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How the Market Works

Two Words: P/E Ratio

Posted by kdadmin on September 22nd, 2014.

The S&P 500 was just at record highs.

The P/E Ratio is just over 20, the average is 16. So, that means that to continue to go up, investors must be willing to pay more than $20 for each $1 in earnings (5% return or less), whereas they are usually only willing to pay $16 or less for every $1 in earnings (6.25% return or more).

In other words, the stock market is likely overpriced.

In other, other words, having a cash stake on hand, like we do, for when the buyers dry up could be a wonderful thing.

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