Hacker News Reader

Comment by dereg | Hacker News Reader

That ratio, in isolation, is totally useless.

> That ratio, in isolation, is totally useless.

Yes, because this time is different.

Can you cut the cryptic message and tell me what you're talking about? The Reinhart/Rogoff book? Or are you just trying to irrelevantly reply with a nice catchphrase?

"The phrase This Time Is Different has often been cited as the four most dangerous investing words in the English language."

http://moneywatch.bnet.com/investing/blog/wise-investing/thi...

> Can you cut the cryptic message and tell me what you're talking about?

Yeah, sorry for that, I know it sounded too reddit-like, but in addition to what arethuza was saying bellow I can tell you how I can still remember reading a The Economist 30+ pages special report on the CDS market around 2007. They were saying how that one time all was different,about how the risks were spread among multiple players, how the market fundamentals had changed etc. And then 2008 happened (and yes, I know that technically the CDS market wasn't the one that blew up, but I think everybody now can see how stupid those assumptions were).

To sum it up, reading this article on Twitter reminded me of that period, and many like it. You cannot just foul the fundamentals.

That said, my original point was that we're looking at a financial ratio, and the first rule of applying financial ratios is that they are useless in a vacuum. We don't know the fundamental valuation of the company.

I didn't say it's inherently under- or over-valued, just that the ratio is meaningless.

I thought it was the fear of an "exothermic CDS chain reaction" that created the real prospect of a global financial meltdown - the CDOs were merely the fuse.

It sets a lower bound on the P/E ratio at which money is being invested, no?

Yes, you may have a really (REALLY) rough idea of the lower bound of the P/E ratio. However, the going concern is that it is over- not under-valued, so that estimate is useless. Also, we (I) have no idea of what their net income picture looks like, so the upper bound of the P/E could be in the clouds. Last, P/E valuation is useful insofar that we can compare it to its competitors.

Reply on news.ycombinator.com