The Truth About P/Es

There has been no factor with a greater impact on the variability of investors’ returns over decade-long periods than the trend in the market P/E ratio. History shows that the change in the market P/E ratio over a decade often doubles or halves investors’ returns. This article and its graphs explain P/E, explore its history, and detail its implications. An addendum titled “About Every Five Years…” has been included to discuss periodic distortions in the P/E ratio (including the significant distortion in 2006 and 2007).