Let me begin by saying that I am only beginning to understand most of the stock world and I still prefer to invest in mutual funds and ETFs. However, I’ve been pointed to a nifty little tool/calculator that seeks to express the effect of stock valuation on a stock’s return.
I can’t properly explain it, so I’ll let the owner do some talking:
The purpose of the calculator is to help you set your stock allocation strategy. Stocks generally offer a stronger value proposition at times of low or moderate valuation than they do at times of high valuation. By comparing the long-term returns likely to follow from stock purchases made at today’s stock valuation level with the long-term returns likely to follow from stock purchases made at a lower or higher valuation level, you can put together a stock purchase strategy likely to aid you in becoming a true buy-and-hold stock investor. Predicting stock returns by making reference to stock valuation levels prepares you for what is to come in the years ahead.
With that said, please go over and toy with it a little. Maybe you can find the value in it. Me? I’m a little confused with it to actually have it do me any good.