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Strategies & Market Trends : Buffettology

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To: jhg_in_kc who wrote (307)	9/22/1998 7:01:00 PM
From: James Clarke	Read Replies (1) of 4691

re: Interest rates vs. P/E multiples I am not going to respond to that whole message. We each posted our reasoned diatribe. Further discussion is superflous. But on this matter of finance, you are absolutely correct that low interest rates justify higher p/e ratios. But the p/e ratio must also take into account whether the "e" is likely to rise or fall. I will submit again that the Return on Equity of the S&P 500 is currently about 19% (and yes, I know what return on equity is - I am not confusing it with stock returns), way in excess of historical averages. What I am arguing is that earnings are going to fall, not rise. Which means I want to pay a fair price (based on interest rates) for sustainable earnings, not peak earnings. And that tells me to be very careful until everybody else's expectations come closer to my own. It is happening - Wall Street analyst estimates are falling in just about every sector. Maybe Dell is the exception. I am not willing to make that bet, and I am sure you are intelligent enough to understand that your downside is enormous if you are wrong. At 75x earnings, some of us are arguing that even if you are right, the upside is limited. JJC

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