Most investors don’t follow Warren Buffett’s lead. They procrastinate and miss the opportunities. Tom Bradley suggests a better way
In bear markets, predictions tend to be bold and confident, even though the situation is rapidly changing, and the quality of information is poor. Everyone has a view or statistic to show how overvalued the market is. The late economist Peter Bernstein said market bottoms are defined by a “switch from doubt to certainty.”Article content
There’s another bias to keep in mind. It’s a positive one and involves anchoring on a stock’s previous high. The high price is viewed as being the value of the company, even if it was reached at a time of near-zero interest rates, extreme speculation and above-average valuations. In other words, a stock isn’t necessarily cheap because it’s down 30 per cent from its 2021 high.
Most assuredly, corporate profits — the denominator in a P/E — will go down in a weak economy, possibly by a lot, but the appropriate multiple on those depressed earnings is higher, not lower. Cyclical stocks, in particular, will carry multiples well above their historical range when they start to rebound.
Remember, stocks are valued on their expected earnings and dividends over the next 20 years or more. In a discounted cash-flow calculation, a commonly used valuation tool, the first few quarters, even years, have a small impact on the final value.Article content
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