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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: benwood who wrote (64611)	6/27/2006 11:51:36 AM
From: Wyätt Gwyön	Respond to of 110194

The expansion of the P/E was from about 8 to about 44 during that span, or about 5.5x. That means that for the moving-target (survivor bias) index, the gain from earnings would be 15/5.5 = 2.7x. by that logic, with today's Dow projected PE of 14x and only a slightly lower Dow price (compared to 2000), earnings must have nearly tripled since 2000. iow, you would have to say that Dow earnings grew the same amount between 2000-2006 as you claim they grew over the thrice-as-long interval of 1982-2000, despite a much lower inflation environment. in any case, today's Dow of ~11K has risen around 14x compared to 1982, while PE has less than doubled. so earnings rise accounted for 7x vs. only 2x for PE expansion. so earnings rise was MUCH more important. and that is cherry-picking an interval containing the greatest bull market in history. over LONG periods of time, like a century, the variation in PE is insignificant compared to earnings growth. (of course, that doesn't mean results won't vary greatly depending on whether you buy into an 8x or 21x PE market, especially over the time horizon of the typical investor, which is on the order of two or three decades or less.) also, to give an example which exposes the true ludicrousness of the argument that earnings don't matter (and the opportunity cost to investors who ignore earnings), the ENTIRE ENERGY BULL MARKET from 2002/3 has taken place without PE expansion. my best stock, VLO, is a 10-bagger off the lows of 2002, WITHOUT ANY RISE IN PE. so its entire 10x gain is due to earnings growth.