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  1. Scott Beavers

    Top of page 4: chart is labeled “Forward” PE Ratios when it is actually “Trailing”. Article presents a plausible thesis but the reasons for labeling and discarding “anomalous” instances are largely unexplained and lead to results that can be suspect due to a data selection bias. Further, how do we know at present that we are not in an “anomalous” cycle?

    1. James A. Kostohryz Post author

      Thanks, Scott.

      Will correct that.

      I did say in the original Seeking Alpha article why I excluded the data from those periods. In the first period, it was due to high inflation which distorts earnings and also the fair value PE multiple. The second was also discarded due to high inflation AND the fact that there was no “mid-cycle” during that short recovery (followed by a double dip). Note that PEs in both of these anomalous periods were very low suggesting that if they were not anomalous periods, the market for virtually all of the rest of US market history was grossly overvalued.

      The third was the bubble period of 1998-2000. I explicitly say that we MIGHT head into another anomalous bubble period and, if so, PEs can continue to expand. The conclusion is that you should probably only be long stocks if you expect a bubble to inflate, similar to 1998-2000.

      I understand your concern about data selection bias. However, I think that perhaps most people could agree on the logic behind my sorting of the data and I did lay out that reasoning, if only briefly.


      1. Scott Beavers

        I didn’t thoroughly connect the two articles. I believe your considerations are valid as 1) we are not in a high-inflation environment so it’s fair to exclude those cycles at this juncture and 2) your point that PEs during those cycles were anomalously low so they more generally deserve outlier attribution. As usual, you’ve provided a very probative analysis.