Wednesday, February 25, 2009

Worst-Case Scenarios Based on 100 Years of Dow Price/Earnings History

A separate post in this series provides a graph of DJIA (Dow Jones Industrial Average) price/earnings ratios by year since 1929. The most recent post summarizes Dow P/E ratio history since around 1900. In this post, we will apply those historic earnings multiples to recent Dow Jones earnings -- primarily in order to create some worst-case scenarios.
One of the primary reasons for doing the original analysis was to get a feel for the range of multiples that have been applied to stock market earnings in the past 100 years or so. As the table below shows, the range of earnings multiples is very wide; the normalized price earnings ratios, NPEs, range from around 33 to around 7. (Note: NPE is price divided by normalized earnings.) What this means is that there have been years when the market charged ($100 of earnings x an NPE of 33=) $3300 for $100 of stock market earnings; there have been other years when you could buy the same level of earnings for about $700. The range between expensive and cheap is very wide indeed.

Pricing the Dow Using Historic Earnings Multiples

An important question is, based on our history of earnings multiples since 1900, what price might the stock market have assigned to the Dow given recent earnings. Answering that question will give us some perspective. First, we will look at 2002, and then extrapolate to 2008/2009.

Implications of Price to Earnings Ratios on Expected Dow Price Range for 2002

Note: The average NPE between 1898 and 2007 was 14.9.

The table above approximates the range of prices that the market might have paid for 2002 normalized earnings (NE) of $455. (Because of the way I normalize earnings, 2002 is the most recent year for which I have calculated normalized earnings.) The table shows

Sunday, February 22, 2009

Dow Price/Earnings Ratio Impact on Future Returns - A Summary

This post shows that, in general, investors buying the Dow index at low p/e multiples have received significantly higher returns than investors buying at high p/e multiples.

Stock Market Price-Earnings Ratios Are Important

In a previous post, I looked at the history of stock market prices over the last 100 years in order to provide some historical perspective. Price is important. However, I would argue that value is even more important; that's the subject of this post. My objective is to provide the same kind of perspective on DJIA (Dow Jones Industrial Average) valuation that the "100 Years" post provides on price.

Whether you are buying stocks, bonds, mutual funds, houses, cars or bananas, valuation is important. By "valuation," I mean relative price, the price you pay relative to the value you get, or relative to some measure of worth. Without some way of measuring worth we can't determine whether we're getting a good price.

P/E Ratios & Subsequent 10-Year Stock Market Returns -- in Dollars

Growth of investment in Dow Jones Index by beginning price/earnings (p/e) ratio
Growth of $10,000 Stock Market Investment by Starting P/E
In the stock market, valuation is most often measured by using price / earnings ratios, that is the price of a company's stock divided by the earnings of that company. This ratio is also referred to as the earnings multiple. Other methods used to assess valuation include price / book value,

Saturday, February 14, 2009

Planning To Buy A House

Planning to buy a house
Are you getting ready to buy a new home? According to, "Nearly 12 percent of all Americans with a mortgage - a record 5.4 million homeowners - were at least one month late or in foreclosure at the end of last year." This post will help to keep you from joining that group.

In a previous post, I discussed the disadvantages of buying a house. In this post, I focus on ways to reduce the impact of four of those disadvantages -- the ones that are primarily related to income and expenses:
• The risk of foreclosure
• Increased monthly expenses
• Potentially significant start-up costs
• Less predictable expenses

Prepare for the Unexpected with Insurance

Ideally, you want to be confident that you can continue to make your mortgage payments for the life of the mortgage -- no matter what. What happens if you are "sick or hurt and can't work?" This is a double-edged sword of the worst kind. Just when you are hit with unanticipated medical expenses, you are potentially facing an unexpected decrease in your income. This could be devastating. Luckily, there is a way to help protect yourself against both edges of this sword --

Thursday, February 12, 2009

Identifying Strengths, Weaknesses, Opportunities & Threats (SWOTs)

Strategic Planning: Strengths, Weaknesses, Opportunities & Threats (SWOTs)


This post will help you identify the critical issues and obstacles that are stopping you from realizing your dreams, and the most important factors that are going to help you overcome those obstacles! Strategic planners call these SWOTs -- strengths, weaknesses, opportunities and threats. They're the primary data for your personal strategic plan.

Identifying SWOTs (Strengths, Weaknesses, Opportunities & Threats)

If the plan is for more than one person (e.g., for a family), brainstorming is usually an effective method for identifying SWOTs. If you're "brainstorming" alone, get a pencil and paper, or 3x5 index cards, or your PC, and set aside a half-hour or so of quiet time to do some serious soul-searching. You want to generate as complete a list as you can, covering:
  • Strengths -- you will need to capitalize on these to achieve your vision. For example:

Monday, February 2, 2009

Discovering Your Vision

Personal Strategic Planning Vision: It Starts With A DreamIt Starts With A Dream
  • "You got to have a dream. If you don't have a dream, how you gonna have a dream come true?": South Pacific (an old Broadway musical)
  • "The average person goes to the end of their life with their music still in them" Zig Ziglar
Personal strategic planning starts with a dream, a possibility -- often, an improbability. Actually, many people have several dreams. In this post, you will identify your dreams; those dreams will be the foundation for your strategic plan.