Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Stock Market Returns Are Anything but Average

awealthofcommonsense.com

Post reply on HN
Print view View original

311–320 of 433 posts

Re: Stock Market Returns Are Anything but Average

#311

Post by ISL »

nostrademons wrote: post #275
ISL wrote: post #233

Earlier quoted context omitted.

As recently as 2011, KO had a P/E of 9. https://www.macrotrends.net/stocks/charts/KO/cocacola/pe-rat... There are two ways that a P/E can return to a quasi-normal value. Either the price can go down or the earnings can increase. The mean and median values, since 1880, are about 15. "This time, it's different" https://www.multpl.com/s-p-500-pe-ratio

So if earnings increase 3x the P/E goes back down to ~10. KO has excellent margins - last time I looked they were around 60%. That means prices * sales only has to increase by 5x to bump earnings up 3x. Food prices have been inflating at 10-15% recently; 15% inflation over 11 years will get you there, and that doesn't include any growth in sales at all. These aren't unreasonable assumptions, given the macro environme…

I'm not sure I follow all the arithmetic here (I'm pretty sure that, at fixed margin, revenue would only need to increase by 3x to increase earnings by 3x), but I did follow up to see what Berkshire had paid for Coca-Cola.

This thoughtful Quora post claims that Buffett made his first purchase of KO at a P/E of 29.

https://www.quora.com/What-was-the-P-E-Buffett-paid-for-Coca...

Re: Stock Market Returns Are Anything but Average

#312

Post by nostrademons »

Zr40 wrote: post #58
Someone1234 wrote: post #8

Earlier quoted context omitted.

It starts to when you ask yourself: Where else are people meant to store money? Since interest rates and bond rates were at historical lows. So you have people who are looking at 10% YOY returns on one hand and 0.2%/2% on the other and making the rational decision. Does this make stocks overinflated? Yes. Is it going to suddenly pop? Unlikely, since the conditions that caused it won't suddenly change (e.g. certain bo…

> Where else are people meant to store money? Money isn't stored in other assets. It's transferred from the buyer of an asset to the seller. It doesn't cease to exist simply because you traded it for stocks (or gold or anything else). Now the seller has to deal with the consequences of holding the money you previously held. A rational trader factors in the costs of money when they price assets, therefore one doesn't…

Right, and so the seller then has to put that money back in the market in some other asset at marginally higher prices, lest they lose money to inflation holding it in cash (or fixed-denomination assets).

This is the natural consequence of negative real interest rates. With positive rates the infinite series representing the "discounted value of all future cash flows" converges to a single dollar value. With negative rates the series diverges: the "discounted value" of future cash flows is greater than their nominal value, simply because you're losing money with competing investments. The rational value of any investment that generates positive and predictable cash flows becomes infinite.

Right now the only thing holding a lid on equity valuations is the expectation that the Fed will eventually raise rates, and so cash flows from time periods > 2023 need to be discounted at positive rates. If that doesn't happen, or if they don't raise rates by more than the inflation rate at the time, things will go boom.

Re: Stock Market Returns Are Anything but Average

#313

Post by kqr »

tonyedgecombe wrote: post #295
intergalplan wrote: post #234

Earlier quoted context omitted.

Yeah, I don't know how someone can look at housing prices say, 1990-2020 and say there wasn't inflation after the housing crisis. House prices dropped, but not as much as they "should" have to eradicate the evident bubble of '00-'08, despite the very public beating housing & banking took. And 2-3 years on they were shooting up again!

Is it really inflation if the cost of a house doubles but the cost of servicing a mortgage halves because interest rates are so low?

No, that's just a single overlevered market with, well, the banks laughing all the way to the bank? Because apparently they can get away with it.

Individual markets have crazy price increases all the time. It's happened to gold, oil, wheat, and virtually every tradeable thing ever, including housing. That it happens in one place is no reason to cry inflation.

Re: Stock Market Returns Are Anything but Average

#314

Post by jdasdf »

skrtskrt wrote: post #270
sichtlinkair wrote: post #15

Earlier quoted context omitted.

> It's likely to be a "picking up pennies in front of a steamroller" type trade. What does that mean?

A good example is selling options for premium. You can sell a put option against a stock. Say the stock is $100 right now, and you sell a put option one month out for a strike price of $90. The seller of this put option essentially bets that the stock will still be above $90 in a month. The buyer of this put option is betting that the stock will be below $90 in a month. For executing this trade, you, the put seller,…

Just a quick note here, selling puts is actually the worse of the examples you could have mentioned, because you can simply use it as a way to maintain an open order for the stock at a given price while getting paid for it.

Selling calls would be a better example, since in that case losses are potentially limitless.

Re: Stock Market Returns Are Anything but Average

#315

Post by v_london »

ISL wrote: post #233
robjan wrote: post #209

Earlier quoted context omitted.

You own the stock in perpetuity, not just for a year. As long as you don't expect the company to go bust any time soon that's not a bad PE ratio.

As recently as 2011, KO had a P/E of 9. https://www.macrotrends.net/stocks/charts/KO/cocacola/pe-rat... There are two ways that a P/E can return to a quasi-normal value. Either the price can go down or the earnings can increase. The mean and median values, since 1880, are about 15. "This time, it's different" https://www.multpl.com/s-p-500-pe-ratio

Stock prices are absolutely inflated, and as a small-scale investor I'm scared.

However, I'm not pulling out because realistically, there's no other asset that's safer in the long run. Interest rates are close to zero so returns in bonds are low, inflation will eat away money held in cash deposits and don't even get me started on cryptocurrency, rare sneakers or other "alternative investments". I started investing in stocks in 2017, even then people were warning that we were in a bubble that was bound to burst at some point. Not investing would have missed me several years of above-average returns.

But today, there seems to be a bubble on everything after all the money printing. So I'll keep investing in good, underhyped and stable companies and try to weather whatever storm, good or bad, will come in the next years.

Re: Stock Market Returns Are Anything but Average

#316

Post by kqr »

Someone1234 wrote: post #8
hpkuarg wrote: post #2

I mean, just look at last year, when the S&P 500 index plunged over 30%, then proceeded to nearly double from then until now, in the midst of a global pandemic that froze big chunks of the world economy. Stock market returns make no sense.

It starts to when you ask yourself: Where else are people meant to store money? Since interest rates and bond rates were at historical lows. So you have people who are looking at 10% YOY returns on one hand and 0.2%/2% on the other and making the rational decision. Does this make stocks overinflated? Yes. Is it going to suddenly pop? Unlikely, since the conditions that caused it won't suddenly change (e.g. certain bo…

You don't have to choose one thing. A portfolio of two assets that are sufficiently uncorrelated can provide substantial returns over either one alone. They don't even have to be cointegrated. One of them could even have net negative returns, and it still works.

A split between equity and bonds still seems prudent, I think.

Re: Stock Market Returns Are Anything but Average

#317

Post by skrtskrt »

jdasdf wrote: post #314
skrtskrt wrote: post #270

Earlier quoted context omitted.

A good example is selling options for premium. You can sell a put option against a stock. Say the stock is $100 right now, and you sell a put option one month out for a strike price of $90. The seller of this put option essentially bets that the stock will still be above $90 in a month. The buyer of this put option is betting that the stock will be below $90 in a month. For executing this trade, you, the put seller,…

Just a quick note here, selling puts is actually the worse of the examples you could have mentioned, because you can simply use it as a way to maintain an open order for the stock at a given price while getting paid for it. Selling calls would be a better example, since in that case losses are potentially limitless.

True, but a casual investor is less likely to sell naked calls with infinite loss.

When they sell covered calls and lose the bet, the only loss is missing out on the run up of the stock.

I mostly just used the put example because it maps better to compare to a buy and hold strategy - good if market is up, bad if market is down.

It's also a well-known pennies-in-front-of-steamroller strategy that hedge funds have gotten very publicly burned on before, so anyone interested could research more.

Re: Stock Market Returns Are Anything but Average

#318

Post by ProAm »

kevincrane wrote: post #303
johnwheeler wrote: post #286

Earlier quoted context omitted.

I agree with this except I think if you know a stock or two is good, diversification is unnecessary. I’ve only had two stocks in my portfolio for the last ten years.

Same for the lottery, if you just know which numbers are good then you only have to buy one or two tickets ever and you're set for life.

You cannot study about lottery numbers however. Whereas studying business isn't impossible.

Re: Stock Market Returns Are Anything but Average

#319

Post by hattmall »

dcow wrote: post #237
PragmaticPulp wrote: post #124

Earlier quoted context omitted.

I think a lot of newcomers to stock investing in the past year have been given the wrong ideas about the stock market. When all of the headlines are about GameStop and Nokia and AMC and some kid who made it lost a lot of money on RobinHood, the stock market can feel like a place for gambling. Now that cryptocurrency prices are listed right next to stock prices, many people don’t even understand that stocks are owners…

The problem is options/derivatives trading. That is straight up gambling. There’s a meta market where you bet on the behavior of the market...

It is ALL gambling, options are just another instrument, they can make your gamble more risky or less risky depending on how you use them.

Except in very rare cases stocks are entirely based on what investors think someone else is willing to pay in the future.

Re: Stock Market Returns Are Anything but Average

#320

Post by kqr »

azemetre wrote: post #281
SavantIdiot wrote: post #263

Earlier quoted context omitted.

How do you "miss" 10 days? Unless you are a day trader (aka gambler), "normal person investing" is about trickling cash into an account slowly over time into low-cost funds/etfs, covering the grid, and pretty much never selling until retirement. Maybe a rebalance here or there over the decades, but you're never "out" unless you're paranoid and liquidate into a cash position, but refer to point A. This is the strategy…

When the 2008 crashed happened the office I worked in had lots of people take their money out of their 401ks, IRAs, or brokerages for years. In hindsight it may have been irrational but from what I remember, people were scared. Some people lost their job for years (remember the various news stories about 99-week unemployment people?), you needed whatever money you could get. If that meant cashing out everything you h…

Not only more common -- that is effectively what crashes are: demand for liquidity exceeds the supply, and the way markets are set up, this condition causes an even greater demand for liquidity, in a feedback loop.

Most of the time, you can get liquidity, but only at a price that really hurts. Sometimes you can't get it at all.

Post reply on HN