1) Would/could you not compare the P/E10 of some fund, rather then the market, as a whole, to determine whether or not to invest in that particular fund?  For example, if the P/E10 of that fund was at 11, while that of the market was 22, one indicator would say light on equity, while the other would indicate exactly the opposite, for that particular fund?

2) What about the P/E10 of individual stocks (same question as 1?)

3) If P/E10 of individual stocks and funds is significant (see 1 & 2), does that mean the average investors has to pour through historical data and annual reports to come up with this number?  That is, how good is current P/E, by itself, as an indicator for an individual stock/fund?

Benjamin Graham came up with the basic idea. He recommended looking at smoothed earnings, both over 8 to 10 years and over the last three years. This was the source of Professor Shiller's idea. He applied Benjamin Graham's idea to the S&P500 as opposed to individual stocks.

So YES, when selecting individual companies to buy, look at smoothed earnings, not simply the latest year's earnings. Single year P/E jumps around considerably. Smoothed earnings do not.

The reason for looking at the last three years of earnings is to make sure that the company is not going to go out of business. [Along the same line of thought, Orygunduck looks at the last two quarters of cash flow to make sure that dividends will continue.]

An individual investor should look at the earnings in a company's annual report. He should look at more than a single year before actual purchase.

The dividend equivalents of P/E10 based on 5 to 10 years of dividend income (P/D5 and P/D10) work well. They are an alternative to P/E10.

The overall P/E10 of the market (S&P500) has a huge influence on individual stocks. Even great stocks get dragged down when the market as a whole is falling.

Have fun.

John Walter Russell