My Sunday Business Washington Post column is out. This morning, we look at earnings, analysts forecasting track record, and what that means for stock valuations if we have a recession.

I actually like both headlines today: The online version is Market action a ‘conversation’ between investors very much sums up a philosophical view I have held for a long time. The print version cuts right to the chase: The investor’s dilemma: Earnings, valuations and what to do next.

Here is an excerpt from the column:

“To make sense of this, let’s look at a stock price relative to a company’s earnings — the key to understanding valuations. The slowing economy can help explain stock prices over the next year, as well as your queasiness.

Start with a basic method for valuing stocks. To grossly oversimplify, what you pay for a share in a company is based (in large part) on a formula called “earnings multiple.” How much you should pay today is a function of how much the company is likely to earn next year. The Wall Street analysts who create those earnings forecasts put a multiple on it, lets say 15X and — voila! — we get a fair estimate for what prices stocks should be next year.

What could possibly go wrong with that? Plenty. Three major things: estimates, multiples and forecasting error.”>

After last week’s huge Apple layout and art work, this week, I am relegated to a simple column (at least I’m next to a great piece on Voodoo economists by Steven Pearlstein):
click for ginormous version of print edition


Publishing note: Over the Summer, I filled in for WP’s tax columnist, publishing just about weekly over the past 2 months. After this week, I return to publishing 2X a month. I hope to use the longer interim between columns to focus on investment issues in greater depth, including more research, versus the timely/topical weekly items.


Market action a ‘conversation’ between investors
Barry Ritholtz
Washington Post, September 11, 2011

Washington Post Sunday, September 11, 2011 page G6 (PDF)

Category: Analysts, Apprenticed Investor, Earnings, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

7 Responses to “WP: Market Action a ‘Conversation’ Between Investors”

  1. You attacked a mega corp last week. You’re lucky they kept you around at all

  2. Petey Wheatstraw says:

    Only scanned the intro to the article, here, but it points out something I’ve noticed about how the nouveau riche in the US came about their wealth. While the robber barons of past eras cemented their wealth by monopolistic practices in growth or core industries, more recently, that wealth has nothing to do with the value or potential of the underlying business model or industry, and everything to do with foisting the value of projected (in this case, “projected,” meaning pulled from thin air), income onto the stock markets by using earnings estimates as far into the future as the eye can see (similar to the Republican Congress and President projecting the Clinton surpluses 20 years into the future and then looting the treasury for all it was worth).

    A home builder I was associated with, who took a publicly traded remnant of the previous housing bubble (worth pennies, at the time) and parlayed it into $1 billion of “his own” money (and a share of stock well beyond $1K). To do this, he ramped up the debt of the company in order to expand geographically, becoming a RRE developer and builder in virtually every market in the US, during the boom. His rapid expansion of the company’s market “share” along with bubble-fueled earnings projections (the debt for which was minimized by allowed “accounting” dishonesties), made his stock worth many times its true value. When this fellow saw the bust coming (one of the few that didn’t drink the Kool Aid he had mixed), he retired” (“retired,” in this case, meaning cashed-out), leaving investors, employees and vendors to fend for themselves when all of the projected earnings and stock values turned to shit.

    All in all, the profit derived from developing land and building houses on it came nowhere close to the valuation of the company, then, or at any foreseeable point in the future.

    In short, his wealth came from investors in the stock of his company, and not from the core business of home building.

    Our economy will continue to crash as long as such fraudulent practices are allowed. Too bad the average investor can’t determine what’s in any particular mystery bag before they buy shares of it.

    If we do not come to grips with the sanctioned thievery, we’re done, for good.

    On a related note: it’s my belief that the US dollar should be devalued by 98%, or so, with the new dollars (in the hundreds of thousands of dollars, per capita), going directly to the middle and lower classes (sort of a Bushco “Tax Rebate” taken to the most extreme of extremes). Only then will the wealth amassed by past fraud schemes be reconciled with the incomes, and more importantly, earnings potentials, of those who violated the laws of economics with impunity.

    How wealthy will a billionaire be in a system where a new-hire at McDonald’s makes several million dollars a year?

    Fuck them. They fucked us, first.

  3. theexpertisin says:

    Excellent article.

    Perhaps some follks who always take time in the coments to cheap shot the US, making no concessions to historical modes of conduct within the times, will ponder what it will be like when China calls in its widespread economic and political markers to the chagrin of the free world.

    Methinks America will be viewed as a decent and fair nation after all.

  4. wunsacon says:

    The “conversation” in August:

    Investor #1: I want to sell.
    Investor #2: Me, too. Where’s investor #3?
    Investor #3: Hey, guys. Sorry I’m late. Would one of you like to buy my shares?

  5. Lariat1 says:

    Petey gets 4 stars this morning.

  6. mathman says:

    Maybe people are waking up:


    for next week.

  7. [...] The investor’s dilemma: Earnings, valuations and what to do next (September 11th, [...]