I think we have become leaders in the value investment industry for buying companies where intangibles have become their largest asset and you can’t see from a price to earnings or price to book how cheap the company is
The way things are, the only numbers of use to an investor from a Balance Sheet relate to debt. The expensing of investments in intangibles of lasting value creates a distortion that completely undermines the use of the Income Statement. Reported earnings are not only useless for investors but also misleading for the unwary.
If the CAPM is flawed, what can replace it? The best approach would be to assess whether companies in general and relatively speaking, the company in question, can raise money cheaply in public offerings.
What Warren Buffett describes as the factors that make the stock market tick. They were interest rates, investor expectations for profits and investor confidence. The Fed Model was too simple but it was not in error in taking interest rates into account. Based on what I write below we should change ‘investor expectations for profits’ to ‘investor expectations for cash flows’.
If the job has been correctly done when a common stock is purchased, the time to sell it is – almost never.
A high ratio of price to book value, a high price-earnings ratio, and a low dividend yield – are in no way inconsistent with a ‘value’ purchase.
The S&P 500 price earnings ratio shot up to over 100 times earnings, a reflection of massive write offs and depressed earnings. In fact, there were outstanding values in the stock market at that time! It was a good time to be a buyer.
The majority of investments are in intangible assets, including research and development, customer acquisition costs and branding. But companies commonly expense these investments on the income statement as they incur them.
CAPE is ignorant of interest rates
The first step for investors is to come to a new understanding of reported earnings and the book value of equity.
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