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Value Investing: Tools and Techniques for Intelligent Investment by James Montier

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Chapter 36. Value Investors versus Hard-Core Bears: The Valuation Debate[36]

  • Go back a few years and I was regularly told that my Graham and Dodd PEs (G&D) were making the market look expensive because they used 10-year average earnings which didn't reflect high secular growth rates. I am now being told that my measures make the market look artificially cheap as the earnings for the last 10 years have been overstated. I suspect these swings tell us more about market psychology than about valuation.

  • To test the hard-core bears case I decided to conduct a robustness check on the valuation measure that I favour. The simplest check is just to look at the earnings deviations from trend over the last 10 years. On our measure the average deviation from trend for the S&P 500 (with the trend estimated since 1950) is – 1.4%. Effectively the last 10 years have seen both boom and bust, thus the G&D PE averages out the cyclical ...

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