On Sale?Recently the DOW dropped below 10k for the first time in a while. At first, I thought, “Yay, its on sale!” Its always good to buy things on sale. My wife goes to outlet stores to buy clothes for our child so we pay less than full price. I like that. It is no different than buying stocks.

“However,” I thought, “just because a price has gone down doesn’t mean its a good price.” Stores are constantly advertising slashed prices, but many of times even at 20% off something is still a bad deal. I decided to investigate more whether dropping down below 10k was a good deal like my instincts told me.

I went to my most trusted indicator to tell me about the bargain level of the stock market -- the price to earning ratio or PE ratio. For most internet research about investing I use msn money because they have a better layout for looking at a company’s financial statements. However, for big picture stuff like PE ratio, Yahoo finance is the way to go and I use the ticker VTI as my indicator. Its broad and its run by a company I trust -- Vanguard.

Right now the PE is about 15.8 as this link shows. The PE is for Jan 31, 2010, but the DOW was at about the same point as it is now -- only a little higher. I will look for a PE of less than 12 before I will get excited about sale prices. That would mean the DOW will have to drop below 8,000 (really its closer to 7,682 for a PE of 12) or the collective earnings of public companies would have to increase significantly.

A PE of the market of 15 is about average historically and the lower the market PE when you buy, the higher the profits you can expect. The market usually ranges between 10 and 20 PE, but has gone down as low as 5 (during the late 70’s when it was a GREAT time to buy) and over 40 (tech boom when it was a terrible time to buy).

My conclusion? The market was not a deal when the DOW dropped below 10k for the first time in a while. I will wait until it is much lower before making a move from my more conservative investments into stocks.