Our financial system is crumbling this week.

[Hungary Jack]

With stock prices at the current level, I wonder what the P/E ratios are for the trailing 12 months. Stock prices must be incredibly cheap right now based on earnings ratios. At some point, after the smoke clears, stock prices will rise dramatically. I wish I knew when...

Good timing for this:

How cheap are stock prices?

A few tidbits:

Late this morning, after several gyrations, the Standard & Poor’s 500-stock index was below 900. That meant the five-year p-e ratio was just below 12. (The corporate earnings data isn’t all available yet, so this is an estimate.) It was last that low in late 1985. Over the past 100 years, the average p-e has been about 15.5.

So stocks are pretty darned cheap right now.

But there's more:

The p-e ratio typically falls well below its long-run average during a bust. It fell to about 6 in both the 1930s and early 1980s...Remember that there are two components to the p-e ratio: the ‘p’ and the ‘e.’ Based on the kind of recession we may now be entering, it’s entirely reasonable to think that corporate earnings will fall, maybe significantly. That would mean that stocks would also have to fall just to keep the p-e ratio in its current place.

OMG. It could be a long way down.

[Popeye_Card]

Buying individual stocks as a layman is retarded (no offense if you do).

Timing the market is also a bad plan as well.

I guess I agree with both of these. but now the alternative to "going it alone" is blind faith in Wall St. stock pickers (mutual funds)...

or burying coffee cans of cash in your back yard.

Despite their recent failures, the Wall Street crowd is still remarkably better at picking stocks than your average Joe. Your mutual funds may be down 20%+ so far this year, but I'm sure that if you had gone alone, you'd probably be as-bad or worse.

[greenback44]

Buying an index fund based on the S&P 500 or the Russell 2000 essentially is a bet on the US economy without the concern about stock pickers (and, yeah, the academic literature is clear that they're not particularly useful). I'm not sure that stocks are an appropriate asset for 401k's though, especially if you have substantial assets outside such tax shelters.

P/E ratios will be low, but the E part is as problematic as the value part of a mortgage's loan-to-value ratio.

[Leroy]

Oct. 10 (Bloomberg) -- Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the world's financial markets while they ``rewrite the rules of international finance.''

[Transmogrified Tiger]

Buying individual stocks as a layman is retarded (no offense if you do).

Timing the market is also a bad plan as well.

I guess I agree with both of these. but now the alternative to "going it alone" is blind faith in Wall St. stock pickers (mutual funds)...

or burying coffee cans of cash in your back yard.

Despite their recent failures, the Wall Street crowd is still remarkably better at picking stocks than your average Joe. Your mutual funds may be down 20%+ so far this year, but I'm sure that if you had gone alone, you'd probably be as-bad or worse.

I've read that 85% of mutual funds don't beat the market.

[Freed Roger]

With stock prices at the current level, I wonder what the P/E ratios are for the trailing 12 months. Stock prices must be incredibly cheap right now based on earnings ratios. At some point, after the smoke clears, stock prices will rise dramatically. I wish I knew when...

Good timing for this:

How cheap are stock prices?

A few tidbits:

Late this morning, after several gyrations, the Standard & Poor’s 500-stock index was below 900. That meant the five-year p-e ratio was just below 12. (The corporate earnings data isn’t all available yet, so this is an estimate.) It was last that low in late 1985. Over the past 100 years, the average p-e has been about 15.5.

So stocks are pretty darned cheap right now.

But there's more:

The p-e ratio typically falls well below its long-run average during a bust. It fell to about 6 in both the 1930s and early 1980s...Remember that there are two components to the p-e ratio: the ‘p’ and the ‘e.’ Based on the kind of recession we may now be entering, it’s entirely reasonable to think that corporate earnings will fall, maybe significantly. That would mean that stocks would also have to fall just to keep the p-e ratio in its current place.

OMG. It could be a long way down.

Thanks for that article Jack.

I'm not smart about these things, so I'll echo the worry over the "earnings" part of equation. If they are using a base of earnings from a 5-10 year period for these companies - I'm guessing those earnings are likely overstated. I've heard companies wrote off a lot of bad assets starting with the Enron and Worldcom shams, but it seems to reason a large amount more are coming and not yet reflected in the 5/10 yr avg. ...at least that's part of what I'm inferring from the article. Its a damn vicious cycle

[Popeye_Card]

Buying individual stocks as a layman is retarded (no offense if you do).

Timing the market is also a bad plan as well.

I guess I agree with both of these. but now the alternative to "going it alone" is blind faith in Wall St. stock pickers (mutual funds)...

or burying coffee cans of cash in your back yard.

Despite their recent failures, the Wall Street crowd is still remarkably better at picking stocks than your average Joe. Your mutual funds may be down 20%+ so far this year, but I'm sure that if you had gone alone, you'd probably be as-bad or worse.

I've read that 85% of mutual funds don't beat the market.

Well then you better pick your mutual funds wisely.

What percentage of individual stocks don't beat the market? I'm guessing that's 85%+ too.

[Freed Roger]

I've read that 85% of mutual funds don't beat the market.

Its hard to say. Again, my reservation with the mutual funds - its putting my faith in Wall St.

With my 401k - the company stock is allowed, but everything else is in various mutual funds.
Basically, i take a guess at what these mutuals are comprised of by their names - i.e. intl, small cap, growth, blue chip, index etc. There is one money market mutual which I managed to move a chunk into about 6 months ago - thus I am only down about 21% for the year - versus the 35% drop the dow has taken this year.

I guess I should be happy.

[BenNX74205]

I've read that 85% of mutual funds don't beat the market.

I'm uneducated about the stock market. What would constitute "beating the market?"

[Hungary Jack]

Oct. 10 (Bloomberg) -- Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the world's financial markets while they ``rewrite the rules of international finance.''

LMAO. Anyone familiar with Italian politics is dying with laughter at this.