Before I write anything about this guide, let me briefly define my approach towards money (and life in general).
I love investing in stocks. But its more because I like the process of investing, than for my desire to be rich. Though I would prefer to be rich than to be not-rich, money still does not mean everything* to me. I don’t loose my sleep over it. I don’t want to be the richest man in graveyard. I want to do things that I enjoy – Be with my family and friends, Travel, Read and Write (and maybe continue doing strange things).
*This reminds me of an interesting line by James Altucher – “Money is not everything. Its a side effect. Its a byproduct.”
Having said that, I also feel that if my approach in stock markets is not based on my above mentioned preferences, then it is bound to create a disconnect between my real personality and my investing personality – which will become a cause for sleepless nights (which I don’t want). So I created a small guide for myself. I shared this few months back on Twitter too. Since many readers here are not active on Twitter, I am sharing the guide here.
It is simple enough for everyone to understand. It is based on an easily available market valuation indicator – the P/E Ratio (which is available here).
You too can use this guide as it is or modify it to suit your own personality. So here it is…
As many of you would have observed, the guide is more about avoiding mistakes than anything else.
It pushes me to keep investing when markets valuations are reasonable.
It pushes me to invest even more, when valuations fall further.
And it also pushes me to disconnect (and take a holiday) from markets, when valuations reach unreasonably high levels.
The guide also does not mention anything about selling. That is primarily because the decision to sell is driven more by change in original investment thesis, requirement of money, availability of better investment avenues, etc. and not just broader market valuations.
Caution: The above guide does not mean that reasonably priced good stocks are not available when markets are overvalued (say PE > 26). The ‘taking long holiday’ point simply means that chances of finding a good business, selling at a reasonable price are very low in an overvalued market.
So it is best to avoid such a market and take a holiday from it. And as Charlie Munger once said:
Tell Me Where I’m Going To Die, So I Won’t Go There.
It is as simple as this. If the cost of not venturing into a highly overvalued market is that I may miss out on a few future multibaggers, then so be it (known as FOMO – Fear Of Missing Out).
I prefer not making big mistakes.
I prefer return Of capital more than return On capital.
But that does not mean that I invest only in safe products like PPF, NSC, Fixed Deposits, etc. I have absolutely no doubt about equities and equity-linked products (MFs) being the best bets for long-term wealth creation.
Infact, it has already been proven. Want another proof? Here it is.
Another thing which I continue doing irrespective of market valuations, is to keep pumping money in my mutual fund SIPs. So you can take that as a confessional disclaimer from my side – that no matter what, I am always invested in markets. 🙂
Note – This guide is not a hard-and-fast rule book that I follow. It simply helps me stay on track with my investment philosophy and more importantly, helps me avoid making mistakes.
HI DEV,
I want to ask you about the PE range you have given, can we blindly follow this all the time, all stocks, all sectors…
I am asking this because I read some where the PE ratio will differ for each sector – hence need your thoughts
Hi Renga
No one should follow this blindly. It is specifically for Nifty50 and not other indices, stocks or sector.
And as I said in the article too, this guide only helps me avoid mistakes – like not investing a lot when markets are highly overvalued.
Individual stock investing should be done after evaluating other parameters (which are stock specific, peer specific, industry/sector specific).
PE is forward or current /actual?
Nifty 50 Trailing
Hi Dev,
Going by the logic stated here, If Avenue supermarket is at PE ratio of 70 then Is that sustainable for long term value investing as Avenue also came with IPO at a very high listing or we should wait for correction in Avenue for price at which it is trading now.
Regards,
Hemjeet
This article points towards index-level valuations and not those of individual stocks.
How one should know that which mutual fund belongs to Nifty 50 index, i am novice in MF investing.
Hello Dev Asish,
Now the Nifty PE is nearly 26.Do you think its not a right time for fresh investment ?