Something to Think About George.

The P/E or price/earnings ratio for any stock shows the stock price divided by annual earning per share and the stock price reflects the current valuation of the company. (not its asset valuation though that comes into it) Its average over the last century has been around 6 with peaks in 1929 and 2000 of around 16. These were due to excessive bank lending pushing up prices way about the stock’s, and in the latter case housing’s realistic value from either assets or profitability. These unreal inflated prices crashed back to moderate values leaving a mountain of very real debt. There is a need for P/E ratios and the rise of housing prices to be restricted to realistic limits, but that’s not for here. If I were to apply a P/E ratio to a domestic family it would be different. The overall net income of the family relates to its stock price, it’s value in the labour market place, and what it saves per year equates to its net profit after expenses, i.e. its ‘earnings.’ So the P/E ratio for a family is annual income over annual savings. So for a poor family who can barely cover its outgoings its P/E ratio is zero where as a family with a £1m income spending say £50,000 would be ~20. A hedge fund manager on £100m and spending £1m would have a P/E of ~100, and if he could only manage to spend £100,000 it would be ~1,000. So for a company the P/E range is historically 2 to 18 but for a family it is currently 0 to 1,000. I’m not sure how true all this is but as we’re all living the same life in a way there really shouldn’t be that much variation. If nine times is the range for corporations it shouldn’t be that much more for families. Something to think about George.