Price/Sales is Better Than Price/Earnings…for forecasting future returns

Executive Summary

  1. If we’re going to use valuation metrics to make important financial planning and investment decisions why wouldn’t we use the most reliable metrics at our disposal?
  2. The Price/Sales ratio has a much higher correlation to actual subsequent returns than Price/Earnings.
  3. Price/Sales, and other reliable metrics, indicate the U.S. stock market is more expensive than it’s ever been in history.

Continue reading “Price/Sales is Better Than Price/Earnings…for forecasting future returns”

How to Outperform Over Full Market Cycles

Imagine for a moment it’s 2009 at the tail-end of the Great Financial Crisis, and I’m telling you to get aggressive with your investment strategy.

The economy just went through its worst recession since the Great Depression. At its worst point the U.S. stock market was down 55% from its all-time high in 18 months’ time.

If you were lucky enough to keep your job your salary’s been frozen or even cut. Your home value has decreased dramatically when everyone was saying for years that home values never decline. Family and friends around you are in dire straits as they’ve lost their jobs and their homes. 100+ year-old financial institutions have failed. The government is printing trillions to bail out some of these companies the terms of which are being decided by unelected bureaucrats behind closed doors on weekend evenings when the markets are closed with no transparency. Folks are “occupying” Wall Street to protest bailouts for the “1%.”

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VIDEO: The Intersection of Asset Prices, Cash Flows and Returns

I came across an extremely relevant and appropriate quote recently, “Nothing so undermines your financial judgement as the sight of your neighbor getting rich.” – J.P. Morgan (h/t Jesse Felder)

It’s been a while since I’ve made a video, but, given the conversations I’ve been having as of late, it’s time.

How do you know if an asset is cheap, expensive or fairly priced? In this new presentation, I walk through valuations, how they’re calculated, what has made them so reliable for predicting future returns, and why we need to constantly remind ourselves of this principle when the temptation to chase performance in overpriced, poor quality assets grows strong.

S&P 500 “Line in the Sand” and Rotation Out of Growth Stocks?

It appears a line has been drawn in the sand at $3,900 on the S&P 500 as the widely-watched index has crossed that level several times over the last month (see chart below). Thus far, the S&P 500 has been directionless since the beginning of February.

Over the weekend, I assumed Senate passage of the $2 trillion “relief” bill, and likely passage in the House this week, would have been sufficient to thrust the S&P above 3,900. However, so far, even that has not provided enough fuel to support the next leg higher. Has the market already priced this in? A “buy the rumor, sell the news” dynamic? Continue reading “S&P 500 “Line in the Sand” and Rotation Out of Growth Stocks?”