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The Essential P/E: Understanding the stock market through the price-earnings ratio by Keith Anderson

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Chapter 9. Developing the P/E

Here I cover three developments of the P/E that have become popular in recent years. The first two do not recalculate the P/E itself, but simply try to use it in a slightly more sophisticated way. The last one puts different numbers into the ‘E’ in the P/E calculation.

The industry-adjusted P/E

Does the P/E effect work as well within industries? If I buy stocks with a P/E of 15 when the average for that industry is 20, should I expect to do as well as if I had bought stocks with a P/E of 8 when the industry’s average is 13?

This is one of David Dreman’s favourite strategies in his 1998 book. Sure enough, buying the lowest 20% of stocks by P/E in each industry showed a very similar outperformance over the ...

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