Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (14) | Ignore Thread Prev | Next
Author: TMFShadowDragon Big red star, 1000 posts Old School Fool Home Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 21247  
Subject: Re: What is your Avg Portfolio PE? Date: 2/10/2013 11:11 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 3
Hi Carpian

The two calculations estimate two different things. The PE fraction method provides a simple average, weighted by price, across a population of stocks. DTM's method is the overall PE of the portfolio. Your PE 10 stock contributes more because it contributes more (i.e., 2/3) of the earnings of the portfolio.

The "simple average, weighted by price" is about the worst way to estimate the PE of a basked of equities to determine if it is over or under priced.

Take a basket of 20 stocks of equal value in a portfolio. Nineteen (19) have a PE of 10 and one (1) has a PE of 1000. The simple average approach provides an overall PE of 59.5 while the total price / total earnings has an overall PE of 10.52. Even replacing the PE of 1000 with the arbitrary PE value of 200 still gives an overall PE of 10.5.

Which do you think better reflects the "price to earnings" of the basket of equities? Even using the mode (PE of 10 in this case) is a better approach. All of which shows that a highly valued market using a simple average weighted by market capitalization can mask a considerable number of low priced equities.

In my view the simple average weighted by market capitalization / portfolio value is a nearly meaningless statistic.

Cheers

Paul
TMFShadowDragon
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (14) | Ignore Thread Prev | Next

Announcements

Foolanthropy 2014!
By working with young, first-time moms, Nurse-Family Partnership is able to truly change lives – for generations to come.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Post of the Day:
Macro Economics

Looking at Currency Ratios
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement