When we set out to determine how closely price and earnings are connected, using our laboratory group of 12,000 companies, we learned that the longer the time period, the stronger the correlation. With stocks held three years, the degree of correlation between stock price and operating earnings ranged from .131 to .360. (A correlation of .360 means that 36 percent of the variance in the price was explained by the variance in earnings.) With stocks held for five years, the correlation ranged from .374 to .599. In the 10-year holding period, the correlation between earnings and stock price
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