Analyzing the Financial Market: The Rule
of 20
In our own unique way, we are all investors.
We are definitely all investors in time, but the
majority American households also have investments in financial assets, namely stocks.
These equity investments...
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Analyzing the Financial Market: The Rule
of 20
In our own unique way, we are all investors.
We are definitely all investors in time, but the
majority American households also have investments in financial assets, namely stocks.
These equity investments can be held in a 401k plan, mutual funds, or an IRA.
This
doesn’t count the good percentage of people that have a personal account they actively
manage or trade.
Divining the direction of the stock market can be as confusing as being a termite in a yoyo.
So what would be a good simple gauge we could use to determine if the equity markets
are overvalued or undervalued? Price to earning ratio is one determinant, but it has its
limitations.
Enter the Rule of 20—a simple formula that has been around for many years but hardly
ever used.
The Rule of 20 is not a magic formula, but it is useful in evaluating if stock
prices are over or undervalued.
.
What it says is this— from l961 to about l994 the rate of
consumer inflation when added
Less
