I think in 99% of cases it's just a feeling - that the decline should have been bigger given how bad the economic impact seem.
When I say "I think stocks are overpriced" I don't necessarily have a specific number in mind. Rather, it's shorthand for "I think that the Fed and USG attempts to avoid deflation at all costs have created an economic environment that over-promotes stocks as an investment vehicle. In addition, I feel that these attempts have worsened inequality by injecting liquidity in a way that increases asset prices more than it increases the velocity of money".
I would think to calculate a "good" ratio you would need to compare it to returns from property and other investments?
But what else is there? Holding cash is terrible because it even loses value and the real estate market feels grossly over-expensive. So if you earn more than you spend, where do you put your extra money? I don't think that bonds, p2p-lending or precious metals perform better in risk/reward.
Holding cash might be terrible. Certainly the returns are and it makes sense that (the entire world) would be chasing higher yields elsewhere.
However, if those assets take a 50% haircut at some point in the near future, holding cash will have looked like a fantastic idea.
Given the current Schiller P/E of 26 (!) that was mentioned elsewhere in this discussion, a 50% haircut in US equities is not at all outlandish to consider.
That's my point. Stocks outperforming cash, bonds, and precious metals isn't some universal truth. It's a product of Fed/USG policy (and other factors).
Do any of us actually believe that Snap's stock price is reflective of its value to society?
Today, stock prices are all about perception and company image. Most shares are non-voting, and don't pay dividends. And you can't take your stock and march to a company headquarters to demand that they give you something of value in exchange.
To an average small investor, shares in almost every company might as well be Magic cards. Their only value is to sell them later to a different collector.
> Do any of us actually believe that Snap's stock price is reflective of its value to society?
of course not. the stock price doesn't represent the value to society; it represents the (perceived) value to investors, taking into account potential for growth. ford is an established, stable company, but it's hard to see any avenues for massive growth over the next decade. I don't personally believe snapchat will grow massively, but it's more likely than ford to do that or get purchased for a huge amount of money by a tech giant.
In context, the GGP is positing that stocks should have a higher rate of return than other modes of investment because, to paraphrase, "companies create value". The point of the GP is that perceived value to investors drives the stock price more than value to society, thus countering the notion that stocks are inherently "better".
first of all, whether or not a company "creates value for society" is a red herring. it doesn't matter to an individual looking for an investment vehicle.
> To an average small investor, shares in almost every company might as well be Magic cards. Their only value is to sell them later to a different collector
this is true to the extent that thinking of stocks this way probably wouldn't hurt you as a small investor, but it obscures the reason why stocks have value and are different from bonds. when you buy a stock, you are locking in a fraction of future real productivity, whether or not you can derive cashflow from it directly. with a bond, you are locking in a nominal return, which could result in a real loss over time. although stocks have significantly outperformed bonds historically, I would hesitate to say that one is inherently better than the other; they just carry different risks.
as an aside, I'm really not sure why non-voting shares that don't pay dividends are valuable, but AFAIK, these are not as common as nrclark suggests.
80% of S&P 500 companies pay a dividend [0] and non-voting shares are actually very rare. In fact, Snap even wrote in its IPO paperwork that "to our knowledge, no other company has completed an initial public offering of non-voting stock on a U.S. stock exchange" [1].
[0]: https://www.forbes.com/sites/investor/2019/11/20/20-bargain-...
[1]: https://www.vox.com/2017/2/21/14670314/snap-ipo-stock-voting...
Equities are a piece of creative energy applied to capital.
I am not saying you can’t lose money with wallstreetbets or that you can’t make a business of cash. But a creative business around money transmission and risk management is equities not cash itself.
Cash is more than an accounting system too, especially since the end of the gold standard. There isn't a fixed supply of dollars that businesses just move around.
Also, with regards to both cash and precious metals: their value is as media for economic transactions; their value increases each time they change hands. Would you want to barter to buy shares of a company? Trade sheep to invest in Microsoft?
You're saying that businesses generate value. No disagreement from me there.
But then you're saying that stocks are the only way to share the value that businesses create. That's where you lose me. Selling shares is not the only way for a company to raise funds to operate. Companies can also sell bonds or take out loans (i.e. cash). Your argument that stocks are inherently more valuable would only make sense if stocks were the only way to invest in a company.
Companies get funding from two sources, equity and debt. The sum of those are equal to assets in the balance sheet. Both represent different forms of ownership of the company. Equity holders decide how the company is managed, debt holders have priority in income distribution and in liquidation.
Someone already owns a company before company sells (issues / dilutes) shares. That ownership is just shares. No shares need to ever be sold for them to exist. Founders create shares out of nothing when they create a business.
If companies don't sell shares, then there's no stock market. If there's no stock market, then there's no rate of return for stocks. If there's no rate of return for stocks, then stocks aren't an inherently superior investment to bonds, cash, or goods.
If someone founds a company that's 100% owned by that one person, then you (as an outside investor) aren't partaking in any of the value that that business creates. Let's say you want part of the ownership of that company. Companies don't just give out shares of ownership because they feel like it. Companies give out shares because they need liquidity. They can exchange fractional ownership for liquidity directly (e.g. selling shares) or indirectly (e.g. giving employees stock options instead of salary). However, shares are not the only way for companies to gain liquidity.
Ownership that is not traded has no value to investors. Ownership that is traded is traded for a reason, and must be compared to alternatives. Those alternatives are not inherently less valuable than shares.
The highway down the street from me was funded using Bonds. I even own a few Hospital bonds, which were used to construct hospitals.
This begs the question. You've just hidden your premise in this paragraph. What external metric makes an asset over-promoted or under-promoted?
That’s basically how you evaluate what to pay for a company. When you buy stocks, you buy fractional ownership in a company.
Edit: many think the market is overvalued, because it’s currently at historically high price relative to the estimated earnings potential. This, while risk of insolvency for many companies is much higher.
It's high compared to expected earnings over the next year. Which is to be expected, because the ratio of expected lifetime earnings over expected 12 month earnings is also at a high, owing to a pandemic significantly impairing earnings for a year or so but not forever. Looking at 12 month numbers is usually fine as a proxy, but terrible now.
We are still at the highest point ever except for the dotcom bubble and black tuesday of 1929 (and directly before the recent crash, although not by much).
So to answer the parent, pick a ratio somewhere below that. Price has been the main thing moving upward disproportionately for the past decade, now earnings will take a dive.
Most retail investors are not making any valuations whatsoever. The investment criteria is "this company's future is bright/bad", even though price is the most important factor. Then, recent momentum makes you look good...for now.
However, other factors could play a part, as certain industries are favoured over others, risk, projecting earnings growth, etc.
As such, you can make the argument that stocks are overvalued because they're trading at all time or near all time highs in terms of price to earnings ratios and other metrics. And especially so now given that projected future earnings will have dropped considerably while stock valuations have not.
Why? I'm not saying it's incorrect but I've never seen such an approach to valuation.
Really that depends on your time horizon. The Fed has signaled that it is willing to act aggressively to boost AD, so that seems to me to be a signal that projected future earnings will not be that low.
We're above the mean earnings ratios, FCF yields, etc, while at the same time knowing that we're almost certainly in the first leg of a major recession, and a period unprecedented economic uncertainty.
I think the bear case is much stronger than the bull case right now.
The problem, of course, is that we've been in an unprecedented financial situation since 2009 fueled by massive debt inflation among corporations due to near-free money from the government for an entire decade. When will the party end? Who knows. The other problem is that it's hard to predict what will happen post-lockdown globally. As a result, traditional analysis is easily beat by irrational investment even on multi-year timescales these days.
> I think in 99% of cases it's just a feeling - that the decline should have been bigger given how bad the economic impact seem.
As you are suggesting, prices are simply what they are, whether or not someone views them as being "too high" or "too low" the only Goldilocks price is the one you agree to.
However, the markets can be distorted. The Federal Reserve, through policies such as lowering interest rates to zero, eliminating reserve requirements, and announcing purchases of corporate debt, has all but published "we will not let the stock market crash under any economic circumstance" as their official policy.
If the fed had given that money directly to consumers we might have inflation problems. They’ll never do that. Socialism only exists in America for corporations.
[0]: https://www.federalreserve.gov/releases/h41/current/h41.htm
Congress authorizes $300 billion in direct checks to consumers. The remaining $2.7 trillion went to businesses.
The fed has separately printed several trillion dollars lending to businesses, buying corporate bonds, and other actions.
What should the stock market be at right now? Who knows. We have no way to know because we won’t allow the market to tank.
Nope (and the total bill was 2.1 trillion not 3 trillion): https://en.wikipedia.org/wiki/Coronavirus_Aid,_Relief,_and_E...
> The fed has separately printed several trillion dollars lending to businesses, buying corporate bonds, and other actions.
Also not even remotely true, they are predominately buying U.S. Treasury securities and Mortgage-backed securities: https://www.federalreserve.gov/releases/h41/current/h41.htm
Got any sources to back up your claims?
Respectfully, please read an economics textbook.
Please tell me more.
The fed is engaging in aggressive monetary policy to prevent deflation.
The suggestion that buying corporate bonds (while holding everything else constant) is not inflationary is just not right. You can hold on to your mistaken beliefs, but just know that if you do so, it is in willing ignorance of the facts.
And, if history is any guide, SPX can fall all the way to ~500 without breaking all time lows on CAPE (this would be extreme, but is not entirely impossible, and inflation is not required for this scenario - look at 1950s).
Numbers would have to be adjusted if inflation speeds up. It hasn't sped up at all yet, in fact all we see today is deflation.
https://alhambrapartners.com/2020/03/11/what-happens-when-ce...
It's a 2 month old article by perhaps the most respected figure in valuation. He came up with 2750 for S&P at that time (market value was much lower, maybe he would be more pessimistic now). You can enter your own assumptions into his spreadseet and it will output a valuation.
Of course the price is what it is due to supply and demand but I don't think that's what most people mean when they say the price is 'not sensible'.
The stock prices are so high because stocks and real estate are the only investments that might provide any sort of real return, and we've been in that situation since bond returns crashed in the wake of the 2008 financial crisis. In that context, stock values are massively inflated (in terms of P/E) relative to what investors may have considered sensible before 2008.
Even academic detractors of the efficient market hypothesis agree that it is accurate on the macro-scale.
I'm also leaning towards a longer recovery in consumer discretionary right now. Someone posted a story here about how people started self locking down before government lockdowns. While I think people are over the strict versions and are ready to get out of the house, I also think they'll be slow to return to malls and movie theaters.
Pricing takes into account projected future earnings.
It does make me wonder how many people are using total market indexes without caring about anything in them and how that could prop up the underlying assets.
This isn’t an original idea, there’s been lots of talk about index funds being a bubble, but there isn’t a great alternative.
Though I’m starting to wonder if I should pull most of the money out and split it between Apple, Amazon, Google, Microsoft, and Facebook.
The long tail of the market index funds I find more likely to have issues than these companies (particularly Amazon and Apple).
MSFT +21%
AAPL +15%
AMZN +37%
FB +6%
NFLX +50%
UBER +21%
SQ +22%
SNAP +16%
MTCH +10%
NVDA +60%
TSLA +128%NFLX - streaming is up but consumers exhaust the content library faster and competitors (Disney) will now want to gain market share at any cost
FB, SNAP - exposure to ad dollars (brand, travel, hospitality, entertainment) that won’t be coming back for awhile
UBER - unit economics of food delivery aren’t attractive + hyper competitive market, demand for core rideshare business likely depressed for a long time given it’s dependency on events and business travel
SQ, MTCH - no opinion, neutral sentiment
TSLA - with gas so cheap, electric vehicles are less attractive
I buy the tech multiple expansion thesis but that would apply to every company on this list.
One suggestion was that the big players will postpone electric while their ICEs get a temp boost, thus giving TSLA an even more unassailable lead.
The stock market is generally governed by two feelings: confidence and fear. Often times those feelings are outwardly feigned for one's own self interest