P/E Ratios. Do they matter anymore?

There was a moment when I was 16 that I realized, I was different.

Not eye-color or hair-color different. But different.

I was raised by three women.

When you’re a boy in the Midwest getting raised by three women you act different. See the world differently. And even notice what others can’t… or won’t.

I have a great dad, who’s been married to my mom for 52 years but growing up my dad was always on business trips providing for the family.

So it was up to my mom and my two older sisters to raise me.

I remember clearly.

I was out with three of my guy friends on a school night watching TV. I said something like, “Tom Selleck is a good looking guy.” I didn’t think anything of it before I said it.

Why would I?

My two sisters and mom would always point out looks of men AND women. I didn’t know that in the dude-world that men or teenage boys weren’t supposed to notice looks of the same gender. Apparently there’s this rule that men are only supposed to notice the looks of women and if you notice the looks of men…then keep it to yourself.

My friend Ryan said, “Did you just say that Tom Selleck is a good looking guy?” And I said, “Yeah. you don’t think so?”

Silence.

Ryan didn’t say anything. He and my other three friends just looked at me…like I had a horn growing out of my head.

I look at investing the same way.

I ask questions and notice things that “men are not supposed to ask and notice.”

And I’m worried.

Because I think almost every investor (male or female)  is asking the wrong questions about the stock market today. And that’s what’s going to hurt them most in 2018.

I learned early (in my mid-20’s) that PE ratios and earnings reports didn’t matter nearly as much as the big-box world was marketing them to us.

Amazon

Look at this price chart of Amazon.

The P/E ratio was 511 (June 2014) before the price broke to the upside by 281%. If you follow P/E ratios then what you see below should never have happened. A high P/E ratio, for comparison, is typically anything over 30!

IBM

And then take a look at this price chart of IBM.

It’s P/E ratio was 12 (in June 2014) when Amazon’s was 511. Again if you follow P/E ratios then IBM would have been the better investment. But clearly, PRICE and real-life disagreed.

Isn’t that interesting?

Do you want to know what to think about an investment? Just ask “real life” what it thinks. Not theory but real life. And in the world of investing, real life is price direction.

What was IBM’s performance after it’s June 2014 P/E ratio of 12…? It was, wait for it, 1%. And yes, that is including dividends. If you don’t include reinvested dividends, then IBM would have returned -11.5%!!!

So what happened to IBM? The price has the answer for you, they lost their way. And Amazon hasn’t.

I kept noticing that price was that one thing that NEVER got restated or adjusted up or down after the market closed. And I know this sounds novel but price direction determined if your investment went higher or lower.

I noticed a P/E ratio could be “too high” for years before it actually mattered. And/or a low P/E ratios could be a sign that something is wrong and not that it’s a deep value stock.

When I first started sharing my research about price direction, there was a similar reaction to noticing that Tom Selleck was good looking.

I was called names.

You’re a timer.

You’re a predictor.

You’re a trader.

I didn’t know how to react to that. I was like, “Really? By looking at price direction, I’m those things?” Sometimes I actually think of myself as a “pricer” more than anything else. And yes, I know that “pricer” is not a term.

Investors have a dilemma.

They’ve been taught to ask someone else’s questions. They’ve been taught to ask the questions of the big-box world and the “pick of the month” newsletter world. AND it’s the questions that investors ask that matter most to their performance and not the securities they own.

Stick with me here.

So what is Mark Zuckerberg’s strategy?

He built the biggest noise machine in the world.

It’s bigger than China, Islam and closing in on Christianity. This great comparison below is pulled right from Scott Galloway’s weekly missive. It’s called No Mercy/No Malice and its priceless.

Do you think Mark is going to stop trying to figure out how to distract you even more?

Full disclosure, I use Facebook advertising to find people who are looking for a powerfully simple investment approach. And I get that if someone is looking for a trading solution (read: not a good idea), I would show up as possible noise to them.

Because the fight for your attention is not going to end.

And that means you have to fight back. Which means asking better questions that can filter out the confusion, conflicting points of view, upsells, chaos and Mark’s noise machine.

So what should your attention be on?

Building a superpower…an investment superpower.  

And price direction and the relationship stock-price has with bond-price and commodity-price and real estate-price is the superpower people are looking for.

And right now, stock-price is moving higher despite [nose-bleed] high P/E ratios just like the stock market had in 1998, 1999 and the beginning of 2000. But price moving higher has never been the thing that ends bull markets or pops “bubbles.”

What’s ended every bull market and bubble?

A euphoric feeling that the price could ONLY go in one direction with the next stop being the moon. This bull market will end. All bull markets are designed the same. They are designed to keep the most amount of people out of the market, until the very very end. And then the bull market changes its personality from keeping as many out as possible to bringing in as many as possible until the market gets every last person invested.

And then.

Pop!

When bull markets start to prepare their fall, or start their topping out process, or prepare to get popped they always do the same thing. They start leaking money into the other three core assets on the planet (fixed income, commodity, real estate). The leaking is the beginning of the end for a bull market to“pop.”

Let me be 100% clear.

There is no leaking happening in the stock market right now. In fact its the fixed income market that has sprung a leak!

You cannot set your money aside. Ever.

It’s either in the stock market, the fixed income market (bonds/cash), the real estate market or the commodity market. It can never escape out of the system.

I realize I’m alone with this point of view, but quite honestly I’m not sure why. Cash is an investment.

Please look at a long-term price chart of the US dollar below for example. And please notice the price line is not flat. It moves up and down like any other security on the planet.

Here’s a 43-year price chart of the US dollar.

 

Some of you might be thinking, “oh I thought it would be worse.” And that’s because you aren’t seeing this investment (US Dollar) through the eyes of inflation. Below is the price chart of the US Dollar from 1978 to 2018 with the government’s measured inflation rate being considered.

Looks different. Doesn’t it?

This is why understanding which core asset is in an uptrend AND beating the other three core assets (fixed income (bonds/cash), commodities, real estate) could be considered an investment superpower.                     

And yes, these four relationships (stocks, fixed income (bonds/cash), commodity and real estate) is what told Fearless Wealth Research to get out of the stock market in 2000 and 2008. And then told us to get back in just five months after the stock market bottomed.

Become an expert in understanding the relationship between these for assets, and you win the game.

You’ve been taught that stock picking is the answer, you say?

It turns out having the right stocks only determines 7% of your performance. While understanding which core asset to be in determines 93% of your performance.

I want to be in the “93% of your performance” game. And that is why I rail against the “pick of the month” newsletter industry. They are telling you to master the “7% of your performance.”  

I’m biased.

I want you to master the 93% that determines your performance.

Stock market euphoria will happen.

The 1980’s Japanese stock and real estate boom (and bubble) ended with complete euphoria. As the top was getting put in for Japan its livable land (which only comprises 22% of Japan) was worth 4 times more than all the land in the US.

In fact, the land of the Imperial Palace in Tokyo was worth as much as all the land in California. And a square foot of Tokyo’s highest rental district was selling for 350 times more than the highest rental district in Manhattan. That is what euphoria looks like.

The only euphoria I can find right now on the planet is around cryptocurrencies. Just take Chris Larson’s startup that he co-founded.

Ripple, founded in 2012, is an enterprise blockchain solution for global payments.  Ripple’s coin (XRP) increased from 1/100th of a penny to $2.91 per coin in less than ten months. But they do have a pretty website.

Here’s a price chart of Ripple’s coin XRP.

Here’s the kicker.

Currently, Ripple owns 62% of all their XRP coins. That doesn’t feel too decentralize. Part of the reason people have flocked to cryptos is that of the decentralization-ness of the coins. So, let me understand this, we’re supposed to distrust large governments like the US and its coin but trust a couple dudes living in San Francisco with their coin?

Ripple could be the company that figures out the whole shebang. I don’t know. And no one else does. My point, this is what euphoria looks like. This is not a prediction. I’m not saying XRP (Ripple’s Coin) is going to drop back to $0.0003.

My point is to notice when securities or assets are acting euphoric. And right now apparently Ripple just saved the world. And one more thing, I wish Chris Larson, who became the fifth richest person on the planet on January 4th, 2018 and the rest of his crew, the best. I love entrepreneurship and it’s the dreamers and doers that change the world. Go, Chris.

But back to the stock market.

I would not be shocked if the stock market went up for another 12 to 18 months. And then it’s my prediction (and predictions are stupid) that the market will correct downward by about 55% after that 12 to 18-month euphoric rise.

Let me be very clear.

I want you in the “this causes 93% of your performance” club. I want you to follow a powerfully simple approach. I want you to follow an implementable approach. I want you to understand what the real world is saying about the stock market. And not the noise machines.

And the real world speaks in price direction.

And that means asking better questions or sometimes pointing out something you are not supposed to…like how good looking Tom Selleck is.

In Your Corner,

RCPeck-Dig Signature.JPG     
RC Peck, CFP

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