I liked this blog “Predicting the 1 year returns on the NIFTY based on the current PE Ratio” and liked the same and copied for my reference
The current NIFTY PER is around 22.5, thereby falling in the “Hostile Zone” as described below.
To describe the above table in words, we can look at 4 zones based on the PER:
· Safe Zone with incredibly attractive rewards and low risk for the patient investor,:
If you had invested on days when the NIFTY traded at a PER below 15, the subsequent 1 year return was positive 96% of the time, implying an almost guaranteed safety of capital with an average return of +48%. The maximum loss you could have sustained was only 9%; i.e. though there was a small 4% chance of losing some money, you definitely wouldn’t have lost your shirt!
· Buffer Zone with attractive rewards and moderate risk for the nimble investor:
If you had invested on days when the NIFTY traded in a PER band of 15 to 19.99, the subsequent 1 year return was positive 63% of the time, implying a reasonable safety of capital with an average return of just +13% which is not much higher than 1 year bank interest rates for this period. The maximum loss that you could have sustained was pretty high at 33%; i.e. there was a good chance of losing a significant part of your shirt if you weren’t careful enough!
· Hostile Zone with uncertain rewards and high risk for the adventurous investor:
If you had invested on days when the NIFTY traded in a PER band of 20 to 24.99, the subsequent 1 year return was negative 62% of the time, implying a high chance of losing your capital in the pursuit of a maximum return of +61% and an average return of only -4%. This is definitely not a zone for the faint hearted given that there was a high probability of losing your shirt in chasing high but risky returns!
· Suicide Zone, almost certain to blow up a gullible investor’s money
If you invested on days when the NIFTY traded at a PER 25 or more, the subsequent 1 year return always negative and you would have been guaranteed to lose at least 11% at the end of that period. The maximum loss sustained was 57% i.e. there is every chance of losing your shirt!
Needless to say, this exercise is completely amateurish in nature and none of these conclusions should be used by anybody to make any investment decisions without further investigation and application of independent thought.