Hello Saul and everyone. I am wondering how you all interpret and potentially use this data in directing your investments. I am a long term holder of stocks but find the data compelling.
Please see this article and chart here: http://www.businessinsider.com/stocks-more-expensive-2014-12…
It basically shows that stocks- as measured by CAPE- are at their highest valuation and PE in history other than 1929 and 2000. It seems reversion to the mean is inevitable but wondering if anyone uses this data in their decision making.
Thank you for any input.
Two questions worth asking:
1.- Is CAPE accurate and relevant today?, and
2.- Are you buying the market or individual stocks?
I have read somewhere a critique of CAPE than contends that it does not reflect the current reality. Unfortunately I don’t have a link and I don’t recall the details of the argument well enough to reproduce here. It centers on the idea that the character of the market has changed. In any case, don’t take CAPE on faith. Check it out before you do.
Staying out of markets for one reason or another can be good or bad. It was bad in 2009. But more to the point, there are always bargains somewhere, the trick is to find them. The reverse is also true, find the overbought stocks in your portfolio.
Another point. The world and specifically the US is a safer place than it used to be. None of todays enemies even approach the power of Hitler or Stalin, or even the Kaiser. Thus P/E should be higher.
In other discussions of this issue on other boards, one of the points is that accounting standards have changed meaning that more is considered a GAAP expense meaning that the E is lower without there being any real change in the economics of the company.
Cash as a percentage of assets,
Many companies are collecting cash with the sole intention of returning it to shareholders or reinvesting it back into the company.
This is one aspect that completely differentiates the current all-time highs from previous tops in 1999 and 2008. To put it simply: there’s just more cash now than there ever was. Take one more look at this chart. You’ll notice that cash as a percentage of assets was much lower in 1999 and 2008 than it is today.
Very different from 2000, for example.
Dividend Payout Ratios Reach 15-Year High
And of course the share buyback craze. Dollar volume up over 300% since 2009. Hopefully that will end better if no repeat of 2008 any time soon as companies were also rapidly increasing share buybacks to about these levels before the collapse. Harvard Business Review article showed the buybacks did not work out well as far as capital appreciation went for the 10 biggest buyback companies 2002-2012. Don’t expect a repeat.
Still, show me the cash is my preference despite the taxes. So maybe one reason shares not as overvalued as they might seem. Then again, might just be another example of confirmation bias, my bias is that stocks will go higher 2015.
I think stocks are going to crash eventually, I just don’t think they are going to crash yet and there is substantial upside still. I generally align with Steve Sjuggerud on the subject. http://www.dailywealth.com/2911/this-bull-market-is-not-over….
A few points that I think are salient on the matter:
(1) The actual P/E ratio is high, but not “bubble” high. The P/E10 ratio may be a bit deceptive in this regard because we are coming out of one of the biggest recessions in history, which depressed the earnings from 2008-2012 – five of the last 10 years. So the P/E10 has the worst recession in our lives baked in. Current P/E or P/E4 or something may be a bit better of a measure. Also, corporations are saving massive amounts of money through automation; which is driving earnings higher the last few years, so the last 10 may be last representative of what is going forward.
(2) Interest rates are extremely low; this drives up valuations because there is a lot more capital to invest and people are plowing it into the market. One indicator to look at is the S&P 500 P/E + the interest rate. Right now that is 17+2 = 19. Which is below the peaks of
(3) Cash on the balance sheet should drive P/E higher. If I like stock B, selling for $10, but it has $5 on the balance sheet, then I should be thrilled even if it only makes $.50 per year.
Again, I think we are closer to the end than to the beginning, but think there is substantial upside from here.
I enjoyed the article, thanks. Simple and clever way of looking at things.