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Study the table above. The first 3 companies are part of the Sensex whilst the bottom 2 are in similar businesses but are not part of the Sensex.
If we compare Glenmark to Lupin, their earnings per share (EPS) is almost same, however, the PE ratio of Lupin is much higher than that of Glenmark, which makes it an expensive stock.
Now, compare Aurobindo Pharma to Cipla. Its EPS is much higher than Cipla and its PE ratio is much lower, hence making it a much cheaper stock to buy than CIPLA.
So, generally, stocks that form part of the Sensex (or any index as such) are ‘expensive’ stocks.
Remember, all the indices are created by the government (or some arm of it). Why would anyone create an index of all the most expensive stocks? Would it not be better to create an index of all the cheapest stocks – lowest P/E (above a certain size)? Or an index of the stocks with the highest earning per share? Or an index of the stocks with the highest return on investment?
There is a theory that maybe the government has created such indices so that it would be easier to manipulate the markets. Manipulate the markets? The government? Never! Say, before a crucial election, if the Sensex tanks 1000 points, do you think that finance minister would ever call up the heads of UTI and the LIC and a few such govt. bodies and say “Hi guys, I think the Sensex stocks are going cheap. Why don’t you look into them?” And a few thousand crores of our money with these institutions would go into the Index stocks resulting in a ‘healthy bounceback’ of the index! You think such a scenario would ever happen in India?
In fact, in the US, their ex- President, Ronald Reagan, actually institutionalized it by forming a group called a ‘Plunge Prevention Team’. Check it out on Wikipedia.
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PS: Truth is stranger than fiction, but it is only because Fiction is obliged to stick to possibilities; Truth isn’t – Mark Twain