For some reason, human beings tend to be relatively short-sighted when it comes to investing in stocks.  Instead of making long-term investment decisions, people often focus on relatively minor or short-term occurrences or temporary changes in earnings.  One result of this phenomenon is the fact that the traditional P/E ratio, which uses only one year of earnings in its calculation, is a very popular measure used in stock buy and sell decisions.  Many investors react aggressively to changes in a single quarter or a year of earnings or in anticipation of future earnings.

In his popular book, Irrational Exuberance, Robert J. Shiller instead recommends using an inflation-adjusted P/E covering the past ten years to support decisions about whether to buy or sell stocks.  This ratio is referred to as the P/E 10.

Since, the P/E Ratio can also be measured for a bundle of stocks, Shiller illustrates his point using the S&P 500.  During the times preceding a market crash, the S&P 500 has become overvalued, exhibiting a very high P/E 10.  The P/E 10 rose all the way to the low forties in 1999 and 2000 just before the tech bubble, and it reached high twenties again just prior to our current economic turmoil.

Shiller keeps an updated and ongoing spreadsheet of the P/E 10 calculation for the S&P 500 all the way back to 1871 here.