Author Topic: Has P/E always been calculated the same?  (Read 2290 times)

ender

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Has P/E always been calculated the same?
« on: January 13, 2016, 08:12:59 AM »
My understanding is that P/E is the "valuation" of stocks calculation.

But I also have read that the method to calculate P/E has changed over time. Is there any comprehensive history of the P/E ratio and how it has changed over time?

arebelspy

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Re: Has P/E always been calculated the same?
« Reply #1 on: January 14, 2016, 03:25:24 AM »
Where did you read that?  Some context may help us explain what they meant by that.

There are different types of P/E, so over time one may have shifted into favor: https://en.wikipedia.org/wiki/Price%E2%80%93earnings_ratio

And stuff has changed like the S&P methedology: http://www.joshuakennon.com/sp-500s-dirty-little-secret/

Maybe you saw something related to that?

If you link us to what exactly you read, likely someone can help clarify it.  :)

(Also, Mod Note: Moving this from Ask a M to Investor Alley, to get more interested eyeballs on it.)
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Mr.Tako

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Re: Has P/E always been calculated the same?
« Reply #2 on: January 14, 2016, 04:34:14 AM »
GAAP accounting rules change all the time too.  That's the 'E' in the PE.  Could you mean that?

ender

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Re: Has P/E always been calculated the same?
« Reply #3 on: January 14, 2016, 05:09:01 AM »
GAAP accounting rules change all the time too.  That's the 'E' in the PE.  Could you mean that?

I think this might be what I was thinking?

I don't know if there have been significant changes in how this is counted, if there have been changes in this it would affect all the "historically P/E ratios of 15... etc" types of conversations.

For example, if earnings are "lower" now due to accounting fluff that might significantly affect how one can compare historical P/E.

brooklynguy

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Re: Has P/E always been calculated the same?
« Reply #4 on: January 14, 2016, 07:29:45 AM »
The Philosophical Economics article "Fixing the Shiller CAPE: Accounting, Dividends, and the Permanently High Plateau" got a lot of attention when it was published for pointing out problems with using P/E 10/Shiller PE/CAPE to make comparisons across history (due to, among other reasons, changes in accounting standards).

But the author continued to refine his thinking on the issue in subsequent pieces, including this one, where he sort of reversed his position from the first piece:  "A New-and-Improved Shiller CAPE: Solving the Dividend Payout Ratio Problem"

Also, it doesn't address the question in the OP, but Kitces put out an interesting article yesterday regarding the predictive power of CAPE for future returns:  "Should Equity Return Assumptions In Retirement Projections Be Reduced For Today’s High Shiller CAPE Valuation?"

zz_marcello

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Re: Has P/E always been calculated the same?
« Reply #5 on: January 14, 2016, 11:37:51 AM »
For me CAPE valuations are much more important than yearly PE's
The valuable links from Brooklynguy are showing that the US market currently again has a high valuation. (Currently still CAPE 24 after the small sell off)
Maybe that doesn't matter that much in 30 years from now but it matters a lot in the next 5-10 years.
With the exception of 1996 those high valuations where always sold off in the years ahead (from 1902 to 1921, 1929-1942 and 1966 to 1982)

Other markets with similar growth and stability in the last 40 years already have lower CAPE valuations and from my perspective it make sense to at least diversify also in those (Singapore CAPE ~11 (!) Dividend yield ~4,5%) and Hong Kong CAPE ~13.5 Dividend yield ~4% )
Those numbers are historically pretty low for this stable and still growing (non commodity) countries.

 
« Last Edit: January 14, 2016, 11:39:30 AM by zz_marcello »

MustacheAndaHalf

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Re: Has P/E always been calculated the same?
« Reply #6 on: January 14, 2016, 12:29:52 PM »
For me CAPE valuations are much more important than yearly PE's
The valuable links from Brooklynguy are showing that the US market currently again has a high valuation. (Currently still CAPE 24 after the small sell off)
Maybe that doesn't matter that much in 30 years from now but it matters a lot in the next 5-10 years.
With the exception of 1996 those high valuations where always sold off in the years ahead (from 1902 to 1921, 1929-1942 and 1966 to 1982) ...
Larry Swedroe observes that comparing the historical CAPE 10 to today's CAPE 10 might not be an apples to apples comparison.  GAAP is one of the changes, but there are others.
http://www.etf.com/sections/features-and-news/swedroe-key-market-value-metric-outdated?nopaging=1

Going back before all the modern institutions (like the SEC, or reporting GAAP earnings) gives you an average cyclical P/E of ~16.  But incorporating changes from the past 15-40 years raises that closer to a cyclical P/E of ~20.  If you agree with Larry Swedroe's points, CAPE 10 is only +20% (of 24) rather than +50% (of 16) above it's historical average.