On Mar 19, 9:57 am, beliav...[at]aol.com wrote:
- quote -

The information in this article is not correct. As of February 28, the
average trailing P/E of the broad market was 16.24 (and given the
declines in the last 3 weeks, it is almost certain that it is lower
than 16 as of right now):
http://www.globalindices.standardand...jsp&rp=returns).

In any case, the average P/E is not the most relevant indicator of how
much a certain category of stocks (small or large caps) are
over(under)valued, but the average P/B (see article at the DFA library
cited above). The average P/B of large caps is still significantly
larger than the P/B of small caps.

<beliavsky[at]aol.com> wrote
- quote -

Little clarification:

That last sentence is a little loaded, it seems to me. I was
hoping the article as a whole did not seem to suggest that
large companies are currently a "great buy." Unfortunately,
it does tend to do so. So one sees

"According to Standard & Poor's, for example, the P/E ratio
of the S& P 500 currently stands at 17, based on trailing
12-month operating earnings. The comparable ratio at the end
of March 2000 was 31.1, almost double the current level."

So an S&P 500 index fund is a real bargain now, if P/E is
one's main criterion?

Not necessarily.

Shiller's data shows the average P/E to be 14.6 for the
period from 1871-2003. Since WWII, it's still averaged about
15.

I would not say, explicitly or implicitly, that the S&P 500
is a good buy right now. It's not bad, maybe, but relative
to historical valuations, it's not impressive. go back to
1988 or even 1995, when its P/E was close to 11 and 14,
respectively, and then I might start suggesting it's a good
buy.

On Feb 14, 2:54 pm, beliav...[at]aol.com wrote:
- quote -

The academic literature is all about price to book (or rather the
inverse book to market value).

It sounds like this is one of those cases where 'value' and 'growth'
have become marketing terms. It's no longer transparent to the
outside investor what is a 'value' and a 'growth' stock.

Many of these companies have prodigious free cash flow relative to
their capitalisation. My own observation is that large cap 'growth'
stocks are as cheap as they have ever been relative to the market
(Barton Biggs says he cannot find evidence they were ever cheaper).
However as you highlight, a typical 'growth' stock like GE, WalMart or
Pfizer, is now rated in PE terms as if it were a value stock.

The managements of these companies have a lot of scope to add value
simply by financial engineering: buying back stock, selling operations
to private equity, spinning out subsidiaries. Even if organic growth
remains sluggish.

Biggs also points out that these stocks are a good hedge against
global inflation, given the international diversification of their
operations.


======================================= MODERATOR'S COMMENT:
Posters to this thread should relate comments to general financial planning.

This article from the New York Times confirms my earlier comments.

http://www.nytimes.com/2007/03/18/bu...l?ref=business
Beyond the Bubble, With Small-Cap Stocks
By MARK HULBERT
Published: March 18, 2007

"This picture of a highly bifurcated stock market is painted by data
from Ford Equity Research of San Diego, which tracks around 4,500
publicly traded companies in the United States. Among companies that
have been publicly traded for at least seven years, the firm reports
that 55 percent have higher price-to-earnings ratios today than they
did in March 2000. The bulk of these pricier issues, however, are in
the smaller-cap sectors. Among the very largest companies, the average
P/E ratio is now just a third of what it was seven years ago."

Value investment is defined as the style of choosing stocks that are
trading below their intrinsic value. On average, econometric tests
show that the best indicator of value of a portfolio is a high average
book-to-market price ratio (low P/B). Other indicators, such as a low
price/earnings ratio, have a weaker relationship with value. This
article: http://www.dfaus.com/library/articles/
is_there_value_btm_ratio/ provides a good survey of the empirical
literature in this area.

That said, an individual stock with a P/B of 5 and a P/E of 30 (for
instance) may have more value than a stock with a P/B of just 1 and a
P/E of just 10. It all depends on factors such as the future earnings
prospects of a company. An example: a stock with a P/E of 30, but with
stable earnings growth rates, which can be more or less accurately
projected at a rate of 20 percent a year during the next 10-yr period
has more value than a stock with a P/E of just 10 but with very risky
earnings prospects, which average zero growth during during the next
10-yr period (just do the exercise using http://www.zroundtable.com/
ZRT_files/Finance/scripts/calc_stock_earnings.htm).

Remember that these indicators suggested a year ago that growth
"should" outperform value. Didn't happen.

Lots of evidence indicates that such attempts to time markets
are futile. The only things true about the market are true only
on the average in the long run. On the average in the long run,
value outperforms growth and probably small outperforms large.
This year? Nobody can say.

The way of wisdom is to choose an asset allocation that tilts
toward value and small and is appropriate for your age, wealth,
and risk tolerance. You can do this with Vanguard or even
better with DFA. Then sit on your hands, resisting the temptation
to trade. In a few decades, you will probably be rich. As
Warren Buffet said, "Activity is the enemy of investing."

One small coda, which I hesitate to bring up because it may open the
gates of temptation. There is some evidence of slight mean reversion
in the market. That is, on the average in the long run, periods of
above-trend performance tend to be followed by periods of
underperformance. The effect is small and is overwhelmed by noise at
time periods less than (perhaps) a decade or so. But in practical
terms, the books by Malkiel (1980) and Schiller (2000) performed
similar comparisons of stock prices with economic, historical, and
value measures. Malkiel found that stocks were shockingly undervalued
-- he was two years early, but the great 18-year bull market started in
1982. Schiller was lucky (and it was just luck) to hit the top almost
exactly. Despite the "Dow hits record" hype, the S&P 500 is still 5%
below its March 2000 high and the NASDAQ is straining to get back to
half its March 2000 value -- 7 years later. Keep repeating "only on
the average in the long run" and remember that in this game 7 years is
not the long run. A convincing call every 20 years may be about all we
can look for.

David

beliavsky[at]aol.com wrote:
- quote -

It's interesting that P/E is used to measure value...

- quote -

....but it is not used to measure value... How then does one measure the
premium?

-Will

beliavsky[at]aol.com wrote:
- quote -


B, I think you know this, but you could look at that by comparing the
characteristics of DFA's mutual funds with analogous ETFs whose
portfolios are based on published indices. Ostensibly that was their
motivation for founding DFA -- mutual funds that were "true to the
research". I have some materials from them showing comparisons to
indices, but unfortunately they're stamped all over "advisor use only".
From publicly available info you can see that there are differences in
number of securities, market cap, and book-to-market metrics for some
portfolios. Whether these differences will persistently result in
performance differences is open to debate, especially when factoring in
the costs one might pay to access these funds, vs. ETFs (including tax
costs, if that's relevant).

On your general point - I thought of this when you posted a similar
paper recently...I've always though that the value premium, at least in
part, can be explained as the advantage you get when you avoid bubble
stocks. A value investor systematically avoids them. If widescale
mispricings (and resulting crashes) are periodic events in equities
markets, both on a macro scale and with smaller batches or sectors of
securities, the value investor benefits from systematically avoiding
these events - or at least, not buying those securities during the peaks
in valuation. And to a lesser extent, that investor avoids the more
subtle bubble-buying, on the individual-security level -- such as that
experienced by someone owning a Nasdaq 100 tracking fund (which adds
stocks only after they've run up far enough to be one of the 100 largest
by market cap...perhaps systematically "buying high"?).

To the extent this thesis holds water, it would make sense that there
would be an ebb and flow to the value premium. When you're in a bubble,
you benefit from overweighting value, when the market is more fairly
valued, you don't. Of course the catch is identifying these periods
using something other than hindsight.

-Tad

On Feb 14, 2:54 pm, beliav...[at]aol.com wrote:

- quote -

good analysis. Thank you.

The short answer is I suspect there has been 'style drift'. Value and
growth are getting rather confused (as you point out).

So telecommunications, media and some technology stocks, and some
pharma cos are 'value' whereas some resource stocks make have become
'growth'. Banks tend to figure prominently in 'value' indices, since
they habitually trade at lower PEs than the market.

Value in an academic context is almost always price to book (or rather
book to market value in the econometric tests). Studies of other
measures don't show the same 'value effect'.

James Altucher just wrote at realmoney.com (a pay site) that "many
growth indices (Value Line, in particular) actually have lower P/E
ratios than their value counterparts."

The TickerSense site http://tickersense.typepad.com/ticke..._value_vs.html
wrote on 1/26/2007,

"Don Hays appeared on CNBC this afternoon and said that investors
should be focused on growth stocks, as that group provides the best
opportunity for gains in the year ahead. His argument makes sense.
The table below highlights the PE ratio of the growth and value
indices for the S&P 500 (large cap), S&P 400 (mid cap), and the S&P
600 (small cap). As you can see, in the mid cap and small cap
indices, the aggregate P/E ratio for growth stocks is actually lower
than value stocks. In other words, growth stocks are a better value
than value stocks (Yes you read that right!).

PE Ratio (Trailing)
value growth
large cap 16.9 18.6
mid cap 21.2 20.5
small cap 23.4 20.1

So investors should invest in growth stocks right? But what exactly is
a growth stock? Apparently, that is a tougher question than you would
expect. S&P apparently, is not so sure. Currently, there are 162
stocks in the S&P 500 that are in both the S&P 500 value and growth
indices."

The S&P value and growth indices used to be maintained in conjunction
with BARRA, using price/book as the criterion. The S&P/Barra Style
indexes ceased to be the official Standard & Poor's Style indices in
December 2005.

Now the S&P style indices use a multifactor model of Citigroup with
the following growth and value factors:

Growth Factors
5-Year Earnings per Share Growth Rate
5-Year Sales per Share Growth Rate
5-Year Internal Growth Rate (IGR)
(IGR = ROE x Earnings Retention Rate)

Value Factors
Book Value to Price Ratio
Cash Flow to Price Ratio
Sales to Price Ratio
Dividend Yield
Value Factors

I think that the current compression in earnings multiples between
growth and value stocks means that the value premium (the expected
return differential of value over growth stocks) is small right now.
In 2000 there was a much bigger difference in earnings multiples
between value and growth stocks, and with some hindsight, one can also
that the value premium was also much higher.

I wonder how closely the value and growth ETFs and index mutual funds
conform to the definitions of value used by academics who have studied
the "value premium".