From: gts (gts@optexinc.com)
Date: Tue Sep 17 2002 - 03:28:32 MDT
Dan,
> As far as many people know, it's only a fad that there even IS
> a P/E ratio. (Look how out of touch we got during the 90s.) I
> think I could explain it. You would merely claim that one was
> based partly on the other, just like the gum broker would claim.
I'm not clear what you mean by "one based on the other" but I'll agree
that the P/E ratio can be viewed as a "fad." More accurately, I'll agree
that the hypothetically "correct" P/E ratio for a given stock is
determined by "faddish" opinions. The P/E ratio has been shown
empirically to be worthless as an indicator of a stock's future
performance.
Beta is the only reliable indicator of a stock's future performance
relative to the market. For those who don't know, beta is a measure of a
stock's historical volatility relative to the market. The general market
has by definition beta of 1. A stock with beta of 1.5 will see gains 50%
greater than the market when the market rises, and see losses 50% worse
than the market when the market declines. A stock with beta of -1 would
move opposite to the market. In general all stocks have a positive beta.
A few do not, most of them gold-mining stocks.
Beta is a measure of risk. To make a return x% greater than the market,
one must embrace x% greater risk by owning a portfolio with average beta
x% greater than the market. To say, as I do, that the market is
efficient is to say that there is no strategy capable in the long-term
of achieving a risk-adjusted return better than the market return.
> When called upon to find a basis, you'd, ah, claim it again.
> With authority. ;) But so would the broker. The point was
> that you needed to say something that the broker couldn't say.
>
> But you didn't.
Care to elaborate?
-gts
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