[nknight]

Hint: Watching CNBC doesn't make you a good investor, and throwing around the letters "PE" just makes you look like the worst kind of shallow, ignorant investor.

No experienced investor bases stock purchasing decisions off P/E ratio alone or even primarily, because the metric has absolutely no intrinsic meaning.

[xyzzyz]

Please, read the HN guidelines, especially the parts about being civil and replying to arguments instead of calling names.

[nknight]

You may not realize it, but 6sigma just did the equivalent of walking into a programming discussion and shouting "goto is evil!". It displays a disturbing and dangerous disconnect from reality. As a rule, I don't try to sugar-coat my responses to the willfully ignorant, but in the context, I don't see anything uncivil about my reply.

[nkurz]

Your response to Hessenwolf is great, and it's clear you know what you are talking about. I happily voted it up. But your reply to 6sigma is indeed uncivil, and I did my part to downvote it into oblivion. Since you apparently didn't intend to offend, I'll try to explain why people (me included) are having a negative reaction to it.

Starting off with "Hint" is condescending. Don't do it unless you intend to condescend, as this is uncivil. 6sigma offered a fact, qualified with "For what it's worth". You read a specific meaning into that fact, and are attacking him for the meaning that you have chosen to assign to his statement. This is impolite. Ask for clarification before assuming intent. And try to avoid insults like "worst kind of shallow, ignorant investor".

But please stick around and offer more solid comments like the one to Hessenwolf!

[hessenwolf]

P/E is pretty important, or could you back up why it is not?

[nknight]

Earnings are strictly past performance. They are a fixed quantity that has no meaning other than "for X time period, the company had Y profit".

Price is based on a combination of assets (not all of which have fixed values), future outlook (which can change at any moment and is based on subjective judgements and irrational consumer spending decisions), scarcity of the stock, and even second-to-second manipulations by automatic trading platforms.

You are dividing an absolute quantity based on past performance by a complicated, ever-changing number based in no small part on future predictions and other subjective and human factors, and trying to extract some sort of meaning.

Without a framework in which to evaluate the result that incorporates many, many other factors that are far more interesting, all you've got is a number that assumes the current judgement of the market has some relationship to past performance.

[pinko]

Very helpful, thanks. And for what it's worth, this is what I (and xyzzyz above, I imagine) wished you would have said initially, two comments up, for a higher HN S/N.

[hessenwolf]

Yes, helpful, but P/E is still important as a proxy measure for all of the things you mentioned. Current earnings are not a worse predictor of future earnings than many other more complex possible models. Under the assumption that future earnings will be at least reasonably predicted by current earnings, comparing the price as a multiple to that predictor is not a bad way to make a purchase decision relative to other assets. Of course book value is important, as are growth prospects, but book value (hopefully less so after IFRS4) is not really a great estimator of fire-sale value, and I would argue that growth is second order to earnings' first order and accordingly harder to estimate.