We have all heard the words "overvalued" and "undervalued", and we all know the truth of "buy low and sell high", that is, buy when the index is undervalued and sell when the index is overvalued. So how do we beginners choose index funds? Today, Bian Xiao will share with you how to treat valuation and how to buy index funds, for your reference only!

Price-earnings ratio valuation method

1, price-earnings ratio (PE)

P/E ratio, which we usually call P/E ratio, is one of the most common valuation indicators in China. P stands for market value and e stands for company profit, which can be expressed by dividing the company's value per share by earnings per share: P/E ratio = company's market value/net profit = value per share/earnings per share. That is, PE=P/E= company market value/company profit.

The market value of a company is the total value of its shares, which can be regarded as how much the current market thinks the company is worth.

If the total stock value of the company is 1 100 million and the company's annual net profit (e) is 1 100 million, then the price-earnings ratio of this company is10/=10 times. To put it simply, it will take 10 years to buy this company for 10 billion, but if you predict that the annual profit of the company will actually reach 300 million in the future and think that it is worthwhile to spend 3 billion now, then the current P/E ratio is 30/ 1=30 times.

In addition, even the same index, in different periods, the standards of overestimation and underestimation are different. So is there a unified standard to measure whether the current index is undervalued or overvalued? Of course, this is the historical percentile.

2. P/E ratio percentage

The historical percentile of PE indicates how much PE is lower than the current PE in history. Sort the historical P/E ratio from small to large, and then look at the current PE position. The smaller this value, the lower the current valuation of the index.

How much is this value underestimated? In fact, 30% is generally the cut-off point, and an index with a PE percentile below 30% can be considered to be in a low valuation range. In the low valuation range, you can consider buying more and investing more. When the valuation is normal, you can continue to hold or invest less, and when the valuation is too high, you can sell it in batches.

PE index is suitable for industries with good liquidity and stable profits. Stocks with poor liquidity and small capital fluctuation will cause the stock price to skyrocket and plummet, thus affecting PE.

Estimation method of price-to-book ratio

And the price-to-book ratio, which is what we usually call the price-to-book ratio. P stands for the market value of the company, B stands for the net assets, and the net assets are equal to the total assets MINUS the liabilities. The price-to-book ratio can be expressed by dividing the price per share by the net assets per share.

P/B ratio = company market value/net assets = price per share/net assets per share

Net assets = owner's equity = assets-liabilities

The smaller the PB, the better, and the higher the investment value, because the amount of net assets is determined by the company's operating conditions. The better the general company's operating performance, the faster the asset appreciation, the higher the net assets and the smaller the PB.

The price-to-book ratio is also compared with its own historical data, and is also measured by historical percentile. The smaller the PB percentile, the better.

Industries and indexes with cyclical or unstable profits, such as securities, aviation and energy, which are not suitable for PE, can be measured by PB. In addition, in special periods, such as short-term economic crisis, industries with stable profits or broad-based index funds will have unstable profits in a short time. At this time, PB can also be used to assist the valuation.

The use of PB must ensure that the company's asset value is stable, intangible assets are few, and there is no increase or loss of liabilities, because the asset value is too easy to increase or decrease with time, which will affect the calculation of net assets, intangible assets are difficult to measure, and the increase or loss of liabilities will reduce net assets, thus reducing the reference value of PB.

Compared with P/E ratio, P/B ratio has several obvious advantages:

First of all, it is suitable for loss-making enterprises. As mentioned above, when the enterprise loses money, it is impossible to use the price-earnings ratio for valuation; Net assets are cumulative values, usually positive, which can be used when the P/E ratio is invalid.

Second, it is relatively stable. In the short term, enterprises may have relatively large profit fluctuations, but the fluctuation of net assets is often not so intense, and net assets per share are more stable than earnings per share. Therefore, in the case of large fluctuations in corporate profits, the reference value of P/B ratio is greater.

Generally speaking, the P/B ratio is mainly applicable to enterprises with large assets and positive net assets.

When we value the enterprise, we should comprehensively use various methods, compare them with the historical valuation level of the enterprise, and take into account the overall valuation level of the industry for comprehensive evaluation.

But the valuation is for reference only. The PE of the index is at a historical low level, which does not mean that it will definitely rise more and fall less in the future.

For the industry index with strong cycle, the valuation is generally more appropriate to look at the price-to-book ratio (PB), such as brokerage, banking, real estate, coal and so on. Weak cycle growth index and broad base index are generally more suitable to be valued by price-earnings ratio (PE), such as Shanghai and Shenzhen 300, food and beverage, medicine and biology.

Where can I check the valuation?

Calculating the valuation of the index is a complicated and tedious process, which needs to be updated every day. Ordinary investors have neither the energy nor the need to do such work. Now there are many ways in the market for you to inquire about the valuation of major indexes.

First, you can log on to CSI official website and SSE official website for enquiry, where you can get authoritative first-hand information.

Second, you can use some valuation tables developed by third-party platforms to make inquiries, such as Tian Tian Fund APP- Finger Treasure, which is the most convenient and direct for ordinary investors.

It should be noted that the valuation data provided by different platforms may be slightly different, which is due to the errors caused by the different historical stages and calculation methods selected by different platforms when calculating indicators and percentiles, but in general, the conclusions tend to be consistent. If the difference is too big, it is suggested that official website data shall prevail.

Can I buy a low valuation index?

For ordinary investors, the best strategy is to underestimate buying, hold at normal valuation and overestimate selling.

But for the industry, some industries are very hot today, and some industries are not so hot; There are cyclical industries, sometimes very profitable, and sometimes not so profitable.

Accordingly, investors will be enthusiastic about some industries for a period of time, and some industries will be left out; The industry has made money, and investors are also in high spirits and pay more attention. When this industry doesn't make money, investors pay less attention.

It is precisely because of this phenomenon of investor sentiment that many neglected indexes are underestimated.

However, the low valuation is just that investors are not enthusiastic about the index for the time being. As time goes by, when the profit margin of the high valuation index is getting smaller and smaller, investors will notice the low valuation index, and then start to shift their investment enthusiasm, and the low valuation index will also rise.

So the valuation of an index will never be underestimated, and there will always be a climax (maybe three years, maybe five years).

But if you buy a fund with a low valuation index, you must first think about it. Can you hold on when this index goes out of the trough? What if the market sentiment is not attracted by the index you bought?

It may linger in the trough for several years until your enthusiasm for it runs out, and then one day when you see other indexes soaring and you can't help but abandon them, it quietly begins to rise again.

Since the low valuation index may continue to hover at a low level and the high valuation index may rise even higher, I suggest that you should consider both types of funds when allocating funds.

A low-valued index, like a forgotten value depression, is still of great investment value in the long run. However, for most investors, on the one hand, they don't know which low-valued indexes to choose, and on the other hand, they see that other indexes have risen sharply during the holding process, and it is difficult to keep their initial intentions unshakable.

Therefore, the most appropriate method is to properly allocate some low valuation indexes that are concerned by the policy and hold them for a long time, so that when everyone turns to low valuation indexes again, you can enjoy the extra benefits brought by early lurking.

Suggestion: invest in fund index, choose enhanced index fund, and choose enhanced fund which has been established for a long time and has better long-term income than ordinary index fund; The core logic of the fixed investment segmentation industry index is to underestimate buying, ensure sufficient safety margin, and sell when overvalued.

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