Sound Bites Suck

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Sound Bites Suck

I was watching one of the talking heads on a TV business show this week and he stated that the markets in the US have an average P/E (price to earnings ratio) of 17.6. He went on for a long period of time stating that because of this all U.S. stocks had to go down a lot, as everything was over-priced.

If you believed him, you would be going to cash and waiting for everything to come down a lot more. I’m not making a market call here, so please don’t start buying without meeting with a Professional, Independent Investment Advisor.  I do have advice in this area, but I do not make these calls in a blog. They are for my clients.

Think Tank Analysis

We discussed this the next day at our brain trust of advisor’s meeting and all found this hard to believe. I wrote about the advantages of our Practical Independent Think Tank in August 2014. One advisor went on Google Finance and did a screen of all the stocks on US markets. Here is what we found:

There are 32,000 listed securities in the U.S. We did a screen of securities that have a P/E of 12 and higher and only found that there were 3,500 securities. That leaves 28,500 securities below a P/E of 12. We used 12 as it is considered in the industry to be at the low end of the range, suggesting there is good value.

11% of the index is higher than a P/E of 12.

89% of the index is lower than a P/E of 12.

Having 89% of the U.S. stocks below that Price to Earnings benchmark, suggest that this TV personality got it exactly wrong. The 11% of the stocks that were pulling the other 89%’s P/E up to 17.6 must have huge Price to Earnings Ratios.

You have to break it down further

Of course at first this does not make sense if this talking head was right. In order for this to be true he had to be measuring with weighted calculations. This weighting probably was one of the following:

  • Weighted by the market capitalization of each stock. In this case the large companies have more influence on the calculation. The S&P 500 uses this method.

  • Weighted by price. They simply add the price of each stock and divide by the number of stocks. High priced stocks have much more influence in this scenario and skew the results. The Dow Jones Industrial Average uses this method.

I sure hope he was aware of the different styles of weighted measurements as he could have also mixed two different styles to get his answer. I wrote about people advising the public about the Price to Earnings Ratio without proper context in November 2014. Please see my blog “How to hurt your Credibility”.

Controversial Sound Bites Make Good Ratings

He should have advised investors to not buy or sell equity securities using only a security’s Price to Earnings Ratio, let alone the whole U.S. market. Making a big controversial call like this is great for TV ratings and helping him to become a regular guest on a business show; but this was not an informed statement. This could hurt a lot of unaware investors - and some advisors.

There is so much more to understand and know about markets than what these sound bites do for you. I read and watch these sources day in and day out and at times I want to scream at them. To tell you the truth, the day I heard this 17.6 P/E ratio statement I found myself nattering at my computer screen. At least my door was closed. I worry about the helplessness of the public against these sound bites.

This is another example of us drowning in information, while starving for wisdom.

YOUR INDEPENDENCE MATTERS and if you want to see what a truly independent investment/insurance advisor can do for you, call me at 905-846-9060, ext.3838, email me at Terry.McIntyre@manulifesecurities.ca or visit my website at www.terrymcintyre.ca