A Quote by Barry Ritholtz
People forget that although we can pinpoint the price, we can only guess at future earnings. The past isn't much help: It simply tells whether a market was pricey or cheap.
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To know whether stocks are cheap or pricey, we typically look at price-to-earnings ratio. Valuation is a tougher question than many folks realize.
It's nonsensical to derive a price/earnings ratio by dividing the known current price by unknown future earnings.
Calculate a stock's price/earnings ratio yourself, using Graham's formula of current price divided by average earnings over the past three years.
It's an earnings-driven market. The big question is whether the flow of earnings can rescue the market from the twin dreadnoughts of higher oil and interest rates.
If you can follow only one bit of data, follow the earnings - assuming the company in question has earnings. I subscribe to the crusty notion that sooner or later earnings make or break an investment in equities. What the stock price does today, tomorrow, or next week is only a distraction.
Most people try to get rich by being cheap and the price for that is that you live cheap and there is so much money out there; why would you want to live cheap?
Approaches to determining stock values vary, but fundamentally, each company judging itself undervalued is saying that its future stream of earnings justifies a higher price than the stock market is willing to accord it.
Think how weird profit margins are: We've got high unemployment and financial crises - and world record profit margins. People think the American market is very cheap. We don't. The market quite incorrectly gives full credit to today's earnings.
Earnings don't move the overall market; it's the Federal Reserve Board... focus on the central banks, and focus on the movement of liquidity... most people in the market are looking for earnings and conventional measures. It's liquidity that moves markets.
In our view, though, investment students need only two well-taught courses-How to Value a Business, and How to Think about Market Prices. Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business who's earnings are virtually certain to be materially higher five, ten and twenty years from now.
If I did not simply live from one moment to another, it would be impossible for me to be patient, but I only look at the present, I forget the past, and I take good care not to forestall the future.
The big picture is: the main thing you should be concerned about in the future are incremental returns on capital going forward. As it turns out, past history of a good return on capital is a good proxy for this but obviously not foolproof. I think this is an area where thoughtful analysis can add value to any simple ranking/screening strategy such as the magic formula. When doing in depth analysis of companies, I care very much about long term earnings power, not necessarily so much about the volatility of that earnings power but about my certainty of "normal" earnings power over time.
Clearly the price considered most likely by the market is the true current price: if the market judged otherwise, it would quote not this price, but another price higher or lower.
Time is the most important factor in determining market movements and by studying past price records you will be able to prove to yourself history does repeat and by knowing the past you can tell the future. There is a definite relation between price and time. By studying time cycles and time periods you will learn why market tops and bottoms are found at certain times, and why resistance levels are so strong at certain times, and prices hold around them. The most money is made when fast moves and extreme fluctuations occur at the end of major cycles.
Forget not your past, for in the future it may help you grow
Takeovers wouldn't cause the stock market to rise unless there is an upward reassessment of earnings (potential). People are more optimistic and confident about the future.
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