Age / Wisdom Ratio akin to Price / Earnings

At 46 – Half the people I meet think I am old and wise (well at least old), half – well let's say they think I have a lot to learn (and that I should better appreciate my physical youth). They are all right. Coming of age in the 90s; I cut my investment teeth into one of the greatest stock bubbles of all time. While never forgetting the mania, it's hard to believe we are anywhere near those mania levels today. However, not forgetful of the aftermath of the tech bubble, not to mention a global financial crisis, which in some regards was a continuation of tech bubble clean up among other things, I cannot but be a little bearish all the time. What is most remarkable to me is that with each passing year, despite my advancing age, I get more bullish (call it wiser on the power of stocks for compounding wealth efficiently) on stocks. Currently, the Dow Jones is facing another milestone, 40,000. Which is 4x the level it hit in the late 90s; 25 years ago – before the aftermath of the tech bubble, the financial crisis, COVID, you name it. The Dow at 10k went to 6k before going to near 40k and thus perhaps we go from 40k to 24k before going to 160k, wild rides indeed. But up over the long run. Which brings me to valuations today. See the Price to Earnings (PE) graphs below, courtesy of WisdomTree.

The top graph is the S&P 500 with Tech Stocks Price to Earnings (PE) Ratio over the last 30 years. The bottom graph is the S&P 500 without Tech Stocks Price to Earnings Ratio over the last 30 years. To Note:

1. We are not at absolute lows.
2. We are not at absolute highs.
3. We are somewhere in the middle – a bit above the Median.
   1. Note Median adjustment relative to an average level[i]

So, a lot like my age…PE ratios are high to some and low to others. But like I feel on a good day, the current PE ratio is in a good spot. Do stocks have to go down in Price for the PE ratio to drift lower to the average? No. That is only one way for the PE to go down. We could also see an increase in earnings. So much like my age to wisdom ratio, while the numerator is what is reported and easily grasped (and for me only goes up), it is an assessment of my wisdom and stocks earnings that really matter.

Looking Ahead with Optimism

Despite past market upheavals, my bullish outlook stems from a belief in innovation, resilience, and the transformative power of technology. The market's ability to recover and reach new heights speaks volumes about the potential lying ahead. I envision a future where we navigate from one milestone to the next, embracing the challenges and opportunities each brings.

As we navigate the complexities of the stock market and life itself, embracing both the wisdom of experience and the (always cautious) optimism for what lies ahead can guide us toward making informed, forward-looking decisions.

[i] The median is the middle number in a list of numbers sorted from smallest to largest, while the average is what you get when you add all the numbers together and then divide by how many numbers there are.
Knowing the median and average is important because they help us understand different things about numbers. The average can tell us what's typical or usual by adding everything up and finding the middle ground, while the median shows us the exact middle point, which can be really helpful to see what's common even if some numbers are really big or really small. This helps us make better decisions and understand information better, like grades in class or scores in a game.

In the stock market, the median P/E (Price-to-Earnings) ratio is often lower than the average P/E ratio. This happens because the average can be heavily influenced by a few companies with very high P/E ratios, especially in sectors like technology where high growth expectations can inflate valuations. The median, finding the middle point, isn't swayed much by these extremes. So, the median gives a more typical value of P/E ratios across the market, showing what's more common for most companies, while the average might reflect the skewing effect of those few high-value outliers.

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About the Author – Dane Czaplicki, CFA®

Dane Czaplicki is CEO of Members’ Wealth, a boutique wealth management firm that offers a comprehensive approach to serving individuals, families, business owners, and institutions. The firm’s goal is to preserve and grow its clients’ wealth to endure over time, while thoughtfully evolving its strategy to suit an ever-changing world. With over 20 years of wealth management experience, Dane and the Members' Wealth team thrive on bringing clarity and confidence to clients' unique situations. He believes everyone needs sound financial advice from someone whose interests are aligned with theirs, and is determined to put service before all else.

Dane received his MBA from The Wharton School of Business at the University of Pennsylvania and his bachelor’s degree from Bloomsburg University. Outside work, he enjoys spending time with his wife and kids, hiking and camping, reading, running, and playing with his dog. To learn more about Dane, connect with him on LinkedIn.

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