investing using pe by justin khoo - 16 august 2008
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Investing in Uncertain Market Conditions
By Justin Aug 08
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Typical Investor’s Mind
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KLCI
KLCI
0
200
400
600
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1200
1400
1600
02-J
an-8
1
25-S
ep-8
1
24-J
un-8
2
16-M
ar-8
3
02-D
ec-8
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23-A
ug-8
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22-M
ay-8
5
21-F
eb-8
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12-N
ov-
86
05-A
ug-8
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19-A
pr-
88
28-D
ec-8
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11-S
ep-8
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28-M
ay-9
0
08-F
eb-9
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21-O
ct-9
1
07-J
ul-92
24-M
ar-9
3
06-D
ec-9
3
26-A
ug-9
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26-M
ay-9
5
13-F
eb-9
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05-N
ov-
96
31-J
ul-97
23-A
pr-
98
13-J
an-9
9
05-O
ct-9
9
30-J
un-0
0
28-M
ar-0
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13-D
ec-0
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10-S
ep-0
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06-J
un-0
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03-M
ar-0
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19-N
ov-
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10-A
ug-0
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08-M
ay-0
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25-J
an-0
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16-O
ct-0
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11-J
ul-08
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P/E Ratio
• P = Price = Market Value• E = Earnings = 1 year Earnings• Company ABC Price = 100k • Company ABC Earnings = 10k• P/E = ??• P/E = 10• P/E of FD = ??• Between 25 (if 4%) to 33 (if 3%)
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Historical and Current P/E
At the KLCI’s closing level of 1,120.31 points on 8th August 2008, the local stock market is valued at a P/E of 13.3x on 2008 earnings, which is at a 21.5% discount to its 8-year average of 16.9x
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Using P/E to Invest
• Buy LOW, Sell HIGH• Asset rebalancing according
to P/E• Depends on risk profile• For investor who does not
need money in the short term• Must also consider cost of
rebalancing
P/E Equity Bond
22 0% 100%
20 20% 80%
18 40% 60%
16 60% 40%
14 80% 20%
12 100% 0%