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Hi Woody and Interested Others.
Your post reminded me of what I wrote on 1 may 2002.
Below is a copy of it. DR's post on the 30 April 2002 gave us a link to an essay. (worth a read). Take note this essay has stood the tests of time ,therefore must be regarded as a great piece of work.
Looking back in sharechat archives can be rewarding.
Hoop
Re: [sharechat]
| From: |
"Richard Hooper" <hoop@ihug.co.nz> |
| Date: |
Wed, 1 May 2002 09:54:59 +1200 |
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Hi DR
Yes an interesting essay, using the KISS approach which many investors seem to ignore at their peril. The writer brings up a very interesting point about the still very overpriced US sharemarkets.
Not mentioned however is that theory and history show that stockmarket supercrashes happen once every 60 years or so. ( a correctional process from overpricing). We (world wide) experienced one in 1987 which bought our av P/E ratio back to "acceptable" levels,to which we (NZ) still have today. If I can recall this never happened in the USA, as the market quickly absorbed the correction and went on to record breaking highs up to year 2000. So my point is, it seems that a supercrash is again "possible" as no-one overseas seemed to have learn't from the 1987 mess.
Is NZ immune to a possible crash? I would like to think we are, as our market seems to have average P/E ratio at a low level compared to the rest. However we(NZ) seem to behave,as show in the past, fatalistically to any drop overseas by dropping further ourselves.
A worse case scenero is an example ......if an average P/E ratio can reach 40 when historically it should average, say 15 or 13 (depending on which source ), it must drop below 13 for sometime for the historical average to stay the same and balance out. If it can reach 40 ( 3 times the Average) as a high extreme, logically it can drop to a very low level say 4 ( 3 times below the average). Scarey Stuff !!!!!
Emotion says this can't happen. However the essay says you should NOT rely on emotion AT ALL in investing.
A bit of food for thought on a nice sunny wednesday morning.
Hope I haven't spoilt your breakfast. :))
Hoop
----- Original Message -----
Sent: Tuesday, April 30, 2002 2:32 PM
Subject: [sharechat]
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-------Original Message-------
Date: Sunday, April 11, 2004 15:22:39
Subject: [sharechat] Fundamentals Snoopy! and his Pups
You know Snoopy ( and litter ) I have been a pure TA trader all my trading life, up until as of late I have never even bothered with the ‘So called ‘Fundamentals. However the more I study the Fundamental indicators used by FA Traders the more I discover our similarities. I am starting to believe that FA analysis is TA ( a rose by another name ) Here is a yearly PE/Ratio chart of the S&P500 group of stocks. It has an Open,High,Low Close. You look at it as a mathematical equation; I look at it as a geometrical equation.
You have the company reports on their weekly, monthly, yearly etc performance. These can also be represented graphically, with an open, high low close chart.
You have the Beta Coefficient (another chart) The Shorting Interest (again) The Put/Call Ratio (also). Volume. Every Fundamental piece of information I have been able to obtain can be represented graphically.
Support/ Resistance lines that are used intensely by TA traders are also areas where FA Traders see value in buying a Share (Support) and calculate a profit taking area (Resistance)
Are we just kidding ourselves or is it really ( viva la difference ) If you buried your FA Bone in the backyard and dug up a TA bone instead would you still gnaw on it ? Would you recognize it as such?
I am doing a ‘Major Back flip ‘ here but I am now seeing that with today’s technology and with the information available I now feel foolish not to use ALL forms of analysis to achieve my goals.
So perhaps we can bury an FA and a TA bone and dig them up at will in any order.
Woody
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Below is the SP500 price earnings ratio (commonly referred to as the "PE ratio" or the "P/E ratio") since 1943. You can see the levels we are at now are still very high compared to historic levels. |
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The PE ratio is one of the most widely watched measures of valuation for both the stock market as a whole and individual stocks. Many people use it to determine whether the market (or a given stock) is "expensive" or "cheap". The calculation is very simple. You simply divide the price by the yearly earnings. One easy way to think of it is the P/E ratio is really just equal is the price divided by earnings... so:
P/E ratio = Price/Earnings
For instance, on 10/01/01 the SP500's closing price was 1038.55. Its cumulative earnings for the 500 companies in the index are $36.79. So the P/E ratio is calculated as 1038.55 / 36.79 = 28.23. This means that if you are investing in the SP500 via a stock index fund, you are paying $28.27 for each dollar of earnings that those 500 companies will have this year.
The PE ratio does not work very well as a timing device, but it can give you some idea of the whether the market is "cheap" or "expensive". And as you can see from the above chart, it is definitely not cheap right now, even after the large losses that the market has suffered. |
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