US recession was over in June and now everybody is starting to believe it. We are in for a new wave of stock exchange prosperity - bull market. I am taking more loans and investing in Israeli high tech companies. I am also watching the options market, where there were gains of 2 - 3000 % this year.
Next Day Follow Up: The Dow Jones plunged 2.5 percent, in its sharpest sell-off since July. The Nasdaq composite index also tumbled. So much for this Learning Engineer's Predictive Powers. Please dont take my advise.
2 comments:
I've read estimates that the US stock markets are radically overvalued relative to their earnings, so if US stocks were to be revalued according to their earnings there should be a large drop in the prices of American stocks.
I've seen several people simply cite last year's earnings to show that stock prices are high. Unless you think we're going to be in recession forever, then basing valuations purely on last year's earnings doesn't make a whole lot of sense.
I've seen trailing ten-year earnings used a few times, but I'm not sure whether or how such a model accounts for top-line growth.
Jeremy Grantham uses long-term average profit margins for his valuations, though I'm not exactly sure what he uses for revenue estimates. This is the method I have adopted for my personal valuations, usually using either last year's revenue or 3-year trailing average if revenue is particularly volatile. Following Benjamin Graham's advice, I throw any qualitative optimism or pessimism into the P/E, putting it somewhere between 8 and 14 accordingly.
I suspect Grantham does something similar, because my calculations tend to be pretty close to his. Right now, using this methodology, most issues are a touch on the pricey side, but plenty of individual issues are still well below fair value.
(And of course, you need some common sense about when you can and can't apply this method. But I find that for approximately half of all public companies, it's pretty reasonable.)
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