Ask Colin

I fail to see any relationship between the PE ratio and the performance of a company. What do you think?

You are making a stand in the face of all conventional thinking and long experience backed up by research. There is no point me going over here what is so well documented in many places. Perhaps the best is David Dreman's book Contrarian Investment Strategies - The Next Generation.

The PE ratio is a measure of relative value. It tells you simply how many dollars you need to pay for every dollar of earnings. Another way to look at it is how many years it will take to get your investment back from the profits. Clearly, on both of these views, the higher the PE ratio, the more expensive the company. Unless it can grow profits strongly and reliably, a higher PE represents more risk and less relative value.

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