I’ve posted Entry #209 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called No P/E10 Value Signifies the Same Thing At All Times.
Juicy Excerpt: It’s also important to keep in mind that P/E10 values do not pop up randomly. There is a pattern that has applied for the entire 140 years of stock market history. Prices start out low. Then they rise steadily for perhaps 20 years. Then they fall sharply and remain low for perhaps 10 years. Prices behave in that matter because the natural impulse of investors is to push prices up. They continue doing this until their common-sense understanding that there are limits to how high prices can go kicks in to cause prices to crash. Then the economic devastation that follows from the huge loss in consumer buying power causes investors to hate stocks for a good bit of time.
A P/E10 value of 15 represents fair-value pricing for stocks. But a P/E10 value of 15 signals something very different when prices are on their way up to a P/E10 value of 25 or more than it does when prices are on their way down to a P/E10 value of 8 or less.