Relevance of the Nifty PE for the long-term investor

Published: July 1, 2014 at 1:29 pm

Last Updated on September 4, 2018 at 9:49 am

Ever since I introduced the concept of SI-PE (PE based SIP investing) in the post, Are Mutual Fund SIPs Suitable for Disciplined Long-Term Investors?‘, I have been worried because it instantly struck a chord with many readers.

SI-PE refers to manual investment based on the PE value of an established index. If the PE is greater than 20 (value chosen arbitrarily! ), monthly investments are put on hold. All the uninvested amount is invested in one go when PE drops below 20.

In  the same post, it was shown that a SIP (blind monthly investing regardless of the state of the market) works perfectly for the long term investor. SI-PE scores over the SIP but only by a little.

Since then I have received many questions on the SI-PE, leaving me worried.

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Is the Nifty PE really relevant for the long-term investor? Of course, if I invest when the PE is 28 and look at my holding a year later, I am almost certain to have lost money. What if I chose not to touch my holding? What if I held on to it for say, 10 years?

Would it still make a difference?

In this post, let us try and answer this question. I present below a series of plots of the Return obtained versus Nifty PE corresponding to the investment date for durations ranging from 1Y to 13y. The data was obtained with the rolling returns calculator. Nifty closing values and PE from 1st Jan 1999 to 30th June 2014 were used for the analysis

If you need the Excel sheet, leave a comment.

These plots are wonderful examples of market volatility. So I suggest you stare at them for long periods of time!




The vertical blue line represents 0% returns! The horizontal red line represents the range of returns possible for a give PE value.  For example, the current Nifty PE is a little less than 21. So if you invest a sum now, the return after a year could range from -50% to +60%. Just about anything.

However, if the PE was 25 or more, The return is likely to be negative (-50% to -10%).

Interestingly if the PE was close to 10, the return can still vary by a huge margin (+30% to +90%)

Notice that the bunch of points slope  down from the top left to the bottom right of the graph. This is referred to as a negative correlation: Higher the PE, lower the return. The width of the bunch represents the extent of correlation. That is, if the range of returns possible at a given PE is narrow, the (negative)correlation is strong.




Notice the range or returns possible for current PE levels (red line). Again just about anything.  Higher the PE, lower the return, but the range of returns has increased.



Notice that the bunching has disintegrated. The points have spread out and the negative correlation has reduced.  Returns for a sum invested 3 years ago at a PE ~ 11 can just about be anything, 5% to 60%! Investing at high PE levels still implies a negative return.



The negative correlation has lowered further. The range of returns possible for investing at low PE has increased 🙁

Notice that the bunch of points is moving toward the right – more positive returns.




The bunch has now moved almost entirely in the positive region. Surprisingly the negative correlation has strengthened now. That is the bunching is tighter now. If one invests at a PE level of 25 and above, it would take about 5 years to get a small but positive return!

So the case for not investing at high PE levels is very much alive!

Surprisingly the case for investing at low PE levels  comes tagged with a huge spread in the  possible ‘high’ returns.





The plot looks like a swordfish! Again the bunching has reduced for low and medium PE values.  The bunching is tight at high PE levels (the sword!)




The bunching has reduced again! Investing at PE levels of 15 and lower has very high chance of getting a double-digit return. Not enough high PE level data points. Whatever exists completely contradicts the high-PE equals low-return theory!!



The bunching and negative correlation returns!




The correlation is stronger, but the number of data points have reduced significantly. Those who invested at PE levels of 25 and above, 12 years back would be sitting with a return of about 10%, while those who invested with Nifty PE less than 15 would have got about 15% or more.

Whether this is significant or not can be debated endlessly. As mentioned above, the case for not investing at high PE (~ 25) remains strong enough, whereas the case for investing only at low PE (< 15) has weakened, thanks to the wide range of returns possible.

Should one forget about all this and just do a mutual fund SIP? Not a bad idea at all.

Is SI-PE  worth it? well, yes and no.

Yes it makes sense not to invest when the PE is high. Yes it even makes sense to pull out a portion of the equity corpus when the PE is very high (> 25).

However, it also makes sense to get rid of the salary into an investment each month. So perhaps one can have a base SIP running and ‘time’ the additional amount according to the PE. Perhaps.

It all comes down to ones mental framework. If one can remain cool, calm and stop worry about the grass on the other side of the meadow, SI-PE will work.

If one gets worked up each time the PE increases by a few points, SI-PE is not worth it.

I do monthly manual investing and do try to invest on 1-2% market dips each month.

On the one hand, my monthly investment is high and my portfolio is getting fatter, meaning soon it will swing by 60K-100K over a few days if not over a day. So I cannot simply invest more or let the money lie around when the PE is high. I however have a lot of inertia and will not do this impulsively.

On the other hand, I am an investment junkie. Unless I put away my salary as soon as possible, I will feel restless. The money may or may not get spent, but I will quite uneasy. So I will need to balance this.

What I do may or may not be smart. It is my thing. You will have to figure out yours. If you are a ‘new’ investor stick to a SIP!

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