WP: Market Action a ‘Conversation’ Between Investors


My Sunday Business Washington Post column is out. This morning, we look at earnings, analysts forecasting track record, and what that means for stock valuations if we have a recession.

I actually like both headlines today: The online version is Market action a ‘conversation’ between investors very much sums up a philosophical view I have held for a long time. The print version cuts right to the chase: The investor’s dilemma: Earnings, valuations and what to do next.

Here is an excerpt from the column:

“To make sense of this, let’s look at a stock price relative to a company’s earnings — the key to understanding valuations. The slowing economy can help explain stock prices over the next year, as well as your queasiness.

Start with a basic method for valuing stocks. To grossly oversimplify, what you pay for a share in a company is based (in large part) on a formula called “earnings multiple.” How much you should pay today is a function of how much the company is likely to earn next year. The Wall Street analysts who create those earnings forecasts put a multiple on it, lets say 15X and — voila! — we get a fair estimate for what prices stocks should be next year.

What could possibly go wrong with that? Plenty. Three major things: estimates, multiples and forecasting error.”>

After last week’s huge Apple layout and art work, this week, I am relegated to a simple column (at least I’m next to a great piece on Voodoo economists by Steven Pearlstein):
click for ginormous version of print edition


Publishing note: Over the Summer, I filled in for WP’s tax columnist, publishing just about weekly over the past 2 months. After this week, I return to publishing 2X a month. I hope to use the longer interim between columns to focus on investment issues in greater depth, including more research, versus the timely/topical weekly items.


Market action a ‘conversation’ between investors
Barry Ritholtz
Washington Post, September 11, 2011

Washington Post Sunday, September 11, 2011 page G6 (PDF)

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