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Strategies & Market Trends : MDA - Market Direction Analysis
SPY 677.56-2.0%4:00 PM EST
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To: Michael Collings who wrote (47824)4/25/2000 2:04:00 AM
From: FR1  Read Replies (2) of 99985
 
Regarding your discussion of PE:

I have always wondered about the PE model. Let's suppose that we all went by the PE model you mentioned. Most people, of course, would want to invest in the best businesses. So in a very short period of time the big names like GE, CSCO, etc would have enough investments from the public to make their PE saturated. In other words, if GE was growing at a 15% rate it would get to a PE of 15 very quickly. Further investments in GE should not be made because they can not match a higher PE.

What happens then?

Where would all the investors of the world (which are growing rapidly) go with their money? 5% savings account?

It seems to me that the PE system works great if you have a small number of investment businesses that control most of the available money to be invested. They can make sure everybody gets their share of GE stock and investments stop around a the PE of 15. Perhaps this is the way it used to be.

If the PE of every stock was limited to its growth it would be nice, in a way, because we could calculate the amount of money that could be given to a business and simply have automatic "freezes" on stock ownership once the PE was hit. People could be on the "waiting list" for a stock. The problem is that fund managers would have every share of GE tied up plus the waiting list.

I don't think the system we currently have is all that good but a strict PE system seems very limited.
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