Posts filed under “Valuation”

Preview: What Does “This Time Is Different” Really Mean?

This is a preview of an upcoming column.



“The four most dangerous words in investing are: ‘this time it’s different.’ ”  -Sir John Templeton

What do these words actually mean to investors today? As of late, more than a few pundits have been misinterpreting their meaning. With a wave of a hand, they dismiss data and fundamental metrics that are in fact very different – sometimes, by a lot. When a significant input to corporate earnings is several standard deviations away from its historical mean, that is different. This is not what Templeton was referring to. This misinterpretation has been costly.

What does ‘this time it’s different actually mean?

Stated simply, Valuation always matters. There is no new paradigm that will ever change that. What you pay for a stock or index will ultimately determine the return it generates over time.

What is never different is the behavior of investors. It is always driven by greed and fear. That is simply human nature at work.

We all understand the basic formula for valuation: Price relative to earnings, or P/E ratio. And as I noted yesterday, there are many ways to measure valuation. “Stocks can be defined as cheap (the rule of 20, which adds the inflation rate to a stock index’s price-earnings ratio) or fairly priced (forecast P/E), somewhat overpriced (12-month trailing P/E) or wildly overpriced (Shiller’s cyclically adjusted P/E).”

What Templeton was not suggesting was for investors to ignore the many factors that actually impact valuation. Metrics such as GDP, Unemployment, Inflation, Interest Rates can move to extremes, and this should be noted. He was not suggesting these factors should be ignored because they are “different” than they were previously. Rather, he was warning that you should check your own behavior if you believed a new era was upon us and that valuations no longer mattered.

Should one ignore inflation rates of 12% or bond yields of 2%? Of course not.

This is a nuanced but important difference.

In 1974, the P/E ratio of the S&P500 was 7.33, but inflation was running at 11% and the 10 Year bond yield was 7.4%. Real returns were negative. Should investors have ignored that different data? By 1981, P/E ratios were about the same, but risk free yield of the 10 year was over 15%. Some investors of that era dismissed the fundamental differences. Those investors in the early 1970s who bought stocks because they were cheap were surprised when they got much cheaper. Real returns in the decade of the 1970s reflected a near 75% loss.

Identifying when metrics that matter change is very different than recognizing when the collective madness of the crowd no longer believes valuation makes a difference.

This is an enormously important difference.


More on this tomorrow . .  .
Update: Sunday’s column is posted here


Category: Investing, Psychology, Valuation

Do You See the Positives or Negatives?

The Standard & Poor’s 500 Index hit an all-time high yesterday, closing at 1,897.45. The Dow Jones Industrial Average also hit a record, ending at 16,715.44. This should be tempered by noting that the Dow is up less than 1 percent so far this year, while the S&P 500 has gained about 2.7 percent. One…Read More

Category: Data Analysis, Earnings, Psychology, Sentiment, Valuation

Are Valuations Really Too High?

Are Valuations Really Too High? By John Mauldin Thoughts from the FrontlineMay 10, 2014 Take It to the Limit In a Perfect World The Future of Earnings How Did We Get Here? It’s Not Only Stock Market Valuations San Diego, Italy, and Nantucket The older I get and the more I research and study, the…Read More

Category: Think Tank, Valuation

Alibaba: The _____ of China

All the Western companies you’d have to combine to get something like Alibaba:   click for larger graphic Source: Quartz   Alibaba filed for its IPO last night, and as you can see below, it is more than merely the “Amazon of China.” If you want to know why the dollars involved are so large, …Read More

Category: Digital Media, Economy, IPOs, Valuation, Web/Tech

Spec-Tech Crash Is a Good Thing

Today, I hope to explain how the crash of the speculative tech names is a positive. Last month, we noted that “High-Flying Tech Stocks Were Coming Back to Earth.” Some of the companies we reviewed then included Twitter Inc., LinkedIn Corp., Netflix Inc., Tesla Motors Inc., Priceline Group Inc., Google Inc. and Facebook Inc. Since…Read More

Category: Investing, Psychology, Technology, Valuation

If Stocks Go Up, Must They Always Come Down?

What’s gone up won’t always come down Barry Ritholtz Washington Post, April 20 2014     U.S. equity markets made substantial gains last year. The Standard & Poor’s 500-stock index, the traditional benchmark for equities, was up 29.6 percent. Add in dividends, and it’s well over 30 percent. Technology and small-cap stocks did even better, with…Read More

Category: Apprenticed Investor, Investing, Technical Analysis, Valuation

Apple In Numbers

How many iPads are sold every minute? Why did The Beatles sue Apple? How much money has Apple got stashed abroad?   Explore more visuals like this one on the web’s largest information design community – Visually.  

Category: Technology, Valuation

It’s a Tech Bubble! Unless You Care About Earnings and Valuations

Earlier this week, Greenlight Capital hedge fund manager David Einhorn reignited the bubble debate that we have spilled so many pixels dissecting. The shorter of Lehman Brothers and the New York Mets fan said in a quarterly letter to clients “we are witnessing our second tech bubble in 15 years.” The Bubble Chatter is nothing…Read More

Category: Hedge Funds, Psychology, Short Selling, Valuation

Asness: Stocks & Bonds Are Expensive

Cliff Asness, founder & CIO at AQR Capital Management, discusses his investment strategy, how geopolitical risks influence markets, his biggest market concern and why he believes we are not in a tech bubble on Bloomberg Television’s “Market Makers.”

Long-Term Market Outlook Concerns Me Most: Asness

Bloomberg April 15


Bloomberg’s Michael McKee and Cliff Asness, founder & CIO at AQR Capital Management, dig deeper into consumer prices for March and weigh the expense of bonds and equities on Bloomberg Television’s “Market Makers.”

Stocks and Bonds Both Equally Expensive: Asness

Bloomberg April 15

Category: Investing, Valuation, Video

How Pricey Are Equities?

One of the elements of modern punditry that continually surprises me is the insistence that stocks are grossly overvalued. As I have written repeatedly, stocks are more or less fully valued. However, since we don’t know what next year’s earnings are going to be, stocks can get cheap or expensive pretty quickly. It depends on…Read More

Category: Investing, Valuation