Message Font: Serif | Sans-Serif
 
No. of Recommendations: 1

OK, this is my first post here, so I apologize if this is old info. In chapter 3 of Beating the Street, Lynch explains a strategy he used in buying small caps. There is a 30-year graph of the PE ratio of the T. Rowe Price New Horizons Fund (PRNHX) relative to the PE of the S&P 500. In other words, he divided the New Horizons PE by the S&P 500 PE and graphed the result over time. The numbers basically ranged between 1 and 2. His belief was that when the New Horizons PE was double that of the S&P 500, ie when the graph was around 2, "small stocks got clobbered for several years afterward. [...] Clearly the best time to buy emerging growth stocks is when the indicator falls to below 1.2."

Well, I looked up the PE of the New Horizons fund and it is 26. The PE of the S&P 500 is 20.62, which puts Lynch's indicator at 1.26. Not exactly below 1.2, but right in that neighborhood.

If I'm going about this correctly, it would seem like now would be a good time to invest in small caps. Anyone care to comment on this?

By the way, I have most of my money invested across various index funds, but was thinking this might be a good way to tweak my contributions for the near future.
Print the post  

Announcements

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.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! 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.