Valuation, Value Investing

Misleading P/E Charts

I was reading an article by John Price on (link here) that wrote about Tobin’s Q. It showed a graph illustrating that Robert Shiller’s P/E ratio (price divided by the average earnings per share over the previous 10 years) is a good proxy to use for the comparison between Tobin’s Q with its long-term average (in a log scale).

I then came across another article here that showed that the S&P500’s P/E ratio hasn’t been this low since 1995.

The interesting thing is that, if you had read the 2nd article only, you would likely have thought that the market is undervalued. After all, 10+ years does seem like a long time, so the market should’ve gone through a few cycles, and if current P/Es are at their lowest point compared to the past 10 years, then hey, the market’s cheap.

But if you had also came across the 1st article, you would have seen that P/Es for the whole period from 1995 to 2006 are above their historical mean (i.e. high), in the context of the whole century (1900 onwards). Surprising but seems true.

On a side note, I’ve been meaning to do some work so that I will be able to generate Tobin’s Q ratio for the market, and Robert Shiller’s P/E ratio, so that I can see how over/undervalued the market is. I’ve tried to look for those on the web but have not been successful. Hope to get to do that soon.


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