Over the course of the 20th century, the valuation for a “typical” S&P 500 stock shifted upward from a P/E ratio of about 10 to a P/E ratio of about 17. Unless you happen to have a nice taste and appreciation for history, this might fall into the category of things that you do not think about a whole lot. But still, it can be a question worth examining: Why are investors, on average, willing to pay $17 for each dollar of a company’s profits when a century ago they were only willing to pay $10 for each dollar of profits. Is this an example of permanent irrationality in the marketplace?
Thanks to technological advances and productivity gains, most S&P 500 companies are able to take more profit out of the company than ever before (as opposed to the days of railroads, telephone companies, and steel mills … Read the rest of this article!