This ratio compares stock prices with earnings smoothed over the last five years. It was Benjamin Graham and David Dodd who came up with the recommendation in their 1934 book Security Analysis to not only take into account the last year but to look at the last 5 or 10 years. This allows the investor to smooth out the business and economic cycle, as well as price fluctuations. This long-term perspective dampens the effect of expansions as well as recessions.
We calculate this factor as follows: