WHY P/E IS USELESS

26/11/2017

2 Comments

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.

2 Comments

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