18th April 2020

www.varunmalhotra.co.in
[For FLIP Students]

#2 - Note on Current PE Range

Q. What is the Current PE Range?

We use the PE Ratio Range to apply Dow Theory as modified by Mr. Varun Malhotra (A.k.a - Wealth
Maximisation Theory © [WMT]).

There are certain simple facts to keep in mind about the PE Range we use for WMT.

1. The Lower Range PE Number is always Logical.

2. The Upper Range PE Number is not Logical as such.

The Lower Range PE Number is logical because it is the same as the “Bank FD Rate” PE Ratio.

Some Facts to keep in mind about the “Bank FD Rates” are that it is basically the ​RISK-FREE​ Rate of
Interest you can earn as an Investor.

Risk Free Investment comprises of :

1. Bank FD
2. 10 Year Govt. Bond Yield

These are the well known benchmarks of Risk Free Investments.

We can use the Bank FD Rate ​OR​ The 10 Year Govt. Bond yield to calculate the Lower Range PE
Number for Applying WMT.

How do we calculate the Lower Range PE Number ?

While calculating the Lower Range PE Number using both Bank FD or 10 Year Govt. Bond yield
should both be almost the same, we would prefer using the 10 year Govt. Bond yield*

*It makes Zero Difference if you take the 1 Year Bank FD Interest Rates to calculate the number.
Finding the number involves finding the 1 year FD rates of Top 5 Private sector Banks and taking an
average. Therefore, we prefer the 10 year Govt. Bond yield. It’s simpler to find and makes zero
difference whether it is this number or the other*

How we find out what is the current 10 year Govt. Bond yield?

You can get plenty of results to choose from.

You can also simply go to ​India 10-Year Bond Historical Data

Now, the thing about Govt Bond yields is that it fluctuates. Not by a lot but it moves so ​some people
might get caught up in the precision of getting it right to the 3rd decimal point.

This is unnecessary. Just take a Ballpark. For Example

 Source : ​https://in.investing.com/rates-bonds/india-10-year-bond-yield-historical-data

As you can see Highest in the Last 1 month is 6.5% and lowest is 6.0%

Take an Average of the two which should be 6.25%.

PE = Price/Earning

So for every Rs. 100 invested in a 10 Year Govt. Bond you should get Rs. 6.25 by the end of the
year.

Therefore, PE = 100/6.25 = 16.

The Lower Range PE Number is 16.

The Upper Range is simply 16 + 13 = 29.

While the Upper Range PE Number is not logical, we add 13 to the Lower Range to arrive at the
number.
Why do we add 13?

Historically, this range (adding 13) usually gives a good idea of what is expensive and cheap.

Logically also, paying Rs. 29 to earn Rs. 1 (3.45% Yield) doesn’t sound like a good idea especially
when you can get a yield of 6.25% on your Risk Free Investment anyway.

Conclusion :

● Lower PE Number + 13 = Upper PE Range Number

● Lower PE Number can be calculated using the ​10 year Govt. Bond yield.

● Please please do NOT get stuck into the decimal places and being unnecessarily
precise. A rough ballpark is good enough.

Hope you found this note useful. You may please write to ​info@eifs.in​ for feedback and
suggestions.

Disclaimer : The Author works with Mr. Varun Malhotra and EIFS. EIFS is an Educational
company and we do not provide Investment advice and nothing in this note should be
interpreted as Investment advice. Any Error, grammatical or numerical is regretted.