5 ms·

Historical price-earnings ratios for common stocks have averaged 15. At the peak of the late 1990s bubble, P/E ratios reached 42. Interestingly, the P/E ratio

by 300bps 6y ago

Historical price-earnings ratios for common stocks have averaged 15. At the peak of the late 1990s bubble, P/E ratios reached 42. Interestingly, the P/E ratio of the S&P 500 right now is 40.30. https://www.multpl.com/s-p-500-pe-ratio https://www.multpl.com/s-p-500-pe-ratio https://www.multpl.com/s-p-500-pe-ratio/table/by-month https://www.multpl.com/s-p-500-pe-ratio/table/by-month

psadri 6y ago
It seems that interest rate x P/E is a ~constant. Interest rates are near historical lows and have been falling. Therefore P/Es are high. Have to check if this relationship holds through the ages.
- fbelzile 6y ago
  Low interest rates definitely helped in the last few decades. Recently, yields have been rising though, which created some choppiness in the market. I think one of the main reasons the market hasn't responded in a big way yet is money supply: https://fred.stlouisfed.org/series/M1SL https://fred.stlouisfed.org/series/M1SL The money being printed has got to go somewhere and a 1% return in the stock market (with high PE) is still worth more than a negative real rate accounting for inflation.
JohnJamesRambo 6y ago
https://www.bloomberg.com/news/articles/2021-02-12/warren-buffett-s-favorite-valuation-metric-is-ringing-an-alarm https://www.bloomberg.com/news/articles/2021-02-12/warren-bu... This metric is awful as well. I'm out of stocks and will be for quite some time. https://assets.bwbx.io/images/users/iqjWHBFdfxIU/iDFYG8plPszo/v0/800x-1.png https://assets.bwbx.io/images/users/iqjWHBFdfxIU/iDFYG8plPsz... That graph says it all.
- odonnellryan 6y ago
  When did you exit?
  - JohnJamesRambo 6y ago
    About July 2019 and I quit my job and transferred my whole retirement portfolio into Bitcoin. I think it has gone up ~600% since then, so it has gone quite well. Bitcoin will peak this year and then I don't know what to put the money into. Certainly not stocks at this point in time. Maybe just sit in a stablecoin earning interest (you can get 8.6% sitting in Gemini USD on Blockfi) and wait and see what happens in a year with all markets.
    - tofurocks 6y ago
      Isn't the extremely high stablecoin interest only because we are in a bull run and there is a high demand for long leverage ? You can make 20%+ shorting bitcoin futures 1x on bitmex or ftt right now, but those returns don't last when the price is not exploding upwards..
- deleted 6y ago
  [deleted]
- kqr 6y ago
  If you really believe this will not keep going up, why aren't you short the market? (Genuine interest: I also debated exiting but then remembered the thing risk takers say about careful deliberation followed by fearless execution and I now have net negative equity exposure.)
  - tertius 6y ago
    Too risky?
  - georgeecollins 6y ago
    Did you actually read this article? Please read the part about the problems with short selling.
    - kqr 6y ago
      I did. The example showed many problems: 1. Any time you make a risky investment (and this includes low-cost index funds) you should make it based on a falsifiable trading hypothesis specified in advance. E.g. "if Microsoft gets valued over $25, I should realise that I got either the direction or the timing of this one wrong and close the position, profit or loss." 2. Again, in advance, formulate a more general drawdown policy to gradually decrease the size of your losing positions. 3. Not ever make risky investments with anything that approaches your entire wealth. My bearish position is not going to throw me into debt even in the worst case. And the EMH, in a sense, guarantees that less commissions, this bet (as would any bet) is on average going to get me my wager back. So the question that remains is why I think the long-term average return is an unusually bad approximation for the near future. I could argue fundamentals, I could argue technical analysis, but it'd all be bunk. I can list other reasons, too. Many big investors are short the market. My employment is long the market, so my capital being short it is sort of a hedge. I can also list reasons it might be a bad idea. They don't weigh as much in my mind, of course. In the end, I just don't know. I'm fully aware that I might have either direction or timing fully wrong. Most likely I do. But it seems to me like a low risk bet with potentially fairly good payoff.
  - deleted 6y ago
    [deleted]
FL33TW00D 6y ago
The Shiller CAPE is probably a better metric for judging the S&P: https://www.multpl.com/shiller-pe https://www.multpl.com/shiller-pe
- riffraff 6y ago
  Notice Shiller has a more interesting metric, Excess CAPE yield, which also accounts for interest rates[0]. It gives a less negative view of the current equities market, but still shows it as expensive. [0] https://fortune.com/2021/01/25/stock-market-value-metric-robert-shiller/ https://fortune.com/2021/01/25/stock-market-value-metric-rob...
dehrmann 6y ago
I tend to ignore P/E as a long-term, absolute metric because 1) it doesn't account for cash on-hand 2) it ignores expected growth 3) it ignores interest rates.

by 300bps 6y ago

psadri 6y ago

It seems that interest rate x P/E is a ~constant. Interest rates are near historical lows and have been falling. Therefore P/Es are high. Have to check if this relationship holds through the ages.

fbelzile 6y ago
Low interest rates definitely helped in the last few decades. Recently, yields have been rising though, which created some choppiness in the market. I think one of the main reasons the market hasn't responded in a big way yet is money supply: https://fred.stlouisfed.org/series/M1SL https://fred.stlouisfed.org/series/M1SL The money being printed has got to go somewhere and a 1% return in the stock market (with high PE) is still worth more than a negative real rate accounting for inflation.

JohnJamesRambo 6y ago

https://www.bloomberg.com/news/articles/2021-02-12/warren-buffett-s-favorite-valuation-metric-is-ringing-an-alarm https://www.bloomberg.com/news/articles/2021-02-12/warren-bu... This metric is awful as well. I'm out of stocks and will be for quite some time. https://assets.bwbx.io/images/users/iqjWHBFdfxIU/iDFYG8plPszo/v0/800x-1.png https://assets.bwbx.io/images/users/iqjWHBFdfxIU/iDFYG8plPsz... That graph says it all.

odonnellryan 6y ago
When did you exit?
- JohnJamesRambo 6y ago
  About July 2019 and I quit my job and transferred my whole retirement portfolio into Bitcoin. I think it has gone up ~600% since then, so it has gone quite well. Bitcoin will peak this year and then I don't know what to put the money into. Certainly not stocks at this point in time. Maybe just sit in a stablecoin earning interest (you can get 8.6% sitting in Gemini USD on Blockfi) and wait and see what happens in a year with all markets.
  - tofurocks 6y ago
    Isn't the extremely high stablecoin interest only because we are in a bull run and there is a high demand for long leverage ? You can make 20%+ shorting bitcoin futures 1x on bitmex or ftt right now, but those returns don't last when the price is not exploding upwards..
deleted 6y ago
[deleted]
kqr 6y ago
If you really believe this will not keep going up, why aren't you short the market? (Genuine interest: I also debated exiting but then remembered the thing risk takers say about careful deliberation followed by fearless execution and I now have net negative equity exposure.)
- tertius 6y ago
  Too risky?
- georgeecollins 6y ago
  Did you actually read this article? Please read the part about the problems with short selling.
  - kqr 6y ago
    I did. The example showed many problems: 1. Any time you make a risky investment (and this includes low-cost index funds) you should make it based on a falsifiable trading hypothesis specified in advance. E.g. "if Microsoft gets valued over $25, I should realise that I got either the direction or the timing of this one wrong and close the position, profit or loss." 2. Again, in advance, formulate a more general drawdown policy to gradually decrease the size of your losing positions. 3. Not ever make risky investments with anything that approaches your entire wealth. My bearish position is not going to throw me into debt even in the worst case. And the EMH, in a sense, guarantees that less commissions, this bet (as would any bet) is on average going to get me my wager back. So the question that remains is why I think the long-term average return is an unusually bad approximation for the near future. I could argue fundamentals, I could argue technical analysis, but it'd all be bunk. I can list other reasons, too. Many big investors are short the market. My employment is long the market, so my capital being short it is sort of a hedge. I can also list reasons it might be a bad idea. They don't weigh as much in my mind, of course. In the end, I just don't know. I'm fully aware that I might have either direction or timing fully wrong. Most likely I do. But it seems to me like a low risk bet with potentially fairly good payoff.
- deleted 6y ago
  [deleted]

FL33TW00D 6y ago

The Shiller CAPE is probably a better metric for judging the S&P: https://www.multpl.com/shiller-pe https://www.multpl.com/shiller-pe

riffraff 6y ago
Notice Shiller has a more interesting metric, Excess CAPE yield, which also accounts for interest rates[0]. It gives a less negative view of the current equities market, but still shows it as expensive. [0] https://fortune.com/2021/01/25/stock-market-value-metric-robert-shiller/ https://fortune.com/2021/01/25/stock-market-value-metric-rob...

dehrmann 6y ago

I tend to ignore P/E as a long-term, absolute metric because 1) it doesn't account for cash on-hand 2) it ignores expected growth 3) it ignores interest rates.