To look at a different part of the world, think about how important China Mobile used to be vs where it is now and how Alibaba Group was 0% and now its the 2nd largest holding in the S&P China Index.
Think about what this does to fundamental ratios like P/E’s and dividend yields on the index aggregates. Exxon pays a large dividend — AMZN and FB don’t pay anything in dividends. Exxons P/E in 2007 was under 13x while the AMZN P/E has averaged well into the triple digits over the past 10 years.
This is loosely related to ‘Regime Change’ — the fundamentals of backtesting are that you should think about RECENT DATA and weight it more heavily than old data. Same concept. What the P/E was 10 years ago isn’t very important And what it was 30 years ago is less important than that. We do not mean you need to totally discard any market related info. We are just saying weight it far less in your overall thinking than data from more recent times.
The following article was republished with permission from ETFreplay.