Wednesday, December 24, 2008

Which Multiple?

I'm not really listening but some guys on CNBC are arguing about what multiple to use to value the S&P 500. 10x? 15x?

The "which multiple?" argument is an old one. I think the more interesting question is "what earnings?" The S&P earned $87 last year, might do $52 or so this year. Who knows for next year. 2010 should be good.

Quoting P/E ratios sounds good a lot of the time. In my opinion, current price divided by last year's earnings tells you nothing. This is not an awards show. Current price divided by current earnings is an observation that a 6th grader could make, not analysis.

Current price divided by what the underlying will earn over your investment horizon is the only bone with any meat on it. Since that calculation is different for every investor, the P/E ratio used by financial media is useless.

Just my opinion.

"Valuation is a lazy way to make an investment decision."
Arnab Chanda

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