over what period of time should we evaluate a long-term approach like value investing in order to believe that it is a reliable guide for future behavior? There is good data for prices and earnings for the New York Stock Exchange going back to the 1870s. I looked at every month from 1881 to 1998 and identified it as a High-P/E (> 15 P/E) or Low P/E (<15 P/E) market. I then looked at the annual inflation-adjusted returns (without dividends) for an investor who purchased a representative basket of stocks in that month, held it for ten years and sold it. For each decade for the 1880s to the 1990s, I calculated the simple average returns for this investment strategy in Low-P/E markets and divided it by the simple average returns for this investment strategy in High-P/E markets. This, in essence, created a simple measure of the advantage created by investing in Low-P/E markets for that decade.
I looked at several variants of this analysis (20-year returns, different P/E cut-points, etc.), and the relative advantage of investing is low-P/E markets is always higher in the post-WWII period than in earlier periods.
[In other words, value investing didn't work very well from 1890 to 1919. But it has done well since, or only about the last 50 years.]
-- via gurufocus