The Extremes of the P/E Effect

Investigations into value-based 'anomalies' such as the P/E effect sort shares into quintiles, or at most deciles. These are blunt instruments. We test whether most of the extra value to be found in the lower end of the P/E spectrum is to be found in the very lowest P/E shares, and whether the worst investments are in the few shares with the highest P/E. Using a long-term definition of earnings, and attributing influences on the P/E to company size and sector, we find that a handful of value shares give returns of 40%+ per annum, while a handful of glamour shares give returns less than the risk-free rate.