Sunday, January 3, 2010

10 Years Gone (vixen in my dreams)

One of the better economic blogs on the internet, Econbrowser, written by James Hamilton and Menzie Chinn, had an excellent post on the U.S. stock market's performance over the last 10 years. The graphs and data are highly educational. One of the main points seems to be Robert Shiller (a relatively famous Professor at Yale) likes to look at the fluctuations in the prices of stocks compared to 10 year averages of the real earnings to compute a P/E ratio (price earnings ratio) for that 10 year period. If you look at the last graph in Professor Hamilton's post it shows a straight red line which is the historical average of the P/E ratio over the last century. As you can see that historical P/E average over those many years is 16.34. As you can see the prices fluctuate above and below that line over the years.

Looking at this graph (the last graph) what is this suggestive of (in my opinion)??? That it's better to buy individual stocks all other things being held equal when the P/E is below 15.