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Victor Niederhoffer responds with A Real P/E Perspective:

The results on p/e's of the former Tennessean Book, the Yale Real Estate Expert, and others like the imitative switch hitting tennis player from the University of Chicago, and all the chronic bears, all have a variation of look back bias far more serious than the Professor's very sanguine overview. This is over and above the fact that anyone who believes that p/e's that occured in 1905 or 1930 are relevant to today. And over and above the fact that people like most of the aforementioned don't seem to realize that the price of something that gives cash flows over time is its discounted value, and when interest rates decline by 1/2 the discounted value doubles. And this is over and above that when computing p/e's in those days, apparenetly the compilers didn't know how to divide by a negative number so if you look carefully they threw out all the negative numbers in computing p/e of individual issues. And this is over and above the fact that earnings they use are revised often and so are retrospectively adjusted.

The main problem is the announcement effect. In those days, they didn't have quarterly earnings so all the back figures are annuals. But the annuals are announced and compilable in March in those days. Let's assume that price is always 10 times earnings. And that the earnings as of 12-31-1904 for the calendar year ending 12-31-2004 are estimated to be $10.00 a share. Also, assume a p/e of 10 times the actual or best estimate. So that the Dow was selling at 12- 31-1904 at the famous 100 level that the Founder of Security Analysis always thought was too high because he went bankrupt by buying it above in the 1930's ( and then this Steinian reasoning got him out of the market in 1955 at Dow 700 for the rest of his life). Okay, assume that earnings actually came in at 12 a share. Price would advance to 120. But the actual p/e of was a low 8.5 in the kind of figures moves by the aforementioned. Similarly when the earnings came in at 8 a share, the actual p/e would go to 12.5 and price would decline to 80. Thus, the low p/e's were associated with a 20% artificial anomalous bias in favor of the above mentioned mumbo. This process repeated year after year is more tha sufficient to account for the 0% correlations that a counting study actually shows. et al.