No opinion or expertise on China market. The odd figures do surprise when looked back, but I refuse to believe that these are all new times. The sentiments change quite suddenly and without reasons

 I think pe ratio does affect investing psyche at individual level too. The central qus is will you be able to hold a high pe stock and maybe even buy more, if it starts falling (possibly with general market) for no change in its fundamentals. I find more confidence with holding low pe stock in such cases than high pe ones other things being same. May differ from person to person. Take example of RPL (with an infinite pe :) rightnow and see how sentiments are changing on various announcements.

 Point is that high pe, high peg stocks fall harder when the fail to meet expectations. That is bound to happen sometime for sure, given that high rate growth is not sustainable.



Edited by tarkeshwar - 27/Nov/2007 at 1:11pm

Very interesting discussion.

My own take is that PE can't be evaluated in isolation.  It has to be viewed in conjunction with future growth rate and revenue visibility.  As Basantji has suggested, PEG ratio is a useful indicator that I myself have used frequently.  I remember buying Infy at PEs of 50to 100 (ten years ago) but then it was consitently posting 20 - 25% QOQ growth.  Or think of Bharti Airtel or FT a few years ago.
Another point to remember while looking at PE is that it does not work well in case of companies that have several distinct businesses.  In such cases, I prefer to use sum of parts value analysis instead of looking at the PE.  RCAP, MAX, ABN, RIL, PRIL...none of these companies can be analysed just looking at the PE!

An absolute PE criterion works well in case of relatively homogeneous businesses, going through a steady growth phase ( as opposed to super growth).

One last point.  Yes, I agree that buying a high PE stock exposes one to the risk that the implied high growth might not happen.  However, how is that different from buying a "deep value" stock but the implied value unlocking triggers not materializing?  Some thing to ponder over!


Edited by MPD05 - 08/Nov/2007 at 6:29pm

 

Understanding P/E multiple to invest wisely

 

 

Originally posted by tarkeshwar Just a general comment - Most of the current software companies in India are just making use of the arbitrage opportunity arising out of the differential between salaries in India and USA. I don't see companies here innovating or building products. As with any arbitrage opportunity, the differential is going to shrink over time, whether it happens through competition (among Indian companies or from other countries), rising rupee, slowdown in US or increase in salaries in India. This is bound to happen.