# P/E Predicts Returns

## Метаданные

- **Канал:** Learn to Invest - Investors Grow
- **YouTube:** https://www.youtube.com/watch?v=3qsX1u4loEY
- **Источник:** https://ekstraktznaniy.ru/video/34513

## Транскрипт

### Segment 1 (00:00 - 05:00) []

Hi, I'm Jimmy. In this video, we're looking at value investing, specifically when it comes to how we can improve our investment returns for as long-term value investors. So, you may have heard that the long-term average return of the S&P 500 is about 10%. And I went back and calculated that, and that is in fact true. It's actually about 10. 7% going back to 1960. In theory, if we would a dollar cost average where we invest the same amount of money in every, you know, month or quarter or year, whatever it is, well, we would end up doing fairly well. But here's the trick. When we pull up a chart of the returns of the S&P 500 going back to, let's say, 1990, well, obviously the returns don't look consistently at 10. 7%. In fact, an actual chart of the returns of the S&P 500 going back to 1990, we can see that it is far more volatile than that. Now, of course, we need to be careful because us as long-term investors, well, we don't want to say hypothetically if we would have bought here in 1999, well, we don't want to buy at that point and then lose money over the next few years. In fact, if we had invested at that point in time, well, we didn't make our money back. We didn't get back to like break even until it was like 2011 or something. Now, of course, I'm using an extreme example right before the tech bubble burst. And some people may ask, well, how would we have even known at the time that 1999 was going to be such a bad time to invest? Now, of course, we know it in hindsight, but how could we have known at the time? Well, this brings us to a chart that I actually found from Fidelity. Now, Fidelity's chart was from about a year ago. So, I kind of recreated it because I wanted to test to see if I got the same results that they did. And I got very similar results. Now, just so we're on the same page, this is how you read this chart. So, we have a dot. That dot represents the end of a quarter. And this specific example was actually in 2009. So, the way we read this is that we take that particular point in time and we go down to what was the PE ratio for the S&P 500 at the time. Now, we're using forward PE ratio and we could see that the PE ratio is about 15X. And then assuming we're long-term investors, if we were to buy at that point in time and we hold the investment for 10 years, well, what would our average annualized return been? Well, average, if we bought at that point in time, our average annualized return would have been a bit over 14%. So, clearly, that's good. That's better than the long-term average. It's really that simple. Ultimately, when we jump over and look at the full set of data going back from 1990 up till today, well, you can see that there's clearly correlation here. You can tell that because there seems to be, let's say, a discernable pattern. Now, the first thing we can notice is that if we buy a company and it's on the lower end of the PE ratio spectrum, well, clearly on average our returns are higher. Well, on a on the other side of the coin, if we were to buy them when the PE ratio is high, clearly the returns on average is lower. Okay, now let's clean this up a bit. Here's the interesting part. Right now, using the forward PE ratio, now I use Bloomberg estimates. There's a lot of different estimates out there, but they're all right around about 27X. Today, our the forward PE ratio for the S&P 500 lands here. Now, what's crazy about this is that if you look in history, if we invested when the PE ratio, when the forward PE ratio was anywhere near this level, well, for the next 10 years, our returns always turned out to be somewhere between 5% and positive about 2%. Again, that's an annualized basis, assuming you held for 10 years. And what's tough about that is if we're going to make practically nothing and possibly lose money, well, when we jump over to the Investors Grow website, here's some treasury yields, aren't we better off just buying treasuries or making some longerterm investment, we can guarantee some sort of return? Now, when we jump back to the chart, what's interesting is that with this particular market is that not all stocks are doing the same thing. And you might have heard that this market is being largely driven by the largest companies. And that's true. So, what I did is I went through the S&P 500 and I was looking for companies in the S&P 500 that had a forward PE ratio of, let's say, 15X or lower. And with that, there were 140 different companies in the S&P 500 that had a 15x or lower. If we wanted to do something like 20x, well, there was just short of 250 companies that had a PE ratio of 20x or lower. So, clearly, there's a lot of opportunities still out there. Now, my analysis focused on the S&P 500, which is the 500 largest companies in the United States, but not all companies are trading at that same level. When I looked at the S&P 500 midcaps midcap index, well, there that whole index was trading at about 21x. When I looked overseas at the Footsie 100, well, that Footsie 100 was trading at about 16x. The DAX, which is

### Segment 2 (05:00 - 05:00) [5:00]

Germany's index, they were trading at about 18x. Now, historically, the DAX and the Footsie don't have averages nearly as high as we do. But my point is that although the S&P 500 itself does look overvalued right now, and historically, if you bought the S&P 500 at this level, performance over the next decade is likely not to be all that great. But that doesn't mean there are not individual opportunities out there. Now, I recently started an free newsletter that I put out each day before the market opens. And in that newsletter, we put like a spotlight on a different industry, different companies. Now, if you want to sign up to get access to that free newsletter, I'll leave a link to that in the description below. And thank you so much for sticking with me all the way to the end of the video. I really do appreciate it. Thank you and I'll see you in the next