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For people who think stocks are overpriced: what would be an appropriate price and how did you come up with that number? I haven't seen an answer to this yet fr

• nicbou 6y ago
  A stock is worth whatever people will pay for it. However it's fair to point out that the price does not match the underlying asset or its future growth.
  • amiga_500 6y ago
    Governments are directly buying ETFs https://alhambrapartners.com/2020/03/11/what-happens-when-central-banks-buy-stocks-etfs-well-we-already-know/ https://alhambrapartners.com/2020/03/11/what-happens-when-ce...
    • dehrmann 6y ago
      At least in the case of the Fed, it's buying bond ETFs, not equities.
    • nicbou 6y ago
      That's mental. Is that a common thing to happen?
• christophilus 6y ago
  You can estimate the earnings yield you get on a business based on its price. So, if you have a lemonade stand that earns $100 per year, and you buy it for $100, that’s a great price. You’ll make your money back in a year. After that it’s profit, baby! If you pay $100000, it’ll take 1000 years to earn back your original investment in nominal terms. But it still might be an OK investment, if you are very certain that you can double earnings every year for long enough. 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.
  • RivieraKid 6y ago
    My point was - people say stocks are overpriced, presumably vs their intrinsic DCF valuation. Why do people conclude that without making a valuation?
    • dforrestwilson 6y ago
      What makes you think that they aren’t?
      • RivieraKid 6y ago
        That I have asked this a bunch of times - "What would be an appropriate price and how did you come up with that number?" - and never got a reply.
        • hhw 6y ago
          Historical rate of return on stocks is about 7%. So in theory, a stock trading at a price to earnings ratio of 14 or less is good value, whereas a stock trading at 15 times earnings is not so much. 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.
          • RivieraKid 6y ago
            > Historical rate of return on stocks is about 7%. So in theory, a stock trading at a price to earnings ratio of 14 or less is good value Why? I'm not saying it's incorrect but I've never seen such an approach to valuation.
          • adrianhel 6y ago
            For 7% a P/E of 14.285714285 or less would be good to be very precise.
• generalpass 6y ago
  > For people who think stocks are overpriced: what would be an appropriate price and how did you come up with that number? I haven't seen an answer to this yet from the "stock market is irrational" crowd. > 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.
• montalbano 6y ago
  An equally interesting question: for people who think stocks are accurately priced, how did you come up with that number?
  • vladimirralev 6y ago
    That's easy. You come up with that number because the market organically came up with it thru supply and demand. You could argue the government interfered unfairly but the price is the price either way.
    • montalbano 6y ago
      I don't agree because that argument says that the price is sensible because it is the price. You could equally make that statement about the price of tulips in 17th Century Holland, where "single tulip bulbs sold for more than 10 times the annual income of a skilled craftsworker." [1] 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. [1] https://en.wikipedia.org/wiki/Tulip_mania https://en.wikipedia.org/wiki/Tulip_mania
      • MiroF 6y ago
        The suggestion that modern financial markets are similar to markets in 17th century Holland is certainly interesting. Even academic detractors of the efficient market hypothesis agree that it is accurate on the macro-scale.
    • banads 6y ago
      That may be what your ECON101 text book says, but its plainly obvious that's not the case in reality.
  • 6y ago
• lazulicurio 6y ago
  Let me take a stab at this: 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".
  • badestrand 6y ago
    > that over-promotes stocks as an investment vehicle. 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.
    • lazulicurio 6y ago
      > But what else is there? 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).
      • naveen99 6y ago
        Stocks represent ownership of business producing goods and services and selling them for profit. Cash, bonds, and precious metals are just an accounting mechanism. The value is created by business. So it pretty much is universal truth.
        • lazulicurio 6y ago
          Bonds are not just an accounting mechanism; bonds are an alternative to stocks for investment. Even government bonds create value---if not funding something tangible (such as infrastructure), just the existence of a stable and functioning legal system is hugely valuable. 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?
• cwhiz 6y ago
  Let’s remove the fed money printing machine and find out what real investors think of the market.
  • criddell 6y ago
    That seems like it would be a terrible idea. The ability to create money up until the point of inflation seems like a key tool to manage economic disasters like COVID-19.
    • cwhiz 6y ago
      There’s no inflation when the fed buys corporate bonds or bails out failed corporations. It is just propping up the market. 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.
      • mrep 6y ago
        The fed cannot give directly to consumers. However, congress can and did give directly to consumers with the 1200 check, the 600 a week increase in unemployment, and indirectly by funding payroll for small businesses and the airlines. However, that created a whole lot of debt which the fed has been predominantly buying with their printed dollars as you can see in their balance sheet [0]. [0]: https://www.federalreserve.gov/releases/h41/current/h41.htm https://www.federalreserve.gov/releases/h41/current/h41.htm
        • criddell 6y ago
          When there's no worries about inflation, is there a downside to the fed doing this?
        • cwhiz 6y ago
          The fed is legally barred from directly lending to businesses or households except for in an emergency where they can do virtually anything they want. 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.
• H8crilA 6y ago
  SPX at ~1600 so that CAPE matches its historical median. 1600 would be the "neutral" position on that metric. 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.
• almost_usual 6y ago
  price to earnings ratio
  • dehrmann 6y ago
    P/E fails to account for future earnings (ok, so F P/E), it doesn't account for assets and liabilities, and it ignores that security's relative value to other companies an other investments. And suppose profit margins are 7%, annual revenue is $1.2B, throw in a few more stats. What should the company's market cap be?
• mdorazio 6y ago
  Which stock? If you want to price any individual company, traditional value-based analysis using earnings, assets, and future revenue growth expectations will get you a number. This number varies wildly between different companies. If you're talking about a broad index like the S&P, I personally look at 30 years of price history, draw a best fit line to average out growth to a normal level, then discount 7% for our current economic trough (5% output drop Q1, likely 10% or more this quarter). By this method, S&P should be somewhere around 2150. 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.
• matthewdgreen 6y ago
  I would personally compare the current price to past prices. If the S&P500 price has been the same this past couple of weeks as it was in, say, October 2019: then I might interpret this as the markets predicting that future earnings today are similar to future earnings as one would predict in October 2019. The markets may turn out to be right about this, but it's a very surprising prediction given the current economic carnage.
  • freyr 6y ago
    It’s surprising to see just how much higher many tech stocks are valued right now than they were six months ago: MSFT +21% AAPL +15% AMZN +37% FB +6% NFLX +50% UBER +21% SQ +22% SNAP +16% MTCH +10% NVDA +60% TSLA +128%
    • nugget 6y ago
      Of that list, I understand why MSFT, AAPL, AMZN, and NVDA would be up. The rest aren’t so clear to me. 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.
      • dredds 6y ago
        > TSLA - with gas so cheap, electric vehicles are less attractive 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.
        • folmar 6y ago
• fossuser 6y ago
  I have most of my stocks in FZROX which is a total market index. 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).
• banads 6y ago
  >I think in 99% of cases it's just a feeling 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
  • dehrmann 6y ago
    s/confidence/greed/
• dehrmann 6y ago
  Full disclosure, I hold a short GOOG position right now, but I'm long on a similar company, so it's a hedge. I don't think Google's worth more today than it was on Jan 1. You're right that it's a feeling, but it seems crazy to think that with 15% unemployment, it's still worth that. 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.
  • MiroF 6y ago
    > I don't think Google's worth more today than it was on Jan 1. You're right that it's a feeling, but it seems crazy to think that with 15% unemployment, it's still worth that. Pricing takes into account projected future earnings.