Not only at the individual stock level, but also at the index level, using the PE ratio as the anchor for your investing decisions is best avoided. Consider this: At the end of calendar year 2020, the price to earning (PE) ratio of Nifty was at 37; today it is just above 22. So, the question is: Were stocks expensive at the end of 2020; and are they cheap today? Here’s another example: Twelve years back, the stock of an MNC company was quoting at a PE multiple of 44 at a time the Nifty’s PE was at 25. Since then, the company’s market capitalization is up 10 times and its PE today stands at 63. So, if you had decided to buy or sell the stock based on its PE number, you would have lost a great opportunity to create wealth.
