PE ratio for an equity index by a Newbie

B

bogle

Registered User
Messages
129
Hi Askaboutmoney readers,
About 1 year ago I discovered this site and at the time downloaded and read the Askaboutmoney Guide to Savings and Investing. This free booklet was a real eye opener for me (would very much recommend it) and at the time I realised that I needed to do something about my lack of financial and investing knowledge, so over the last 12 months I have read the following books from cover to cover.

A Random Walk Down Wall Street by B Malkiel
The Little Book of Common Sense Investing by J C Bogle
The Warren Buffet Way by R G Hagstrom
The Four Pillars of Investing by W Bernstein
Investing in Stocks and Shares by J While
Fooled by Randomness by N Taleb
The Next Big Investment Boom by M Shipman

I tried to read this book to...
Getting Started in Technical Analysis by J Schwager

But after reading the previous books my heart just wasn’t in technical analysis and I'm not interested in trading so I gave up on it.

Anyway I’ve come to the conclusion that the best place to invest most of my money for the longer term (5-10 years) is in a broad based equity index fund with the lowest possible charges.
At the moment I’m looking for information on etfs namely iShares MSCI Europe and iShares MSCI Emerging Markets. There is plenty of historical price information on the ishares website on these funds and data on how well the they track the index.
But what I’m looking for is PE ratio data for these market indexes to put the recent fall in equities and funds in prospective. It’s easy to see that prices have fallen pretty dramatically recently but it would be very help full to know if the PE for the MSCI Europe index for example was in the 10-15 range, 15-20 range or above.
Sorry for the long post.

Cheers Bogle
 
Last edited:
Not sure how you could calculate this, would the different components of the fund not be reporting their earnings on different dates?
You'd have to take some kind of weighted average as well. The methodology in working it out could be so complex as to render the statistic useless?
 
Thanks for the replies.

Tiger according to Wikipedia the correct way to calculate a market PE is to use weighted averages as you suggest (see below). I don’t know how accurate they are but I think it is useful to get an approximate idea of the market PE to put the recent falls in some sort of historical perspective.

PMU thanks for those two very useful links. I didn't realise that Yahoo finanace had this type of info available. I guess it’s just a case of knowing where to look!


Rgds,
Bogle


The Market P/E as written on Wikipedia

To calculate the P/E ratio of a market index such as the S&P 500, it is not accurate to take the "simple average" of the P/Es of all stock constituents. The preferred and accurate method is to calculate the weighted average. In this case, each stock's underlying market cap (price multiplied by number of shares in issue) is summed to give the total value in terms of market capitalization for the whole market index. The same method is computed for each stock's underlying net earnings (earnings per share multiplied by number of shares in issue). In this case, the total of all net earnings is computed and this gives the total earnings for the whole market index. The final stage is to divide the total market capitalization by the total earnings to give the market P/E ratio. The reason for using the weighted average method rather than 'simple' average can best be described by the fact that the smaller constituents have less of an impact on the overall market index. For example, if a market index is composed of companies X and Y, both of which have the same P/E ratio (which causes the market index to have the same ratio as well) but X has a 9 times greater market cap than Y, then a percentage drop in earnings per share in Y should yield a much smaller effect in the market index than the same percentage drop in earnings per share in X. A variation that is often used is to exclude companies with negative earnings from the sample - especially when looking at sub-indices with a lower number of stocks where companies with negative earnings will distort the figures. In Stocks for the Long Run‎, Jeremy Siegel argues that the earnings yield is a good indicator of the market performance on the long run. The average P/E for the past 130 years has been 14.45 (i.e. earnings yield 6.8%). Shiller has argued that the mean P/E has risen from 12 to about 21 during 1920 to 2003[6]. Matt Blackman has examined a trading strategy using P/E ratio involving staying out of the market when P/E's 2 year SMA falls below 5 year SMA. It resulted in capturing 91% of the gain by staying in the market for only 42% of the time.
 
bogle said:
PMU thanks for those two very useful links. I didn't realise that Yahoo finanace had this type of info available. I guess it’s just a case of knowing where to look!
Click to expand...
I was most impressed by the books you’ve read, as, basically, they validate my own reading decisions. You could also look at Contrarian Investment Strategies by David Dreman; Stocks for the Long Run by Jeremy Siegel and John Neff on Investing (out of print but you can get it from Amazon UK). Schwager’s book on technical analysis is rubbish but you could look at those by Dr. Alexander Elder (especially Come into My Trading Room). I’m not saying these will make you money but they are a good read.

If you’re just using ETFs the average return and the correlation between ETFs are probably more important than the p/e of the ETFs (unless you are comparing national ETFs against the MSCI World index). Index p/e ratios are probably more important if you are comparing the p/e of individual stocks against the market/index value.
 
PMU said:
the books you’ve read...
Click to expand...

I only wish I'd read them 10-20 years ago!
Also in all fairness to B Burgess the Guide to Savings and Investments accompanying this site is very informative as well.



Cheers,
Bogle
 
You must log in or register to reply here.
Menu
Log in
Register