The New York Times [registration required] reports that if you use the long-term P/E -- based on the earnings over the last decade -- as Warren Buffett's mentors Graham and Dodd recommended, stocks are very expensive.
While Wall Street analysts want to convince you that the S&P 500 is cheap -- trading at a P/E of 16.5 -- Robert Schiller, a Yale economist, doesn't buy it. He calculates that the long-term P/E -- based on the average of the last 10 years' earnings -- is almost 27.
This is not good. In fact, it suggests that stocks are trading higher than they have been at any other point in the last 130 years, save the great bubbles of the 1920s and the 1990s. The stock run-up of the 1990s was so big, in other words, that the market may still not have fully worked it off.
All the debt added to the economy may have delayed the adjustment in stock prices. But it could make that adjustment even more severe.
Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.
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Reader Comments (Page 1 of 1)
8-15-2007 @ 5:38PM
don pressman said...
Graham and dodd was written over 60 years ago.
Many of it's principal's are valid.This one makes no sense to me.
Stock's should be appraised on what is going to happen not on what happened in the last 10 years.
Companies change,management's change and the economic environment changes. In listening to the news today we hear that some companies have exceeded analysts expectations but that their stocks will open lower because management is forecasting results below what analysts have forecasted.
As my grandfather said when I asked him how his sex life was,he replied 'WHAT WAS,WAS!"
Look to the future ,that is where you are going to be
8-15-2007 @ 11:06AM
Michael Schneider said...
Yeah but this article also said the analysis could be academic if the economy rolls along: "One possibility is the boom will continue. In this case the Graham-Dodd PE ratio doesn't really matter. It is capturing a reality that no longer exists and stocks could do well over the next few years."
Dr. Michael Schneider runs several Web sites including http://www.Barrelomoney.com and the international http://www.Barreloworld.com.