Six years into a bull market for U.S. stocks, you may be wondering: Is the run over? The financial news is peppered with references to the stock market being overpriced and ripe for a correction, so it would be natural for an observer to worry.
I thought I would take a look at some of the data used in these predictions to see what I could learn. One of the measures often cited by those claiming the market is overvalued is the cyclically adjusted price-to-earnings ratio. This is also called the CAPE or P/E10. I call it the PE ratio’s big brother.
As Warren Buffett has famously said, “Price is what you pay. Value is what you get.”
The price of a particular stock is clear to anyone who cares to look it up. Just punch in the stock ticker symbol on a financial website, and you’ll see the current price instantly. Determining the value of a stock isn’t so simple. While a stock’s price is a simple fact, value is subject to interpretation and analysis. Differing opinions of value explain why the buyer and the seller can both walk away from a stock trade thinking that they got the better of the deal.
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