P/E ratios relate to the ROI possible with other investments. It’s likely that as the world gains more wealth that wealth will face diminishing returns when generating more wealth.
The simplest model to demonstrate this an a fund that extracts 1% of it’s value per year. Eventually it’s total returns hits the global GDP growth rate plus inflation. Theoretically stocks should have a lower P/E due to associated risks but eventually a P/E of 20 is very possible.
> P/E ratios relate to the ROI possible with other investments.
Yes, but P/E ratios also relate to a lot of other factors, like human psychology
> It’s likely that as the world gains more wealth that wealth will face diminishing returns when generating more wealth.
Maybe, but my (outdated) understanding of the literature is that the equity risk premium has not decreased, even as the world has gotten a lot richer
> The simplest model to demonstrate this an a fund that extracts 1% of it’s value per year. Eventually it’s total returns hits the global GDP growth rate plus inflation. Theoretically stocks should have a lower P/E due to associated risks but eventually a P/E of 20 is very possible.
I don't understand this logic (could be right, I just don't follow it)
The simplest model to demonstrate this an a fund that extracts 1% of it’s value per year. Eventually it’s total returns hits the global GDP growth rate plus inflation. Theoretically stocks should have a lower P/E due to associated risks but eventually a P/E of 20 is very possible.