The P/E mess

P/E should be an easy ratio: price of the stock divided by its earnings. For an index such as SP500: price of the index divided by the weighted earnings. For long-term studies, the ones we use in this web, when we want to compare different periods of time, using just one day (for instance 31 December) cannot represent a full year adequately, though. Instead we could get all the closing daily prices for the year and average them and use this new number as P (Crestmont approach). Professor Schiller provides monthly data for the P/E, where P is daily average across the month, and E is extrapolated from the quaterly reports of the companies.

However, Schiller´s most famous index is the P/E10 where P is the inflation adjusted price and E is the prior ten-year mean of inflation-adjusted earnings (methodology here). This is the approach we will use throughout this web. We can get updated data from www.multpl.com. The historical average of PE10 is 15.5 (we will use 16). For the Cresmont methodology 14. In general both methodologies are quite similar, Schiller being a little bit higher in general when above 15.

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