Enrique Diaz-Alvarez enrique at
Thu Nov 18 11:55:59 PST 1999

Jordan Hayes wrote:

> > ... and the Incredible Expanding P/E Ratio ...
> Something I haven't quite figured out yet is why there's this big
> concern about P/E, as though it were some Law Of Physics. Yes, in
> the long run, P/Es have been lower than they are today. But also
> in the long run, every index we've come up with have been lower
> than they are today.
> Who says P/E has this magical property of having a historical
> anchor?

Nobody, as far as I remember. As I see it, P/E ratios of 2.5 the historical average are OK if

1) People will be happy to accept future real returns on their capital much lower than they have in the past. The fact that you can get nearly 7% on an off-the-run T-bill and the general attitude I see in the "investors" I know would seem to indicate that this is not the case


2) Real profits will grow much faster in the future than the historical average. Absent any cogent argument for this (beyond "it's, like, the internet, dude!") , it belongs in the realm of collective fantasy.

An alternative explanation would be that investors have no fucking clue what they are doing, and they don't care as long as prices go up, but of course we must reject this theory out of hand.

Once again, though, I defer to your expertise. Any holes in the above?


Enrique Diaz-Alvarez Office # (607) 255 5034 Electrical Engineering Home # (607) 272 4808 112 Phillips Hall Fax # (607) 255 4565 Cornell University mailto:enrique at Ithaca, NY 14853

More information about the lbo-talk mailing list