Showing posts from May, 2021

Price Earnings Multiple: An exception to Occam's razor?

I entered my MBA specializing in Finance at S P Jain Mumbai in 2008 just a quarter before Lehman came crashing down. One of the first classes in Finance was related to Financial Statement Analysis and in one of the sessions our Professor said something which set indelibly in my mind - Every company gets the PE it deserves. A low PE always doesn't mean undervalued and a high PE doesn't always mean overvalued. Sunset from the living room The usual definitions and explanations are not required for this note. I would recommend to flip over the CFA chapter on multiples for that or perhaps refer to any standard text such as by Professor Damodaran. In this post we will try to look at a general landscape of PEs in India and peek into two hypothesis -  Buying a stock at low PE yields a better stock price CAGR A high PE stock cannot give excess market returns Since investing is more of an art and not science the answers will 'tend' to one of these states and not be absolute in na