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High price/earnings ratios and the stock market: a delicate odyssey - stocks-mutual-funds


After some forty years of banking and investments, I retired in 2001. But since I do not golf, I soon found retirement to be very boring. So I absolute to come again to the investment world after ten months. However, those ten months were not a accomplished waste of time, for I had spent them in annoying to develop my forty years of investment come into contact with to gain perspective on the most hot stock bazaar "bubble" and later "crash. "

There were quite a few colonize who saw the stock marketplace crash coming, but they had atypical ideas as to when it would occur. Those who were too early had to be diagnosed with the disrespect of their peers. It was arduous to take a stand when so many were proclaiming that we were in a "new era" of investing and that the old rules no longer applied. Since the activation of 1998 because of the promote high of March 2000, among 8,000 stock recommendations by Wall Boulevard analysts, only 29 suggested "sell. "

I am on background as having called for a precautious accost to investment two years already the "Crash of 2000. " In an in-house investment newsletter dated April 1998, I have a consider of the "Titanic" with the caption: "Does a person see any icebergs?"

When I resumed employment in 2002, I happened to glance at the chart on the last page of Value Line, which showed the stock advertise as having topped out, by coincidence, in April 1998, the same date as my "Titanic" newsletter! The Value Line Composite Index reached a high of 508. 39 on April 21, 1998 and has been lower EVER SINCE! But on the first page of the same issue, the date of the promote high was given as "5-22-01"! When I contacted Value Line about this discrepancy , I was bowled over to learn that they had altered their approach of computing the index for "market highs" from "geometric" to "arithmetic. " They said they would adjustment the name of the Value Line "Composite" Index to the Value Line "Geometric" Index, since that is how it has been computed over the years. At present Value Line is presentation a hot marketplace low on 10-9-02 and the most current advertise high, based on this new "arithmetic" index, on 4-5-04, A further ALL-TIME HIGH! If they had stayed with the creative "geometric" index, the all-time high would still be April 21, 1998!

Later that year, I was pleasantly astounded to read in "Barron's" an interview with Ned Davis, of Ned Davis Research, that said that his indicators had selected up on the bear market's early development in April 1998, the same date as my "Titanic" newsletter! So, my instincts were correct! I accept as true that we are in a "secular" depression that began in April 1998 and the "Bubble of 2000" was a marketplace rally in what was previously a long-term bear market.

Another advancement transpired soon after I resumed employment in 2002. I happened to become aware of one day that, in its "Market Laboratory," "Barron's" had mysteriously altered the P/E Ratio of the S&P 500 to 28. 57 from 40. 03 the prior week! This was due to a adjust to "operating" income of $39. 28 from "net" or "reported " gain of $28. 31 the before week. I and others wrote to "Barron's Mailbag" to grumble about this alter and to bicker with it, since these new P/E ratios could not be compared with past P/Es. "Barron's according to the grapevine established our point of view and, about two months later, distorted back to using "reported" balance as a replacement for of "operating" balance and revised the S&P 500 data to show a P/E Ratio of 45. 09 compared to a preceding week's 29. 64.

But a akin conundrum occurred the next day in a sister journal to "Barron's. " On April 9, 2002, "The Wall Boulevard Journal" came out with a new design that included, for the first time, charts and data for the Nasdaq Composite, S&P 500 Index and Russell 2000, in accumulation to its own three Dow Jones indices. The P/E Ratio for the S&P 500 was given as 26, as a replacement for of the 45. 09 now found in "Barron's. " I wrote to the WSJ and after much correspondence back and forth, they at length established my claim and on July 29, 2002 misused the P/E Ratio for the S&P 500 from 19 to 30! I had given them examples screening where some monetary writers had inadvertently bewildered "apples" with "oranges" by comparing their P/E of 19, based on "operating" earnings, with the long-term be around P/E of 16, based on "reported" earnings.

Because I ongoing to be alert about investing as early as April 1998, since I attention that price/earnings ratios for the stock promote were dangerously high, I was not hurt face-to-face by the "Crash of 2000" and had tried to get my clients into less aggressive and more liquid positions in their investment portfolios. But the pressures to go along with the advertise were tremendous!

Price/earnings ratios do not permit us to "time the market. " But comparing them to past chronological carrying out does facilitate us to tell when a stock marketplace is high and vulnerable to eventual correction, even even if others about us may have lost their bearings. High P/Es alert us to a need for caution and a conservative advance in our investment decisions, such as a renewed prominence on dividends. Very high P/Es as a rule be a symptom of a long-term bear bazaar may ensue for a very long dot of time. We are deceptively in such a long-term bear promote now. But in seminal whether the advertise is high, we must be aware with connect with to what data mambers of the economic press are exposure to us, so we can equate "apples" with "apples. " When the economic in order does not arrive on the scene to be correct, we, as monetary analysts, owe it to the investment cooperation to challenge such information. That is what I have concluded from my not public "odyssey" in the investment world.

After three years of the DJIA and the S&P 500 dying below their before year-end figures, the marketplace as a final point bunged senior at the end of 2003. But the P/E ratio is still high for both indices.

Does a person see any icebergs?

Henry V. Janoski, MBA, CFA, CSA is a 1955 arrange 'magna cum laude" of Yale Academic world and a component of Phi Beta Kappa. He established his MBA in finance and banking from the Wharton Accommodate Big business Educate of the Academy of Pennsylvania in 1960 and holds the authority designations of Chartered Economic Analyst (CFA) and Licensed Elder Advisor (CSA). As a registered investment advisor ambassador with the title of Chief Investment Officer, he is located in Scranton, PA. His biography is scheduled in "Who's Who in Finance and Industry" and in "Who's Who in America. " E-mail address: HJanoski@aol. com


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