The Intelligent Investor – Or How To Atleast Sound Like One !
The road to upward mobility is best travelled by name-droppers. While Page Three parties might be the epitome of air-kissing and social name dropping, the corporate world has its own special version. It's called Jargon Spewing. The more jargon you throw at colleagues, bosses, vendors, the more likely people will regard you as intelligent and well read and in-the-know. So if you want to impress that snooty colleague in the next cubicle with a few well-chosen technical terms, make sense of all the jargon splashed across the pink papers, or most importantly, avoid having the blank I'm-too-dumb-to-write-my-own name kind of stare on your face when people around make complex-sounding statements at you, here's a primer:
I. India is expensive; Investors reconsider fresh investments; Valuations look attractive
Valuation comprises 4 words really - Buy Low, Sell High. Words we hear often and from people who seem unconnected to the stock markets - your grandma, the local grocer or even your family jeweler. Yet, behind this seemingly simple line, resides a very complex world. How do we know what is low, what is high and how do we measure it?
The terms 'Low' and 'High' are relative terms - which means that for their value to be understood they need to be compared to something. But for that we need a common parameter of comparison. This is where P/E comes into the picture
P/E ratios are typically used as a first-cut measure by investors to determine if a stock is overvalued or underpriced and whether it makes sense to invest in it. The P/E ratio or Price Earnings Multiple is calculated by dividing the price (of a share) by its earnings (EPS or earnings per share). It means that for a given level of performance by the company - EPS, the market has priced the stock at a particular level - P.
Take for instance a company, Xlerate, in the biotech space. Say, the company's stock price is Rs 240 and its EPS forecast for the year is Rs 8, then the PE for Xlerate is 30. However 30 per se means nothing; it doesn't signify if the P/E is high or low and whether one should buy Xlerate stock.
To take that decision, one needs to compare the P/E to other stocks in a comparable category or industry. So if most other stocks in the biotech industry have P/Es of around 40, then Xlerate could be undervalued - given its P/E is 30 and lower than the industry average, and hence its 'valuation seems attractive' However there could be two reasons why the market has priced it lower than the rest of the companies in its category: Either the major local and global investors are unaware of the company and its performance and hence haven't been able to value it correctly, or they think the stock purposely ought to be priced lower than competitors due to reasons like bad management, expected slowdown in performance, inadequate ability to deal with future/competition, etc.
Similar to a stock, foreign institutional investors who have allocations for various countries also compare India (the major indices - Sensex and Nifty) to that of other emerging markets. If most of the other emerging market indices P/E s are at around 12 and India's P/E is at 17, then India is considered 'expensive'
The road to upward mobility is best travelled by name-droppers. While Page Three parties might be the epitome of air-kissing and social name dropping, the corporate world has its own special version. It's called Jargon Spewing. The more jargon you throw at colleagues, bosses, vendors, the more likely people will regard you as intelligent and well read and in-the-know. So if you want to impress that snooty colleague in the next cubicle with a few well-chosen technical terms, make sense of all the jargon splashed across the pink papers, or most importantly, avoid having the blank I'm-too-dumb-to-write-my-own name kind of stare on your face when people around make complex-sounding statements at you, here's a primer:
I. India is expensive; Investors reconsider fresh investments; Valuations look attractive
Valuation comprises 4 words really - Buy Low, Sell High. Words we hear often and from people who seem unconnected to the stock markets - your grandma, the local grocer or even your family jeweler. Yet, behind this seemingly simple line, resides a very complex world. How do we know what is low, what is high and how do we measure it?
The terms 'Low' and 'High' are relative terms - which means that for their value to be understood they need to be compared to something. But for that we need a common parameter of comparison. This is where P/E comes into the picture
P/E ratios are typically used as a first-cut measure by investors to determine if a stock is overvalued or underpriced and whether it makes sense to invest in it. The P/E ratio or Price Earnings Multiple is calculated by dividing the price (of a share) by its earnings (EPS or earnings per share). It means that for a given level of performance by the company - EPS, the market has priced the stock at a particular level - P.
Take for instance a company, Xlerate, in the biotech space. Say, the company's stock price is Rs 240 and its EPS forecast for the year is Rs 8, then the PE for Xlerate is 30. However 30 per se means nothing; it doesn't signify if the P/E is high or low and whether one should buy Xlerate stock.
To take that decision, one needs to compare the P/E to other stocks in a comparable category or industry. So if most other stocks in the biotech industry have P/Es of around 40, then Xlerate could be undervalued - given its P/E is 30 and lower than the industry average, and hence its 'valuation seems attractive' However there could be two reasons why the market has priced it lower than the rest of the companies in its category: Either the major local and global investors are unaware of the company and its performance and hence haven't been able to value it correctly, or they think the stock purposely ought to be priced lower than competitors due to reasons like bad management, expected slowdown in performance, inadequate ability to deal with future/competition, etc.
Similar to a stock, foreign institutional investors who have allocations for various countries also compare India (the major indices - Sensex and Nifty) to that of other emerging markets. If most of the other emerging market indices P/E s are at around 12 and India's P/E is at 17, then India is considered 'expensive'
So thats about the PE in a nutshell - am not sure how many of you have followed this. Bricks and roses are welcome. Assuming that i am still a self styled finance guru - am planing my next session on what most of us hear about but cant relate the topic to real life - INFLATION!!
Promising to make the next post before the inflation numbers are out the next time!!
Cheers and happy work after a long holiday season!!
3 comments:
Dear Sujay, This is good. I am not aware of blogging much. Consider me a student on your lessons for investing. good luck.
Hmm P/E…surely it was a valuable addition to my infinitesimally small knowledge bank on finance :)… and must say u very rightly mentioned that today’s world belongs to all those Jargon blabbers…looking forward to your next post on so called greatest threat to Consumers “INFLATION”…wish u a happy writing :)
Hi Simpleton - I am not sure who you are - and no where in the message do i see your name. May i know who has posted a comment with the ID "Simpleton"?
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