Re: An Arithmetic mystery - need help
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.
Re: An Arithmetic mystery - need help
Shiller PE Ratio
The case Shiller p to e is at same level as in 2007 peak (2.3). 1929 was at 30. 2000 ratio was at 45.
So gives I a sense of where we are.
Re: An Arithmetic mystery - need help
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:
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?
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?
Accounting regulations have changed a lot since 2000 ( and certainly since 1929). Wouldn’t it render such comparisons of limited value?
Do you consider Market-to-book less informative than pe ratio?
Re: An Arithmetic mystery - need help
Useful in case of perhaps predicting market-wide movements (and not individual stocks) but a few questions:
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
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.
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.
Book value may be subject to more financial engineering.
100 yrs ago p to b of 1 was good. Now u can’t find that. It is more p to b 2.
Re: An Arithmetic mystery - need help
Book value may be subject to more financial engineering.
100 yrs ago p to b of 1 was good. Now u can’t find that. It is more p to b 2.
This discussion is not suitable for this forum but a couple of things:
Book value is much more stable (less volatile) than earnings.
Buy backs impact both numerator and denominator of pe ratio, (ideally) keeping it constant.
Rest can be discussed in your favorite forum.
Re: An Arithmetic mystery - need help
Here’s my contribution to this thread:
Re: An Arithmetic mystery - need help
This discussion is not suitable for this forum but a couple of things:
Book value is much more stable (less volatile) than earnings.
also is debt easily payable thru cash in hand plus free cash flow.
Buy backs impact both numerator and denominator of pe ratio, (ideally) keeping it constant.
Companies do buybacks to goose up eps. And price goes up accordingky. So p to e is consgang. And that’s my point. This constant p to e is a tally an inflated p to e. Cause prior moved up for no reason other than buybacks. That move in price not justifies
Rest can be discussed in your favorite forum.
Saarjee
aap sawal pooch rahe mai jawab deta ja raha.
