A Sensex Anomaly – I

A few days back, I came across an interesting article regarding the BSE Sensex and investing. Thought I would share it but it will need some explanation. This will take at least 2 newsletters as certain technical terms will have to be explained to those not familiar with the stock markets. Please bear with me.

Whenever you want to buy a stock by doing some analysis (and not on tips), one of the most common ratios to be considered is the PE ratio (Price divided by Earnings per share). Generally, the average PE ratio for a particular sector is known. Say, the average PE ratio for Pharmaceutical companies is around 30. If a company enjoys a higher PE ratio than this, means it is favoured by investors and hence enjoys a higher price. But it also means that this is a costlier stock. The basic principle of any investment should be ‘buy low, sell high’ and one aspect of buying low is to buy cheap also. So, if the PE ratio of a particular stock is higher than the average for that sector, then one should investigate why it is higher and if the higher price is justified – maybe it enjoys some competitive advantage. Here are the PE ratios of some Indian Pharma stocks (all from Google)

To be continued………….

Niranjan Bangera
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PS: If you don’t study any companies, you have the same success buying stocks as you do in a card game if you bet without looking at your cards – Peter Lynch