Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

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Jiu Jitsu Fighter
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Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

Post by Jiu Jitsu Fighter » Tue Jul 18, 2017 9:01 pm

After the wonkiness of the PE ratio small-cap index funds per Vanguard's website as of 5/31, they either changed methodology and/or corrected errors on their portfolio tab. Here are the P/E and P/B ratios of some of their index funds as of 6/30:

Ticker Fund P/E P/B
VTSAX Total Stock Market 21.2x 2.9x
VSIAX Small-Cap Value 16.3x 1.8x
VTIAX Total International 16.6x 1.6x
VTMGX Developed Markets 17.2x 1.6x
VEMAX Emerging Markets 14.5x 1.7x
VFSVX Ex-US Small-Cap 15.9x 1.5x

That's all

Dirghatamas
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Re: Stocks just got cheaper... per Vanguard

Post by Dirghatamas » Tue Jul 18, 2017 11:41 pm

I wouldn't worry about VG being very prompt and good about fund analytics projections. They only do backward looking earnings, do a fairly conservative handling of 0 and negative earnings and are not very prompt at updating the numbers. There are other sources which specialize in this stuff. The one I use consistently to look at forward P/E projections across the world (broken by every country, each region etc.) is

Yardeni Research. http://www.yardeni.com/pub/mscipe.pdf

They update their stuff at least once per month and often twice a month. As a research analytics type org, this is the type of stuff they specialize in. VG is good at managing index funds. I wouldn't focus on them for analytics.

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JoMoney
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Re: Stocks just got cheaper... per Vanguard

Post by JoMoney » Wed Jul 19, 2017 12:22 am

I'd wager Vanguard changed nothing in there methodology, and there was nothing incorrect with the data consistent with their methodology.
More likely, the end of a financial quarter and new earnings estimates from companies changing the denominator.

viewtopic.php?f=10&t=193123&#p2938027
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TinkerPDX
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Re: Stocks just got cheaper... per Vanguard

Post by TinkerPDX » Wed Jul 19, 2017 12:51 am

Dirghatamas wrote:I wouldn't worry about VG being very prompt and good about fund analytics projections. They only do backward looking earnings, do a fairly conservative handling of 0 and negative earnings and are not very prompt at updating the numbers. There are other sources which specialize in this stuff. The one I use consistently to look at forward P/E projections across the world (broken by every country, each region etc.) is

Yardeni Research. http://www.yardeni.com/pub/mscipe.pdf

They update their stuff at least once per month and often twice a month. As a research analytics type org, this is the type of stuff they specialize in. VG is good at managing index funds. I wouldn't focus on them for analytics.
Thanks for sharing

Interesting to see India, Indonesia and Mexico w similar valuations to US

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ray.james
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Re: Stocks just got cheaper... per Vanguard

Post by ray.james » Wed Jul 19, 2017 1:08 am

TinkerPDX wrote:
Dirghatamas wrote:I wouldn't worry about VG being very prompt and good about fund analytics projections. They only do backward looking earnings, do a fairly conservative handling of 0 and negative earnings and are not very prompt at updating the numbers. There are other sources which specialize in this stuff. The one I use consistently to look at forward P/E projections across the world (broken by every country, each region etc.) is

Yardeni Research. http://www.yardeni.com/pub/mscipe.pdf

They update their stuff at least once per month and often twice a month. As a research analytics type org, this is the type of stuff they specialize in. VG is good at managing index funds. I wouldn't focus on them for analytics.
Thanks for sharing

Interesting to see India, Indonesia and Mexico w similar valuations to US
India and Indonesia have 0% LTCG tax rates for their citizens which is why they tend to be expensive.(mexico at 10% --I think)

In addition India and Mexico also provide tax exemption for stock investment. This is is to encourage population to move away from Gold and real estate as sole investments.

Just FYI, these markets also yield less dividend than Russia or Brazil because it is considered income.(These latter 2 nations make no distinction between dividends and capital gains. SO they have higher dividends.) This is also the reason when people say to look at interest rates to understand the market valuation.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

datamonkee
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Recent Sudden change in P/E?

Post by datamonkee » Wed Jul 19, 2017 7:51 am

[merged datamonkee's thread and a reply into this existing thread - moderator prudent]

I track on a monthly basis the P/E ratios for a couple of vanguard funds. There was a huge change (drop) in P/E ratios between 5/31/17 and 6/30/17. I did not see a huge price drop, so that implies a large earnings boost. But this seems odd. Does any one have a good explanation for this?

SP500 (VFINX) 24.0-->21.5
total US mkt (VTI) 27.4-->21.2
mid cap us (VIMAX) 33.1-->22.6
small cap us (VSMAX) 69.7-->19.7
europe (VEUSX) 26.2-->18.8

Thanks.

alex_686
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Re: Recent Sudden change in P/E?

Post by alex_686 » Wed Jul 19, 2017 9:11 am

It is being discussed in this thread here:
viewtopic.php?f=10&t=223708&newpost=3455229

The short answer is that the P/E ratio that Vanguard uses is backwards looking at stale. Jumps like this are not uncommon.

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siamond
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Re: Stocks just got cheaper... per Vanguard

Post by siamond » Wed Jul 19, 2017 9:34 am

Vanguard methodology is a P/E TTM (Trailing Twelve Month), calculated as described on this P/E wiki page. IMHO, this type of factual data about the current price and the past year of earnings is much more significant than any aggregate of forward-looking guesses from biased analysts...

Anyhoo, the OP is asking about changes about the Vanguard metric. I don't believe one second that they would change methodology on a dime. It seems more likely that a raft of new quarterly earnings data changed the denominator. But yes, that is indeed quite a sudden change between May and June. Here are some posts documenting numbers grabbed in May-17:
viewtopic.php?f=10&t=221946#p3423395
viewtopic.php?f=10&t=221946#p3423823

I am starting to think that it would be good to do something similar to the Simba spreadsheet, and maintain an historical archive of various metrics provided by Vanguard (e.g. price, P/E, P/B, Sec Yield, etc), with annual and/or quarterly updates. After a few years, it would then be easy to compute a PE10 (aka CAPE) to smooth things up. Or maybe we can try to ask Vanguard for historical data.

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siamond
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Re: Stocks just got cheaper... per Vanguard

Post by siamond » Wed Jul 19, 2017 9:45 am

Jiu Jitsu Fighter wrote:Here are the P/E and P/B ratios of some of their index funds as of 6/30:

Ticker Fund P/E P/B
VTSAX Total Stock Market 21.2x 2.9x
VSIAX Small-Cap Value 16.3x 1.8x
VTIAX Total International 16.6x 1.6x
VTMGX Developed Markets 17.2x 1.6x
VEMAX Emerging Markets 14.5x 1.7x
VFSVX Ex-US Small-Cap 15.9x 1.5x
Let me add a couple more we discussed in the thread I just pointed to:
VSGAX Small-Cap Growth 27.9x 3.3x
NAESX Small-Cap Blend 19.7x 2.3x
VVIAX Large-Cap Value 18.7x 2.3x

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nedsaid
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Re: Recent Sudden change in P/E?

Post by nedsaid » Wed Jul 19, 2017 10:21 am

datamonkee wrote:I track on a monthly basis the P/E ratios for a couple of vanguard funds. There was a huge change (drop) in P/E ratios between 5/31/17 and 6/30/17. I did not see a huge price drop, so that implies a large earnings boost. But this seems odd. Does any one have a good explanation for this?

SP500 (VFINX) 24.0-->21.5
total US mkt (VTI) 27.4-->21.2
mid cap us (VIMAX) 33.1-->22.6
small cap us (VSMAX) 69.7-->19.7
europe (VEUSX) 26.2-->18.8

Thanks.
You see a similar effect at Morningstar, which posts P/E ratios based upon future estimated earnings. I would often be surprised to see the market go up and forward P/E ratios actually go down! Similar effect, must be due to rising earnings estimates.

Wall Street and investors would like to believe that earnings move upwards at a steady rate. I remember the so-called ruler stocks that allegedly had 15% compounded growth that you could draw with a ruler on a graph. In real life, the 15% growth was a product of optimistic earnings projections by analysts and clever financial engineering by companies. In reality, corporate earnings are volatile.

The above numbers are reassuring. Price to Earnings ratios are not as outrageously priced as some believe, the market is not cheap, but in the light of very low interest rates, not irrationally priced either. If you look at P/E ratios based on future estimated earnings, things look even better.
A fool and his money are good for business.

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jhfenton
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Re: Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

Post by jhfenton » Wed Jul 19, 2017 10:30 am

My M* portfolio weighted-average forward PE ratio just dropped too with the new Vanguard June month-end data. M* portfolio x-ray now shows 15.99, whereas a few days ago, it was 16.74.

Jiu Jitsu Fighter
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Re: Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

Post by Jiu Jitsu Fighter » Wed Jul 19, 2017 12:50 pm

It was the huge drop in some of the funds that I found peculiar. I believe that the small-cap growth had a P/E around 121x and now has a P/E of 27.9x. It'd be difficult to explain that away by earnings growth alone. Granted P/E's of index funds went bonkers in 2008, but that was mainly driven by gigantic losses in some firms along with overall earnings weakness. With a very non-volatile market, I would not expect these swings. 27.9x seems about right, although, I haven't calculate it myself (you could convince me that 35x is right as well). However, the over-100x didn't seem to be calculated correctly.

JJF

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siamond
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Re: Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

Post by siamond » Wed Jul 19, 2017 12:56 pm

Jiu Jitsu Fighter wrote:It was the huge drop in some of the funds that I found peculiar. I believe that the small-cap growth had a P/E around 121x and now has a P/E of 27.9x. It'd be difficult to explain that away by earnings growth alone. Granted P/E's of index funds went bonkers in 2008, but that was mainly driven by gigantic losses in some firms along with overall earnings weakness. With a very non-volatile market, I would not expect these swings. 27.9x seems about right, although, I haven't calculate it myself (you could convince me that 35x is right as well). However, the over-100x didn't seem to be calculated correctly.
I would agree with you here... The Small-Cap Growth P/E as of May-17 was documented by Vanguard as a mind-boggling 259x (cf. this post of mine). The new value does seem much more credible. I am trying to ask Vanguard for a history of such P/E values (and price and more) for various funds. Stay tuned and wish me luck...

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Re: Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

Post by Jiu Jitsu Fighter » Wed Jul 19, 2017 12:58 pm

siamond wrote:
Jiu Jitsu Fighter wrote:It was the huge drop in some of the funds that I found peculiar. I believe that the small-cap growth had a P/E around 121x and now has a P/E of 27.9x. It'd be difficult to explain that away by earnings growth alone. Granted P/E's of index funds went bonkers in 2008, but that was mainly driven by gigantic losses in some firms along with overall earnings weakness. With a very non-volatile market, I would not expect these swings. 27.9x seems about right, although, I haven't calculate it myself (you could convince me that 35x is right as well). However, the over-100x didn't seem to be calculated correctly.
I would agree with you here... The Small-Cap Growth P/E as of May-17 was documented by Vanguard as a mind-boggling 259x (cf. this post of mine). The new value does seem much more credible. I am trying to ask Vanguard for a history of such P/E values (and price and more) for various funds. Stay tuned and wish me luck...
Thanks siamond. Good luck!

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JoMoney
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Re: Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

Post by JoMoney » Wed Jul 19, 2017 1:27 pm

Jiu Jitsu Fighter wrote:... It'd be difficult to explain that away by earnings growth alone...
If you understand that Vanguard's methodology includes for negative earnings, and the distortions that can cause in some cases, it's not difficult at all... but it might have been an error too..
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

alex_686
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Re: Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

Post by alex_686 » Wed Jul 19, 2017 2:13 pm

JoMoney wrote:
Jiu Jitsu Fighter wrote:... It'd be difficult to explain that away by earnings growth alone...
If you understand that Vanguard's methodology includes for negative earnings, and the distortions that can cause in some cases, it's not difficult at all... but it might have been an error too..
I have worked on these kinds of problems before. Stale data is the bigger culprit. Earnings data can be 12 months old, firms have left the index via mergers, growth, or whatever. Which takes me to my next point...
siamond wrote:Vanguard methodology is a P/E TTM (Trailing Twelve Month), calculated as described on this P/E wiki page. IMHO, this type of factual data about the current price and the past year of earnings is much more significant than any aggregate of forward-looking guesses from biased analysts...
Why do you say this? I understand the issues with forward earnings. However it is my understanding that forward earnings have more predictive value than backwards earnings. Looking forward in the fog instead of driving by the rear view mirror sort of thing.

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Re: Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

Post by Thesaints » Wed Jul 19, 2017 2:21 pm

alex_686 wrote: Why do you say this? I understand the issues with forward earnings. However it is my understanding that forward earnings have more predictive value than backwards earnings. Looking forward in the fog instead of driving by the rear view mirror sort of thing.
Forward earnings are just that: a prediction. ttm were actually realized (bar accounting creativity) and one could argue that a company does not change a lot one year to the next. This is certainly false for some companies, but it is a lot truer for a whole market.

We can compromise and calculate P/E on 6 months of past and 6 months of projected earnings. It is certainly true that projections 6 months ahead are more reliable than 12 and that companies change less in 6 months than they do in a year.

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Re: Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

Post by siamond » Wed Jul 19, 2017 2:27 pm

alex_686 wrote:Why do you say this? I understand the issues with forward earnings. However it is my understanding that forward earnings have more predictive value than backwards earnings. Looking forward in the fog instead of driving by the rear view mirror sort of thing.
For an individual firm, maybe there is truth to your statement, although analysts are notoriously biased and often wrong. For a market as a whole, things do not change much from one quarter to another, and we know that PE1 (TTM) or PE10 (CAPE) have fairly decent predictive power over the coming decade or so, so better use factual information. Personally, this is what I am looking for. Don't know what the OP's intent was.

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Re: Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

Post by Thesaints » Wed Jul 19, 2017 2:35 pm

The "10" in "PE10" stands for "10 years". In 40 quarters companies can and do change a lot. 10 years ago Apple was a personal computers company...

I agree with what you write regarding P/E ttm, but the CAPE has a very questionable predictive power.

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Re: Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

Post by alex_686 » Wed Jul 19, 2017 2:46 pm

Thesaints wrote:The "10" in "PE10" stands for "10 years". In 40 quarters companies can and do change a lot. 10 years ago Apple was a personal computers company...

I agree with what you write regarding P/E ttm, but the CAPE has a very questionable predictive power.
It depends what you want to do.

If you want to run market models with a 1 year time frame the order of predictive values is
1. Forward Looking Estimates
2. Trailing PE
3. CAPE

If you want to run market models with a 10 year time frame, the order is
1. CAPE
2. Forward Looking
3. Trailing PE

So Forward Looking always trumps Trailing PE.

As for CAPE 10, I am impressed with it. It comes down the to the cup is half full or half empty. In predicting long term market returns it has a predictive power of 40%. No other simple objective metric has power that is even close to that.

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Re: Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

Post by herpfinance » Wed Jul 19, 2017 3:52 pm

alex_686 wrote: Why do you say this? I understand the issues with forward earnings. However it is my understanding that forward earnings have more predictive value than backwards earnings. Looking forward in the fog instead of driving by the rear view mirror sort of thing.
Forward earnings are more often than not too optimistic, leading to seemingly lower forward valuations, because the denominator is too high compared to the resulting reality.
David Dreman wrote:Analysts’ forecasts are usually optimistic. Make the appropriate down­ward adjustment to your earnings estimate.
"The intelligent investor is a realist who sells to optimists and buys from pessimists" - Benjamin Graham

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Re: Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

Post by Thesaints » Wed Jul 19, 2017 5:15 pm

alex_686 wrote:
Thesaints wrote:The "10" in "PE10" stands for "10 years". In 40 quarters companies can and do change a lot. 10 years ago Apple was a personal computers company...

I agree with what you write regarding P/E ttm, but the CAPE has a very questionable predictive power.
It depends what you want to do.

If you want to run market models with a 1 year time frame the order of predictive values is
1. Forward Looking Estimates
2. Trailing PE
3. CAPE

If you want to run market models with a 10 year time frame, the order is
1. CAPE
2. Forward Looking
3. Trailing PE

So Forward Looking always trumps Trailing PE.

As for CAPE 10, I am impressed with it. It comes down the to the cup is half full or half empty. In predicting long term market returns it has a predictive power of 40%. No other simple objective metric has power that is even close to that.
Why would I care of earnings as much as 20 years in the past in my model ?
The CAPE so called "predictive power" has been all accumulated in a distant past, when the economy moved at a glacial pace.

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Re: Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

Post by datamonkee » Thu Jul 20, 2017 8:25 pm

The vanguard P/E is trailing, not forward, right?

so, is the there a general consensus for the cause of the large drop in P/E?

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Re: Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

Post by Thesaints » Thu Jul 20, 2017 8:32 pm

CAPE today exceeded its value on Black Tuesday.

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siamond
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Re: Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

Post by siamond » Fri Jul 21, 2017 11:33 am

datamonkee wrote:The vanguard P/E is trailing, not forward, right?

so, is the there a general consensus for the cause of the large drop in P/E?
Yes, the Vanguard PE reflects the current price and the trailing twelve months (TTM) of earnings. Don't know if there is any consensus, but it appears that both technology and financials had a really good quarter with earnings, and this probably largely explained the P/E recent changes. This also shows that such an annual measure goes though quite some ups and downs, and really should be taken with a giant grain of salt. It's good to see US companies showing such solid earnings though.

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Re: Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

Post by alex_686 » Fri Jul 21, 2017 12:03 pm

datamonkee wrote:The vanguard P/E is trailing, not forward, right?

so, is the there a general consensus for the cause of the large drop in P/E?
The P/E data is trailing and stale and have lag times. Earnings can be as old as 15 months and still be in the calculations. The data is lumpy, with lots of companies reporting at the same time so lots of updates at the same time.

I have said this earlier in the thread but forward P/E ratios have a higher quality. Yes, they tend to be optimistic. So what types of flaws do you want in your data? When you run P/E ratios through the model of your choice future P/E ratios give you more predictive power than trailing P/E ratios.

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Re: Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

Post by patrick013 » Fri Jul 21, 2017 1:08 pm

Right now EPS ttm for the 500 is $100 and estimated EPS for fiscal
2017 is $117.

What they are for mid, small, and Intl is anybody's guess, but whatever
the EPS ttm and resulting PE is for those is based on the most current
and available info.

Here's what S&P's senior analyst says :
Earnings and sales both coming in stronger, but calendar helps.
Looks like record earnings and margins; sales better but short of a record.
Heavy reporting starts next week - 190 issues, with 126 the following week.
High expectations lead to higher whisper numbers, which are easier to disappoint.
Money managers typically sit, but short-term traders are short term - and paper profits are growing.


Sounds better than a 10% drop in sales.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

Post by JoMoney » Sat Jul 22, 2017 2:22 am

alex_686 wrote:...The P/E data is trailing and stale and have lag times. Earnings can be as old as 15 months and still be in the calculations. The data is lumpy, with lots of companies reporting at the same time so lots of updates at the same time...
I don't think the data is especially old, but it's definitely "lumpy" at the times for which companies are reporting and when. With the large number of companies (especially in certain sectors) that had/have negative earnings, and the Vanguard methodology that includes those (rather than ignoring them like iShares and other fund companies do in there calculations).. I don't think Vanguard's data is in error or inconsistant, people just need a better understanding of how its being calculated.

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Re: Stocks just got cheaper... per Vanguard [sudden change in Vanguard fund P/Es]

Post by alex_686 » Sat Jul 22, 2017 8:12 am

JoMoney wrote:I don't think the data is especially old...
Here is my logic.

I am assuming that they are using audited fiscal year end audited earnings. So the average age would be 6 months and the oldest would be 12 months. They could be using quarterly earnings.

It can take more than a month to generate and post the annual report. So between 1 to 2 months.

The P/E is updated only once a month, so add another month.

In reviewing the numbers I think the oldest data would be 14 months, with the average age around 7 to 8 months.

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Re: Stocks just got cheaper... per Vanguard

Post by TinkerPDX » Wed Jul 26, 2017 12:22 pm

ray.james wrote:
TinkerPDX wrote:
Dirghatamas wrote:I wouldn't worry about VG being very prompt and good about fund analytics projections. They only do backward looking earnings, do a fairly conservative handling of 0 and negative earnings and are not very prompt at updating the numbers. There are other sources which specialize in this stuff. The one I use consistently to look at forward P/E projections across the world (broken by every country, each region etc.) is

Yardeni Research. http://www.yardeni.com/pub/mscipe.pdf

They update their stuff at least once per month and often twice a month. As a research analytics type org, this is the type of stuff they specialize in. VG is good at managing index funds. I wouldn't focus on them for analytics.
Thanks for sharing

Interesting to see India, Indonesia and Mexico w similar valuations to US
India and Indonesia have 0% LTCG tax rates for their citizens which is why they tend to be expensive.(mexico at 10% --I think)

In addition India and Mexico also provide tax exemption for stock investment. This is is to encourage population to move away from Gold and real estate as sole investments.

Just FYI, these markets also yield less dividend than Russia or Brazil because it is considered income.(These latter 2 nations make no distinction between dividends and capital gains. SO they have higher dividends.) This is also the reason when people say to look at interest rates to understand the market valuation.
Thx for the explanation. Makes good sense.

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