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Monday, September 16, 2013

This Dart Board Suggests It's A Great Time To Buy Stocks

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Monday, Sept 16, 2013

This Dart Board Suggests It's A Great Time To Buy Stocks

One of the most basic measures of stock market value is the price-earnings (P/E) ratio.

Generally speaking, when the P/E is low, stocks are considered cheaper.

Citi's Tobias Levkovich examined 73 years worth of next-12-month returns for the S&P 500 based on various levels of the the P/E.

He found that based on this measure, the best times to buy stocks were when the P/E was below 8.

Interestingly, the next best time to buy stocks were when the P/E was at 14 to 16. The average 12-month return at this level is 12.6%. These returns are better than when the P/E is between 10 and 14.

The P/E was just one of nine valuations methods Levkovich considered when he published his call that the S&P 500 would rally to 1,900 by the end of next year.

Now the choice of a dart board to illustrate this seems a bit random. But it illustrates the randomness of the market, which often offers higher returns when it looks more expensive.

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