The rule of 20
by John Authers/ BS
Additional Readings:
Is the rule of 20 back in force? This measure was popular in the 1950s and 1960s in the US, stating that the price/earnings multiple to pay for a stock could be derived by subtracting the current inflation rate from 20. The rule worked well, and was aligned with investment logic – if inflation is higher, a company’s future earnings are worth less now, and so they should attract a lower multiple.
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