About twenty years ago, one of the hallmark technical indicators that folks looked at was the P/E ratio, or the price/earnings ratio. It was one of the key things folks talked about. Then, as has happened in every boom since the 1920's, it became inconvenient to look at the number. People were in the frenzy. They needed a new thing to concentrate on. So---they looked at future PE ratio and made up dreams of future earnings to justify buying higher and higher, and higher.
One of the stocks that comes to mind in this regard is QCOM, or Qualcomm. They were manufacturing, or in the process of developing the technology for the current cell phones that could transmit video and pictures. The P/E as I recall was 85 times earnings. The pundits always said that that was no longer important.
When the tech stocks imploded, everyone learned the rest of the story. P/E does matter. In every mania, the tendency is for folks to deny what has always been accepted valuation, and in time, those very folks become shocked when they discover that the old rules do matter.
Some reflective words on the art of trading....in business, stocks, or ...anything.....and in the spirit of the Book "The Tao Jones Averages," why whole brain analysis is critical whether in the rush of the bull, or the panic of the bust. This blog is an archive blog for prepublication of a small booklet.
