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
Washington Post, September 11, 2011
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.