"The 15X average PE for the S&P 500 is what you get when you use professor Shiller's methodology, which averages 10 years of trailing earnings (and, therefore, if profit margins are normal, uses earnings of about 4 years ago). Prof Siegel's earnings estimate, meanwhile, is a forward estimate--one that adds about 5 years of trended growth (6% a year) to the Shiller estimate, but uses the same PE.Given our class discussion on ratios and using multiples to value equities, this one is a must read for all classes! (yes click through to the article)
We suspect that, if Prof Siegel performed the same 'trended' analysis over the entire 20th Century, the average PE for forward trended earnings would be about 11X-12X, not 15X. This, we expect, would produce a fair value estimate much closer to that of Shiller, Grantham, Smithers, et al."
Monday, November 10, 2008
Jeremy Siegel's Mistake: Why Stocks Are NOT "Dirt Cheap":