GV,
In my humble opinion, you can look at high or low PE's from two different perspectives. It always seemed to me that it was more valuable to look at the trend in PE, how much the collective investment community is and was willing to pay for a dollar of earnings, and if that number was going up or down.
For instance, the PE on the S&P 500 started declining well before the March 2000 peak in the markets (my memory is about 10 months). Even though earnings dollars were accelerating at a very significant rate, the market wasn't buying a dollar worth of earnings increase with an equivalent stock price increase. The PE on the S&P 500 continued to decline, and hit a low point at 22.xx in March of 2001, and has been increasing steadily since to it's current PE of about 40. Starting last March, folks began paying more for a dollar of earnings, even as the earnings have continued to decline.
My belabored point is that if the collective wisdom of the markets is correct, earnings should start to increase in the near future. An increasing PE can mean that folks have more confidence in the future earnings of a company; or you can accept Bambs perspective that it means the collective markets are increasingly being duped into buying over-priced companies, unaware of their real value.
Personally, I'll bet with the market, not Bambs.
John |
