An Arithmetic mystery - need help

[Southie]

Re: An Arithmetic mystery - need help

@kakaballi

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?

Bogle preaches buying the mkt using low cost index funds. To that extent getting a feel for mkt valuation may be useful. Also as mkt gets extended the large cap sticks which comprise 75 pct of total mkt in us get extended. So you have a feel for whether even individual large caps valuation. The mkt p to e serves as ONE guide to not be overly exposed to mkt at high valuations. For me it also serves to act as a 2nd line of defense wrt rebalancing. The 1st line being if target asset allocation is off balance due to mkt movement

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?

I don’t see how this obligation translates to higher reported earnings. Unless u are referring to buybacks goosing up earnings.
3. Accounting regulations have changed a lot since 2000 ( and certainly since 1929). Wouldn’t it render such comparisons of limited value?

To an extent. Let us assume regulations have become more onerous. That would reduce earnings that r reportable.. so may increase p to e a bit. But buybacks also have become rampant. That inflate earnings. Also one can still compare ratio trend over last 20 to 30 years. And using some judgment get a fee for where mkt is at visa vis history and norm.
4. Do you consider Market-to-book less informative than pe ratio?

Book value may be subject to more financial engineering.
.Esp for financial firms. But it p to e is still useful metric. Esp within same industry.

100 yrs ago p to b of 1 was good. Now u can’t find that. It is more p to b 2.