Gyroscopic Investing

Odysseusa wrote: The P/E ratio of the stock market generally has 15. When it approaches to the low teens or the single digit, it means that it is available at a discount.

 

In the very long run, all of the returns earned by stocks are created not by speculation but by investment-the productive power of the capital invested in our business enterprises. History tells us, for example, that from 1900 through 2007 the calculated annual total return on stocks averaged 9.5 percent, composed entirely of investment return, roughly 4.5 percent from the average dividend yield and 5.0 percent from earnings growth. (Dare I remind you that this return reflects neither the croupier costs of investing nor the erosion of inflation?) What I call the speculative return-the annualized impact of any increase or decrease in the price-earnings ratio or P/E multiple-happened to be zero during this period, with investors paying a little over $15 for each dollar of earnings (P/E=15) at the beginning of the period, and about the same at the end. Of course, changes in the P/E can take place over long periods; but only rarely does the long-term speculative return add more than 0.5 percent to annual investment return, or subtract more than 0.5 percent from it. [Bogle, Enough, page 53.]