Thanks Joachim - nicely written!

There's another serious problem with forward PE ratios. Apologists usually use a reasonable-looking forward PE to justify an obviously high trailing PE. Now suppose that the necessarily high earnings growth does actually materialize AND the trailing PE does become what the forward PE had anticipated. Then by basic algebra, the total return on the stock is zero (or, more precisely, just the dividends earned over the period, but if it was a high PE share, chances are that the dividends were negligible anyway).

My empirical work on South African equities since the 1960s is in broad agreement with your findings.

Lucas - in my experience, PEG is even worse than forward PE. It's often used in practice as (price:forward earnings/expected earnings growth), so the probable error in earnings expectations is actually compounded.