This is a great point not included in many historic P/E comparisons. The balance sheet of non-financial America is very sound and Schiller analysis does not take into account excess cash. Tech in Oct last year was given away.
I still like using the P/E ratio and don't think the changes matter much. Some industries may have higher cash but others don't (like financials and their questionable "cash" levels) so it kind of evens things out. Furthermore, companies are more leveraged now. Even if they have higher cash, they also have higher debt. To give you an idea, I forget exactly but I believe there are less than 5 AAA-rated companies in America right now. There were many more in 1980.
Having said all that, I agree wtih your view on tech. That is my favourite sector and expect that sector to do well, especially if we end up with mild deflation/low-inflation, as I expect. I have been looking for a good tech company to buy but haven't found anything. The problem is that, although you are suggesting tech was cheap in Oct 08, I don't believe it was. Even the march low did not produce cheap stocks in my opinion (Seth Klarman also shared a similar view recently.) Market valuations are still way too high IMO if you assume that future economic growth, and hence profitiability, will be subsdued.
Right now, DJIA has a P/E of 16.8 and forwand P/E of 15.1, whereas S&P 500 is at 20.1 with forward P/E of 15.8. Source: WSJ market Data If you ignore interest rates and inflation expectations--both of these influence valuations but depends on your macro call-- the market is not cheap. Long-term P/E is around 15. Trailing P/E is around 20% (Dow) to 40% (S&P500) higher than average. Forward P/E is in line with long term average but that assumes a strong V recovery. Consensus forecast is for profits to drop 1.2% in 2020. In 2008, it dropped 25.4% so current forecast is a very mild recession. Covid-19 coronavirus is not going to last more than a few months but these forecasts are still too rosy in my opinion. So I wouldn't rely on forward P/E. The richly valued (mostly tech or high quality) have not fallen much but the distressed ones have. So if you want to outperform in the long run, I think one’s choice right now is to: • Wait for market to fall another, say
A Young Warren Buffett In a comment to one of my posts , Mark Carter, who incidentally appears to have a good blog worth checking out , asked: "Buffett Prime is 1970's to early 1990's" Could you elaborate? I have vaguely indicated how I view Warren Buffett in the past, but I thought I would detail my view of his investing behaviour. This is more of an opinion piece and many others would disagree with me (if you do, I'm curious to hear your thoughts). I don't follow Warren Buffett as closely as many value investors so I may get some facts wrong. My view is that Warren Buffett went through three different phases, with each consisting of different investment techniques. The overall investment theory remained the same—what people call value investing—but his execution, tactics, and strategy differs across the three phases. Some people may break up his career into additional periods but my feeling is that the three I will describe essentially capt
The model I like to sort of simplify the notion of what goes on in a market for common stocks is the pari-mutuel system at the racetrack. If you stop to think about it, a pari-mutuel system is a market . Everybody goes there and bets and the odds change based on what's bet. That's what happens in the stock market. —Charlie Munger, "Art of Stock Picking" Although I don't share the same views on politics, I am probably closer to Charlie Munger than Warren Buffett when it comes to how we view the world. Warren Buffett is almost singly focused on business and investing, and is not very opinionated, indeed possibly not knowledgeable, in other areas. In contrast, I am closer to Charlie Munger in the sense that I have diverse interests—you can probably tell by the articles I link to or write about—and have an opinion on almost anything. There is one big difference though: I am not into the field of psychology quite like Munger. So it may be surprising to see me rarely
This is a great point not included in many historic P/E comparisons. The balance sheet of non-financial America is very sound and Schiller analysis does not take into account excess cash. Tech in Oct last year was given away.
ReplyDeleteI still like using the P/E ratio and don't think the changes matter much. Some industries may have higher cash but others don't (like financials and their questionable "cash" levels) so it kind of evens things out. Furthermore, companies are more leveraged now. Even if they have higher cash, they also have higher debt. To give you an idea, I forget exactly but I believe there are less than 5 AAA-rated companies in America right now. There were many more in 1980.
ReplyDeleteHaving said all that, I agree wtih your view on tech. That is my favourite sector and expect that sector to do well, especially if we end up with mild deflation/low-inflation, as I expect. I have been looking for a good tech company to buy but haven't found anything. The problem is that, although you are suggesting tech was cheap in Oct 08, I don't believe it was. Even the march low did not produce cheap stocks in my opinion (Seth Klarman also shared a similar view recently.) Market valuations are still way too high IMO if you assume that future economic growth, and hence profitiability, will be subsdued.