Thursday, October 09, 2008

Human lemmings

Paul Krugman on a possible reason for the stock market sell-off:
I’m sure we’ll be hearing all kinds of explanations of today’s drop... But you want to remember Robert Shiller’s classic real-time study of the 1987 crash. Basically, the crash had nothing to do with any news item. Investors sold because — drum roll! — prices were falling.
The price-to-earnings ratio for the S&P 500 is now 11.6, compared to an historical average of about 14. In the dozen years I've been investing, the S&P 500's P/E ratio has never been that low. (Damn bubbles!) As A Random Walk Down Wall Street points out, on average, the lower the market P/E ratio, the greater the future stock market returns over the long haul.

Here is Morningstar's market valuation graph:


Update: According to Yahoo! Finance, the P/E for the S&P 500 is 13.5, not 11.6.

3 comments:

  1. S&P 500 P/E will drop to around 10. Then earnings readjustments will increase the P/E to 15 while prices remain flat. Yes I am expecting about a 35% decrease in earnings across the board. Still at 15, that is a bargain when you compare it to the historic average of 14. I plan on buying again at P/E of around 10.5. Also be wary of inflation in the next 6 months due to massive amount of $ injection into banking system. Hedge with positions in gold and silver such as precious metal funds.

    Tony (who usually posts on here)

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  2. Just as it can create a bubble, it's no surprise that herd mentality can exacerbate a market slide.

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  3. WE have been chatting on myinvestorsplace.com PEs..book values..etc.. the consensus was in the early 1980s..single digit PEs...below book value..dividend yields high...this is what we expect.. are we wrong..let us know

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