An Arithmetic mystery - need help

[kakaballi]

Re: An Arithmetic mystery - need help

@Southie

Great question. In fact for me a market based p to e year over year makes more sense than company specific p to e year over year. Because while one company can have volatility from one year to another, the combined earnings of all companies would (I think ) smooth out some of the volatility.

Having said that in some down years - esp 2009 trough, even mkt earnings dipped a LOT. Giving an artificially high p to e ratio. Similarly during 2000 tech bubble the E was way way high. Peak earnings. IN SPITE of that p to e was 40 I think for mkt. So way way expensive. So yes p to e quite useful.

to smooth out year over year volatility simple use case Schiller p to e - inflation adjusted earnings for last 10 years. It will 5ell u mkt is overvalued. And was way way overvalued in 2000. And also in 1929. And 2007.

So yes. Useful.

Useful in case of perhaps predicting market-wide movements (and not individual stocks) but a few questions:

1. Earnings generation process in different industries is very different. Does it make sense to add them all up together? Industry-wide pe ratio (industry you are interested in) would perhaps be more informative?

2. At times of rising prices, companies are obliged to report higher earnings to meet analysts’ forecast EPS and target prices. Would this impact comparisons of PE ratio?

3. Accounting regulations have changed a lot since 2000 ( and certainly since 1929). Wouldn’t it render such comparisons of limited value?

4. Do you consider Market-to-book less informative than pe ratio?