No. of Recommendations: 0
Was reading an article this weekend that sourced the following, essentially how investors hurt their performance
https://www.ifa.com/articles/understanding-investo...the 30 year return of the S&P 500 looked impressive so decided to check how much of it was Multiple expansion. Turns out, not much
PE was 21.34 in Jan 1994 and 24.3 in dec 2023. That was reassuring but problem then is when I checking profit margins. They exploded upwards from around 5% to 12%. As others have pointed out here, this upward trend for the next 30 years is highly unlikely.
How does Berkshires profit margins compare?
No. of Recommendations: 3
Ok its operating business is about 7pct. So conclusion for me is what its always been. Keep buying Berkshire...
No. of Recommendations: 10
PE was 21.34 in Jan 1994 and 24.3 in dec 2023.
Recall that P/E ratio isn't useful at all as a market valuation metric unless the earnings are cyclically adjusted. They squiggle up and down too much for a snapshot to mean anything.
For the particular smoothing that I use, just a slight variation of CAPE with a bit more smoothing, earnings yield at start Jan 1994 was 5.240% like a P/E of 19.08.
At end January 2023 it was 3.285% like P/E of 30.44.
The real total return for this stretch was 7.387%/year.
Of that, 1.570%/year was the market getting more expensive as a multiple of smoothed real earnings.
Maybe there is a justifiable reason for that, maybe there isn't, but it definitely happened...the broad cap weight US market got a whole lot more expensive. About 60% higher, on these figures.
If the market can get more expensive at 1.57%/year for 30 years (with squiggles), then presumably it is not impossible for the market to get cheaper at 1.57%/year for 30 years (with squiggles).
That is definitely not a prediction, just a memento mori: various things are possible.
Yes, net profit margins also soared, so earnings soared relative to sales. But prices also soared even relative to the soaring earnings: the effects multiplied. This shows up most clearly and simply in the in the market-cap-to-GDP ratio. In this particular interval the ratio rose from about 66% to about 173%.
Jim
No. of Recommendations: 1
Regardless of fundamentals, stock prices are and Will continue to be set by supply and demand. Supply is going down because of my back and fuel companies going public because of a ton of private financing. Demand is going up due to the damned foreigners whose Mickey Mouse stock markets are perceived to be subject to more manipulation than the US stock market.
This chart is a bit old, but should give you an idea.
https://www.taxpolicycenter.org/taxvox/who-owns-us... 