5 ms·

Since about 2008 stock prices have officially decoupled from the fundamentals, in the post-divident, Sarbanes-Oxley and QE era. The stock market no longer serve

by cft 6y ago

Since about 2008 stock prices have officially decoupled from the fundamentals, in the post-divident, Sarbanes-Oxley and QE era. The stock market no longer serves as a collective economic planning mechanism. This won't end up well.

posixplz 6y ago
Of what relevance is SOX other than dating the period?
UweSchmidt 6y ago
Could you elaborate or point to an accessible article?
harryh 6y ago
On Jan 1 2018 the Shiller PE ratio was 24.02. Today it is 26.81. That's hardly a decoupling from fundamentals. https://www.multpl.com/shiller-pe/table/by-year https://www.multpl.com/shiller-pe/table/by-year
- robomartin 6y ago
  It absolutely is. P/E ratios of 20 to a zillion to one only happen in the stock market. Don't believe me? Build a company, keep it private and then go sell it to someone. If you ask for anything more than about 5x you'll be laughed out of the room. The stock market is about speculation, plain and simple. At some level is people playing "business owner" without having a clue how to build value or where it comes from. Go back to my prior 5x scenario for context. Nothing wrong a speculative market, it's just a matter of accepting that reality and everything that comes with it. I made a pretty nice living a couple of decades back day trading full time. Traditional investors putting their money into the market have no clue what goes on in the speculative battleground they trust with their savings. Again, to clarify, I am not saying it is a negative. One can do very well in a speculative market. The key point is that it is important not to confuse it with reality in any way.
  - harryh 6y ago
    Private companies get sold for over 5x all the time. Just to pick the obvious recent example: Giphy.
    - cft 6y ago
      A top VC funded company obeys the same pricing laws as a public market one. It's part of the establishment. He is talking about bootstraped non-sanctioned S corps.
      - harryh 6y ago
        Financial numbers are harder to come by for private companies but I have no reason to believe that PE ratios for companies like Bloomberg or Mars or Deloitte are hugely out of line with similar public companies. But if you mean small businesses like a restaurant or a dentist's office or whatever I would say that the comparison you are making doesn't really make much sense in the first place. Large companies have huge economies of scale and brand value compared to a mom & pop enterprise who's revenues are just as much labor income of the owners as return on capital.
        robomartin 6y ago
        No, I am not talking about small businesses necessarily. I am talking about the reality of non-VC businesses. That doesn't mean bootstrapped either. I do realize private data is hard to come by, but this is known to people in the business world. It's very, very hard to sell a company for more than about 5x. I am talking from personal experience as well a from knowledge of friends who have sold non-VC tech businesses. One way to look at it is that in the real world the buyer has an expectation of ROI that has to align with reality. Buy the business, run it, make money, pay for your investment and make money beyond that. People paying 123 times P/E for stocks have no connection to reality whatsoever, it's pure speculation. BTW, I am not using "in the real world" as a pejorative. It simply means "non VC, non public".
        6y ago
- deleted 6y ago
  [deleted]
- vladimirralev 6y ago
  When you take a 10-year moving average, it's not going to pick up anything abnormal for a while. And the Shiller PE is intended to smooth out the cycles, it doesn't work well when the last cycle itself lasted the whole 10 years.
  - harryh 6y ago
    On Jan 1, 2008 the S&P PE ratio (which just uses 12 months of earnings) was 21.46. Today it is 20.53. https://www.multpl.com/s-p-500-pe-ratio/table/by-year https://www.multpl.com/s-p-500-pe-ratio/table/by-year
    - vladimirralev 6y ago
      My guess is buybacks skew + weight from the previous quarters.
    - cft 6y ago
      I upvoted you. This indeed shows that PE systemically entered into 20+ territory only this century. Those are long-term effects, I'm not predicting a crash "this market cycle", but a systemic change in 20 years.
      - harryh 6y ago
        The secular decline in interest rates as well as the increased ease of diversification can both easily account[1] for a modest long term increase in PE ratios. There is little reason to believe a decoupling from the fundamentals is a better explanation that these forces. 1. http://www.philosophicaleconomics.com/2017/04/diversification-adaptation-and-stock-market-valuation/ http://www.philosophicaleconomics.com/2017/04/diversificatio...
        cft 6y ago
        Have you seen this graph from the same source https://www.multpl.com/inflation-adjusted-s-p-500 https://www.multpl.com/inflation-adjusted-s-p-500
nexuist 6y ago
There's certainly something to be said about "civilian" stock trading tools like Robinhood, right? Stock prices pumped by hype because the barrier of entry is so low that collective masses of uninformed people who don't care about fundamentals can effectively overpower major firms and "experts" through social media (i.e. wallstreetbets). Which is not to say that this is bad, just different from the pre-2008 environment. Stocks used to be for the educated elite; now anyone with a cell phone and a bank account can participate.
- harryh 6y ago
  Anyone with a bank account and a regular phone could participate in the stock market starting in the early 80s with Charles Schwab. Robinhood has maybe 20B in AUM. That's a drop in the bucket for a US stock market worth something like 30T.

by cft 6y ago

posixplz 6y ago

Of what relevance is SOX other than dating the period?

UweSchmidt 6y ago

Could you elaborate or point to an accessible article?

harryh 6y ago

On Jan 1 2018 the Shiller PE ratio was 24.02. Today it is 26.81. That's hardly a decoupling from fundamentals. https://www.multpl.com/shiller-pe/table/by-year https://www.multpl.com/shiller-pe/table/by-year

robomartin 6y ago
It absolutely is. P/E ratios of 20 to a zillion to one only happen in the stock market. Don't believe me? Build a company, keep it private and then go sell it to someone. If you ask for anything more than about 5x you'll be laughed out of the room. The stock market is about speculation, plain and simple. At some level is people playing "business owner" without having a clue how to build value or where it comes from. Go back to my prior 5x scenario for context. Nothing wrong a speculative market, it's just a matter of accepting that reality and everything that comes with it. I made a pretty nice living a couple of decades back day trading full time. Traditional investors putting their money into the market have no clue what goes on in the speculative battleground they trust with their savings. Again, to clarify, I am not saying it is a negative. One can do very well in a speculative market. The key point is that it is important not to confuse it with reality in any way.
- harryh 6y ago
  Private companies get sold for over 5x all the time. Just to pick the obvious recent example: Giphy.
  - cft 6y ago
    A top VC funded company obeys the same pricing laws as a public market one. It's part of the establishment. He is talking about bootstraped non-sanctioned S corps.
    - harryh 6y ago
      Financial numbers are harder to come by for private companies but I have no reason to believe that PE ratios for companies like Bloomberg or Mars or Deloitte are hugely out of line with similar public companies. But if you mean small businesses like a restaurant or a dentist's office or whatever I would say that the comparison you are making doesn't really make much sense in the first place. Large companies have huge economies of scale and brand value compared to a mom & pop enterprise who's revenues are just as much labor income of the owners as return on capital.
      - robomartin 6y ago
        No, I am not talking about small businesses necessarily. I am talking about the reality of non-VC businesses. That doesn't mean bootstrapped either. I do realize private data is hard to come by, but this is known to people in the business world. It's very, very hard to sell a company for more than about 5x. I am talking from personal experience as well a from knowledge of friends who have sold non-VC tech businesses. One way to look at it is that in the real world the buyer has an expectation of ROI that has to align with reality. Buy the business, run it, make money, pay for your investment and make money beyond that. People paying 123 times P/E for stocks have no connection to reality whatsoever, it's pure speculation. BTW, I am not using "in the real world" as a pejorative. It simply means "non VC, non public".
        6y ago
deleted 6y ago
[deleted]
vladimirralev 6y ago
When you take a 10-year moving average, it's not going to pick up anything abnormal for a while. And the Shiller PE is intended to smooth out the cycles, it doesn't work well when the last cycle itself lasted the whole 10 years.
- harryh 6y ago
  On Jan 1, 2008 the S&P PE ratio (which just uses 12 months of earnings) was 21.46. Today it is 20.53. https://www.multpl.com/s-p-500-pe-ratio/table/by-year https://www.multpl.com/s-p-500-pe-ratio/table/by-year
  - vladimirralev 6y ago
    My guess is buybacks skew + weight from the previous quarters.
  - cft 6y ago
    I upvoted you. This indeed shows that PE systemically entered into 20+ territory only this century. Those are long-term effects, I'm not predicting a crash "this market cycle", but a systemic change in 20 years.
    - harryh 6y ago
      The secular decline in interest rates as well as the increased ease of diversification can both easily account[1] for a modest long term increase in PE ratios. There is little reason to believe a decoupling from the fundamentals is a better explanation that these forces. 1. http://www.philosophicaleconomics.com/2017/04/diversification-adaptation-and-stock-market-valuation/ http://www.philosophicaleconomics.com/2017/04/diversificatio...
      - cft 6y ago
        Have you seen this graph from the same source https://www.multpl.com/inflation-adjusted-s-p-500 https://www.multpl.com/inflation-adjusted-s-p-500

nexuist 6y ago

There's certainly something to be said about "civilian" stock trading tools like Robinhood, right? Stock prices pumped by hype because the barrier of entry is so low that collective masses of uninformed people who don't care about fundamentals can effectively overpower major firms and "experts" through social media (i.e. wallstreetbets). Which is not to say that this is bad, just different from the pre-2008 environment. Stocks used to be for the educated elite; now anyone with a cell phone and a bank account can participate.

harryh 6y ago
Anyone with a bank account and a regular phone could participate in the stock market starting in the early 80s with Charles Schwab. Robinhood has maybe 20B in AUM. That's a drop in the bucket for a US stock market worth something like 30T.