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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

by 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".
        harryh 6y ago
        It's very, very hard to sell a company for more than about 5x. Indeed this is definitely true. That doesn't, however, mean that firms with higher multiples are not connected to reality. It just means they have achieved some form of economy of scale or market dominance where there is a reasonable expectation that the ROI on the investment will be worth the risk. have no connection to reality whatsoever, it's pure speculation. Speculation isn't inherently unconnected to reality. There can be very real reasons to believe that a business currently making very little money (or even losing money) will, at some point in the future, make lots and lots of money. In these cases, it's very reasonable to see shares trade at very high PE multiples.
        robomartin 6y ago
        No, high P/E's only exist the stock market. Nobody would pay 27 times earnings to buy Starbucks. Nobody. I mean, write one big check and you own it. No shareholders. It would literally take a century to break even, if even possible. And so, what are people paying for when they pay 27x earnings in the stock market? It isn't real value. The stock is already grotesquely overpriced. They are speculating that someone else is going to be willing to pay 28x or more. And the person who decides to pay 28x is hoping for someone to pay 29x.
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

by harryh 6y ago

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".
      - harryh 6y ago
        It's very, very hard to sell a company for more than about 5x. Indeed this is definitely true. That doesn't, however, mean that firms with higher multiples are not connected to reality. It just means they have achieved some form of economy of scale or market dominance where there is a reasonable expectation that the ROI on the investment will be worth the risk. have no connection to reality whatsoever, it's pure speculation. Speculation isn't inherently unconnected to reality. There can be very real reasons to believe that a business currently making very little money (or even losing money) will, at some point in the future, make lots and lots of money. In these cases, it's very reasonable to see shares trade at very high PE multiples.
        robomartin 6y ago
        No, high P/E's only exist the stock market. Nobody would pay 27 times earnings to buy Starbucks. Nobody. I mean, write one big check and you own it. No shareholders. It would literally take a century to break even, if even possible. And so, what are people paying for when they pay 27x earnings in the stock market? It isn't real value. The stock is already grotesquely overpriced. They are speculating that someone else is going to be willing to pay 28x or more. And the person who decides to pay 28x is hoping for someone to pay 29x.

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