WHY P/E IS USELESS

Why is the notorious P/E ratio useless? Simply because it fails when you need it most.

S&P 500 PE Ratio - 90 Year Historical Chart

Think of it:

• In 1929, the P/E ratio could not have warned you before the stock market crash.
• Ditto in 1937.
• There was no strong 'sell' signal in 1968 when it was needed.
• In September 1976 it would have falsely told you that stocks were still cheap.
• In December 1991 the market looked expensive. It wasn't.
• Another false warning came in 1998.
• The P/E correctly signalled an extremely expensive market in 2000-2001, but it didn't tell you the recovery was on the way in 2002.
• No 'sell' signal in October 2007.
• Worse yet, no 'buy' signal in March 2009.
• Since March 2009, many investors underperformed the index as they mistakenly believed the market was 'expensive by historical standards'. Again, it wasn't.

It's just time to ditch the P/E. The Shiller's P/E (or Cyclically Adjusted P/E) is no better.