The Traders Book Club
In recent decades the P/E has been the most important and best-known investment ratio. Apart from the share price, it is the only investment statistic that is published in print every day. Every share quoted in London has its P/E printed daily in the Companies section of the Financial Times. But what does it actually mean? For most people it?s a shorthand way of deciding how highly the market regards a company. It tells you how many years? worth of future earnings you are paying in order in order to buy the share now.
In The Essential P/E, Keith Anderson starts with the basics: the fundamentals of share prices and how earnings and P/Es are calculated in the UK. He then goes on to look at the value premium, which is the whole basis of using the P/E as an investment tool: low P/E shares, on average, outperform the market.
The second half of the book gets into the details of the P/E: developments that have tried to improve it, and how some famous value investors have combined it with other measures. The P/E can be made into a powerful tool. But as with most powerful tools it can run amok if you don?t control it properly, check what it is telling you by looking at other statistics, and apply a liberal amount of common sense.
While the value to investors of being familiar with this widely used statistic is clear, professionals in financial markets may find it a more surprising subject, possibly never having stopped to think how or why it is calculated that way. Such professionals may well be surprised by how easily the P/E could be improved if things were done slightly differently.
The Essential P/E is primarily aimed at investors who already know something about investing in shares, but is also suitable for market professionals and academics. Quite simply, it is a practical and worthwhile read for anyone wanting to boost their stock returns.
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