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This year it has climbed from 21 to 25. That would seem to limit potential for future gains. The highest it's been since 2003 (excepting 2008-9 when the denominator approached zero). How does the p/e affect your investing decisions?
It is very simple, I am currently not buying new equity positions or adding to any existing positions at these high P/E multiples. I have been rebalancing my portfolio as the stock markets reaches new highs thus keeping equities towards their low range within my asset allocation. Should we get a near term pullback I'll load equities during the pullback and then trim my allocation in equities as they recover.
I bought during the Brexit pullback in the growth and income area of my portfolio and have now begun to trim form the growth area raising cash as I trim.
It is very simple, I am currently not buying new equity positions or adding to any existing positions at these high P/E multiples. I have been rebalancing my portfolio as the stock markets reaches new highs thus keeping equities towards their low range within my asset allocation. Should we get a near term pullback I'll load equities during the pullback and then trim my allocation in equities as they recover.
Hard to disagree with any of this. You make some great points.
- I would not start new equity positions or add to existing ones at such lofty levels.
- Rebalancing is a good way to add to underperforming assets and cull your winners. Not everyone will agree, but I like this approach. As we are well into the distribution phase in our retirement years, "rebalancing" is most often achieved by selling off some of the better performing assets when we take a distribution.
- Sharp pullbacks are a good time to put lower yielding fixed-income assets to work in riskier areas.
I'll make a distinction, however, between rebalancing and trying to time the markets based on valuations, seasonality, Fed policy, elections, macroeconomics, etc. I'm not necessarily opposed to the second, but it is much more difficult to pull-off successfully and consistently, I think, than merely rebalancing.
P/E’s are only “high”, “low” are “moderate” relative to where the market – and individual equities – have traded in the past. Either the range of multiples that markets have traded at in the past is meaningful, or its not…
Here, now, today, the wisdom of the market would seem to indicate that history is not relevant. But Mr. Market can be schizophrenic --- a day will come when Mr. Market will suddenly decide to concentrate on those high P/Es. But when?
Two side-bars on P/Es: Part of the reason that the market P/E is so high is that earnings have been dropping. What is the “right” P/E for an asset with declining earnings. ---- And that decline in earnings has been despite the massively grotesque amount of Q/E, which has greatly eased the financial cost (interest burden) of companies. What happens to earnings growth when eventually rates are normalized…. (if they are, in our lifetimes)…?
Don’t trust “forward earnings”, which are guesses of operating earnings, not NET earnings. “Operating earnings”, much like EBITDA, are “earnings before the costs which management doesn’t like to count”. Making investment decisions on “forward earnings multiples” is like buying a house on your future lottery winnings…
Comments
I bought during the Brexit pullback in the growth and income area of my portfolio and have now begun to trim form the growth area raising cash as I trim.
- I would not start new equity positions or add to existing ones at such lofty levels.
- Rebalancing is a good way to add to underperforming assets and cull your winners. Not everyone will agree, but I like this approach. As we are well into the distribution phase in our retirement years, "rebalancing" is most often achieved by selling off some of the better performing assets when we take a distribution.
- Sharp pullbacks are a good time to put lower yielding fixed-income assets to work in riskier areas.
I'll make a distinction, however, between rebalancing and trying to time the markets based on valuations, seasonality, Fed policy, elections, macroeconomics, etc. I'm not necessarily opposed to the second, but it is much more difficult to pull-off successfully and consistently, I think, than merely rebalancing.
Thanks for sharing @randynevin and @Skeet.
P/E’s are only “high”, “low” are “moderate” relative to where the market – and individual equities – have traded in the past. Either the range of multiples that markets have traded at in the past is meaningful, or its not…
Here, now, today, the wisdom of the market would seem to indicate that history is not relevant. But Mr. Market can be schizophrenic --- a day will come when Mr. Market will suddenly decide to concentrate on those high P/Es. But when?
Two side-bars on P/Es:
Part of the reason that the market P/E is so high is that earnings have been dropping. What is the “right” P/E for an asset with declining earnings. ---- And that decline in earnings has been despite the massively grotesque amount of Q/E, which has greatly eased the financial cost (interest burden) of companies. What happens to earnings growth when eventually rates are normalized…. (if they are, in our lifetimes)…?
Don’t trust “forward earnings”, which are guesses of operating earnings, not NET earnings. “Operating earnings”, much like EBITDA, are “earnings before the costs which management doesn’t like to count”. Making investment decisions on “forward earnings multiples” is like buying a house on your future lottery winnings…
All just one schmuck’s opinions.