portfolios than it could have been if the money was actively managed but then many like myself aren't expert like you and even if they are knowledgeable they do not have sufficient time to do all the exercise, so even if you don't find it extremely attractive, please help)
Now the actual exercise starts... Lets check if this is true for
1) Sensex between 1/1/1991 - 31/12/11
2) Nifty between 1/1/1991 - 31/12/11
3) Other indices that have track of atleast 5 years
I just finished a book by Parag Parikh, Alumnus of Harvard Business School and the chairman of PPFAS (Parag Parikh Financial Advisory Services Ltd). The book is titled "Value Investing & Behavioral Finance". I have shortlisted 2 strategies for further analysis and see if his strategy is true across the board or his case studies are over narrow range. Here I am discussing about the 1st strategy. Mind it this one is for long term investing only.
This is about Contrarian Investment. According to him its better to invest in a company that is having a lower PE in an Index rather than higher PE. He has given an example of companies in Sensex studied between 1995-2006.
Method:
High PE - Spot 10 Highest PE companies in Sensex and invest Rs. 10k in each of them.
Low PE - Spot 10 Lowest PE companies in Sensex and invest Rs. 10k in each of them.
At the end of the year sell all the shares of both PE segments. Then again spot the new 10 highest/lowest PE companies in Sensex and reinvest the received money of each segment.
Say after a year if the value of High PE shares is 90000 (original investment - 100000), reinvest 9000 in each of the newly spotted High PE scripts.
Conclusion:
Value of High PE Portfolio created by above method is Rs. 4.06 Lakh against the initial investment of Rs. 1 Lakh
Value of Low PE Portfolio created by above method is Rs. 5.99 Lakh against the initial investment of Rs. 1 Lakh
As clearly seen the returns of investment in Low PE stocks is way higher than the investment in High PE stocks.
(I know many experts here would feel that the value created is much lower in both the portfolios than it could have been if the money was actively managed but then many like myself aren't expert like you and even if they are knowledgeable they do not have sufficient time to do all the exercise, so even if you don't find it extremely attractive, please help)
Now the actual exercise starts... Lets check if this is true for
1) Sensex between 1/1/1991 - 31/12/11
2) Nifty between 1/1/1991 - 31/12/11
3) Other indices that have track of atleast 5 years