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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.
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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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  • HOME
    • INTRODUCTION
    • THE DASHBOARD
    • RELEASE 2
    • EULA
  • SHOP
  • ABOUT
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  • ČESKY
    • ÚVOD
    • PŘÍSTROJOVÁ DESKA
    • RELEASE 2
    • ČTENÍ
    • OBCHOD
    • CZ BLOG
    • KNIHA