Hi Joseph,
I based my comments upon my experience of the collapse of the market in 1974.
In the early seventies a huge number of "Growth Stocks" like Coke, IBM, Kodak, Polariod,Xerox,Digital sported PE multiples of 60-120. These PEs were justified upon the expectation that the profits were going to grow for ever at the high rate they were growing in the early seventies. These were the "New Economy Stocks" of that era, and all earlier yardsticks were thrown to the wind. All these companies crashed disastrously when the market corrected in 1974. The profits of these Growth Stocks shrank significantly ! When the market recovered the high PE did not come back, because the analysts and investors were burnt so badly, that they all discarded the perpetual high growth assumption.
Finally the high PEs came back in the last few years. A new generation of analysts and investors arrived with no memory of the excessive euphoria of early 70s. The new mantra was that the Internet was going to change everything, and the past rules, yardsticks, and issues were irrelevant. Once most of the Internet equities become worthless, the present analysts and investors will not dare to make the heady assumptions to justify lofty PEs.
The interval of twenty years allows time for a new generation of analysts and investors to dominate the scene, and then get swept into a fresh bout of euphoria. |
