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How to value the stock market

Are shares cheap, you ask? “Compared to what?” is my first reply.

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Analysts, journalists and private investors often talk about the market being cheap or expensive on a P/E basis. What do they mean?

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Contrary to what some of its adherents imply, PE10 will not see you dive effortlessly in and out of the market like a seagull stealing chips. But it’s a useful tool nonetheless.

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Valuing the market by earnings yield

Wondering whether the market is expensive? It’s a good but very hard question to ask. Looking at its earnings yield might give you a clue. (That’s “might”).

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Roll up, roll up, for another widely-quoted measure of stock market valuation with more flaws than a cut-glass diamond.

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As long as you’re not talking nose-bleedingly stupidly high P/E ratios, a higher P/E ratio for the market is no reason to fear lower returns.

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How much it rains in the US has a better statistical record of predicting returns then some variables you’ll hear tossed about in the media…

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