Why You Missed Some Fabulous Stocks!

While these figures are merely averages, they do strongly imply that if you were not willing to pay an average of 20 to 30 times earnings for growth stocks in the 40 years through 1993, you automatically eliminated most of the best investments available!
P/Es were higher on average from 1953 to 1970 and lower between 1970 and 1982. From 1974 through 1982, the average beginning P/E was 15 and expanded to 31 at the stock's top. P/Es of winning stocks during this period tended to be only slightly higher than the general market's P/E at the beginning of a stock's price advance.

High P/Es were found to occur because of bull markets. With the exception of cyclical stocks, low P/Es generally occurred because of bear markets. Some OTC growth stocks may also display lower P/Es if the stocks are not yet widely owned by institutional investors.

Don't buy a stock solely because the P/E ratio looks cheap. There usually are good reasons why it is cheap, and there is no golden rule in the marketplace that a stock which sells at eight or ten times earnings cannot eventually sell at four or five times earnings. Many years ago, when I was first beginning to study the market, I bought Northrop at four times earnings and in disbelief watched the outfit decline to two
times earnings.