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There are objective measures, but how do you connect those objective measures to the price? In other words, how do you decide that a certain P/E ratio is a good
by mikeash 8y ago
There are objective measures, but how do you connect those objective measures to the price? In other words, how do you decide that a certain P/E ratio is a good objective measure, and counting the number of napkins in the company cafeteria is a bad objective measure?
In the end, it’s just another layer on top of the speculation that the price will come down in the future.
- AnimalMuppet 8y agoWell, for P/E ratio, we have a century or more of solid data. We also have a plausible reason why it might be a measure of how overvalued stocks are. For napkins in the company cafeteria, not so much (by either measure). The case against the P/E ratio boils down to "this time it's different". That can in fact be true... once in a while. Not nearly as often as it's claimed, though. That doesn't mean that P/E is absolutely correct - just that it's somewhat better than random noise.