Offensive Valuations

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dcarste
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Offensive Valuations

Post by dcarste » Wed Oct 11, 2017 6:09 pm

I'd like to post this and get replies. I am a business analyst by trade for a mega corp, so this is how I think.

1. I treat the S&P 500 as a "business", for which I can buy shares of this business.
2. As an analyst I know how fudged most of the accounting is, and so I use what nobody can really 'adjust' - REVENUES.
3. If I am a business owner, in which I can buy and sell the S&P 500 (the business, or "part of the business")...
4. Business are bought and sold on a "multiple" of say EBITA/EV etc,...or in my mind, a multiple of this business' (S&P 500) revenue.

Why in the world would I buy more shares of this "business" (S&P 500) right now, at a multiple of twice the historical average?

In fact, why am I not selling a lot of my business to others when I can get a great multiple/price on my business?

Now I know the market is psychological/behavioral game, but everything screams "CAUTION".

I know I'll get "you can't predict future returns". Your "timing the market". But I'm simply applying what every merger and acquisition group follows on buying companies at multiples, and selling companies if they can get a good multiple on their business.

I think a lot of us will look back at this valuation and hit ourselves in the head for not SELLING a good portion of our business to another buyer.

(Note I follow Benjamin Graham, own 50% stocks at fair valuation, 25% at what you view as high valuation, and 75% at good values)

I sure hope at the very least anyone within 10 years of retirement is following the "100 minus your age in stocks" rule from Bogle.

kosomoto
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Re: Offensive Valuations

Post by kosomoto » Wed Oct 11, 2017 6:25 pm

1. Valuations can go higher, easily. Only half of Americans own stocks.
2. Valuations are artificially high based on accounting changes from the 90s.
3. Look at cash flow.
4. What is the alternative? 2% yielding bonds?
5. Even at current valuations, earnings yield is 4% which beats bonds and earnings grow over time.

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Re: Offensive Valuations

Post by z3r0c00l » Wed Oct 11, 2017 6:31 pm

Can't revenue increase too?

alex_686
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Re: Offensive Valuations

Post by alex_686 » Wed Oct 11, 2017 6:36 pm

dcarste wrote:
Wed Oct 11, 2017 6:09 pm
Why in the world would I buy more shares of this "business" (S&P 500) right now, at a multiple of twice the historical average?
...
Now I know the market is psychological/behavioral game, but everything screams "CAUTION".
By "twice the historical average" you imply that the P/E ratio is incorrect and that the market is overpriced? What do you think the correct value of the P/E ratio should be? As a BA you should have some forward thoughts on this. What worked in the past may not work now. What is your analysis?

Consider this. The P/E ratio is a relative measure. What are you comparing it against? Historically the P/E ratio does not have any predictive info here. Sure, it implies the market will have low returns for the next few years but not that the market is overvalued. The current forward P/E ratio, adjusted for interest rates and inflation, is high historically but not in nosebleed level. P/E ratios can be this high for a very long period of time.

Yeah, I grant you that we have yellow caution lights on. But if not stocks then what? Can you point to a asset class that is not overvalued?

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F150HD
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Re: Offensive Valuations

Post by F150HD » Wed Oct 11, 2017 6:53 pm

4. What is the alternative? 2% yielding bonds?
But if not stocks then what?
This is the $1000 question(s)

KlangFool
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Re: Offensive Valuations

Post by KlangFool » Wed Oct 11, 2017 6:55 pm

OP,

Let's assume that we agree with you on everything. Aka, S&P 500 is overvalued. So, give us the trillion dollar answer where could someone like Norway Sovereign Fund, China, Taiwan, South Korea and so on could invest their money? Please answer that.

There is too much liquidity now. The money has to go somewhere. There are not many places big enough for trillion worth of money. In fact, almost everything is overpriced now. S&P 500 might be less overvalued than other asset classes.

I know nothing. So, my opinion is hardly worth 2 cents. I would not invest based on my opinion.

Just one data point

https://www.forbes.com/sites/ellensheng ... ce00aa7419

<<Chinese Now The Largest Group Of Foreign Investors In U.S. Commercial Real Estate
Chinese investors were the single largest group of foreign investors in commercial real estate in the U.S. last year, with deal volumes reaching a record high of $19.2 billion, up 10% from $17.3 billion in 2015, according to a new report from Cushman & Wakefield. Chinese investment made up about 29% of total foreign investment in U.S. commercial real estate, ahead of Canada, the second largest foreign investor, which invested $13.1 billion.>>

This is less than 20 billion.

By the way, my AA is around 60/40.

KlangFool

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packer16
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Re: Offensive Valuations

Post by packer16 » Wed Oct 11, 2017 7:08 pm

You also have to look at the context of the time periods you are calculating your CAPE average. There is some good historical context on pg. 211 of Joel Tillinghast's new book "Big Money Thinks Small". There is chart which shows CAPE vs. interest rates. It shows CAPE to be 26 in April 2017. If you use the average CAPE since 1930 it has been 17.6 with an average 10-yr yield of 5.1%. In April the 10-year rate was 1.8% & now it is close to 2%. So if we adjust the average CAPE by the difference in interest rates we get a normal CAPE of 44 ( 44 = 17.6 * .051/.02) assuming the 10-year stays at 2%. A 26 CAPE is normal for a 2.8% 10-year. So the current CAPE implies a 2.8% 10 year rate. So the question you need to answer to determine if the market is over or undervalued is is a 2.8% 10-year rate reasonable. Now the yield is 2%. IMO I think 2.8% is too high with no inflation. I also see more deflationary forces the inflationary forces so I do not see inflation increasing anytime soon.

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AlohaJoe
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Re: Offensive Valuations

Post by AlohaJoe » Wed Oct 11, 2017 7:10 pm

dcarste wrote:
Wed Oct 11, 2017 6:09 pm
2. As an analyst I know how fudged most of the accounting is, and so I use what nobody can really 'adjust' - REVENUES.
Revenue can be easily adjusted. It is strange that you haven't heard of the many many many many many cases of it happening.

runner540
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Re: Offensive Valuations

Post by runner540 » Wed Oct 11, 2017 7:26 pm

dcarste wrote:
Wed Oct 11, 2017 6:09 pm
I'd like to post this and get replies. I am a business analyst by trade for a mega corp, so this is how I think.

1. I treat the S&P 500 as a "business", for which I can buy shares of this business.
2. As an analyst I know how fudged most of the accounting is, and so I use what nobody can really 'adjust' - REVENUES.
3. If I am a business owner, in which I can buy and sell the S&P 500 (the business, or "part of the business")...
4. Business are bought and sold on a "multiple" of say EBITA/EV etc,...or in my mind, a multiple of this business' (S&P 500) revenue.

Why in the world would I buy more shares of this "business" (S&P 500) right now, at a multiple of twice the historical average?

In fact, why am I not selling a lot of my business to others when I can get a great multiple/price on my business?

Now I know the market is psychological/behavioral game, but everything screams "CAUTION".

I know I'll get "you can't predict future returns". Your "timing the market". But I'm simply applying what every merger and acquisition group follows on buying companies at multiples, and selling companies if they can get a good multiple on their business.

I think a lot of us will look back at this valuation and hit ourselves in the head for not SELLING a good portion of our business to another buyer.

(Note I follow Benjamin Graham, own 50% stocks at fair valuation, 25% at what you view as high valuation, and 75% at good values)

I sure hope at the very least anyone within 10 years of retirement is following the "100 minus your age in stocks" rule from Bogle.
I'll pay a lot more for a business with $100MM of revenue and 25% margins, than I will for a $100MM of revenue and 5% margins. Can you confirm that the mix of margins in the S&P 500 across your time period is the same?

hicabob
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Re: Offensive Valuations

Post by hicabob » Wed Oct 11, 2017 7:28 pm

F150HD wrote:
Wed Oct 11, 2017 6:53 pm
4. What is the alternative? 2% yielding bonds?
But if not stocks then what?
This is the $1000 question(s)
As Mr Bogle says. ... "Invest we must"

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Watty
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Re: Offensive Valuations

Post by Watty » Wed Oct 11, 2017 7:36 pm

dcarste wrote:
Wed Oct 11, 2017 6:09 pm
Why in the world would I buy more shares of this "business" (S&P 500) right now, at a multiple of twice the historical average?
I gave up trying to analays the financials years ago but one thing that you did not mention factoring in earning growth.

One way to value a company is try to calculate the value of discounted future earnings and the expected earnings growth will have a big impact on that.

The current low interest rates will also make the future earnings worth more in the discounting of future earnings.

I'm not trying to judge the current valuations but the low interest rates will tend to make things look expensive by historical standards.

roflwaffle
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Re: Offensive Valuations

Post by roflwaffle » Wed Oct 11, 2017 7:40 pm

Don't forget about after tax P/E. It's not just how much your investments earn, but how much of those earnings you can keep.

dcarste
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Re: Offensive Valuations

Post by dcarste » Wed Oct 11, 2017 8:07 pm

Definitely not a "all out" or "all in" guy, but there are easily read statistics that are most highly correlated with subsequent 10 and 12 year returns.

Buffet Indicator: Market Cap/GNP(or GDP they are pretty close). Around 89% correlation
Price to Sales: 90% correlation

More indicators are close, but P/E is terrible, CAPE is terrible (~85% correlation). margin adjusted CAPE is good.

I guess all I saying is please if you are within 10/15 years of retirement please at least only have 100-your age in stocks (if you are a boglehead than that is what he says to do). Rest in bonds. 3 fund portfolio or whatever you would like. If you were allocated more aggressively than that the past 5 years, consider yourself blessed. I was, I took profits this year after I realized how much money is really in the account, but I guess thats just me...even though I am a Boglehead in that I use a 3 fund portfolio...I'm also not a greedy idiot.

You guys will love the forgotten asset class 'Cash' (i.e. 1.25% savings accounts like Ally which can go way up or down based on interest rates to protect from inflation).

Jack FFR1846
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Re: Offensive Valuations

Post by Jack FFR1846 » Wed Oct 11, 2017 8:33 pm

For amusement, Ford is in the 7 range. Now have fun with....

Tesla
Google
Snap
Amazon

(sits back and listens)
Bogle: Smart Beta is stupid

KlangFool
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Re: Offensive Valuations

Post by KlangFool » Wed Oct 11, 2017 9:19 pm

dcarste wrote:
Wed Oct 11, 2017 8:07 pm
Definitely not a "all out" or "all in" guy, but there are easily read statistics that are most highly correlated with subsequent 10 and 12 year returns.

Buffet Indicator: Market Cap/GNP(or GDP they are pretty close). Around 89% correlation
Price to Sales: 90% correlation

More indicators are close, but P/E is terrible, CAPE is terrible (~85% correlation). margin adjusted CAPE is good.

I guess all I saying is please if you are within 10/15 years of retirement please at least only have 100-your age in stocks (if you are a boglehead than that is what he says to do). Rest in bonds. 3 fund portfolio or whatever you would like. If you were allocated more aggressively than that the past 5 years, consider yourself blessed. I was, I took profits this year after I realized how much money is really in the account, but I guess thats just me...even though I am a Boglehead in that I use a 3 fund portfolio...I'm also not a greedy idiot.

You guys will love the forgotten asset class 'Cash' (i.e. 1.25% savings accounts like Ally which can go way up or down based on interest rates to protect from inflation).
dcarste,

1) So, what was yours before and after AA?

2) Are you going to change your AA to be more aggressive in the future if your indicator tells you that the stock is undervalued?

KlangFool

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patrick013
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Re: Offensive Valuations

Post by patrick013 » Wed Oct 11, 2017 9:39 pm

When in doubt, keep out of the
market. Delays cost less than losses.

But you'll find plenty of people staying
the course.

I always focus on the earning power of the corporations
in this case the 500 and the relation of current prices to
the situation at hand.
age in bonds, buy-and-hold, 10 year business cycle

TigerNest
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Re: Offensive Valuations

Post by TigerNest » Wed Oct 11, 2017 9:40 pm

dcarste wrote:
Wed Oct 11, 2017 6:09 pm
Why in the world would I buy more shares of this "business" (S&P 500) right now, at a multiple of twice the historical average?
Enterprise Value/Revenue is higher than historical averages, but 2x is an exaggeration. It's about 50% more right now: http://www.multpl.com/s-p-500-price-to-sales

While it's true that EV/Revenue is less prone to fudging than earnings, that's less relevant for a 500-company aggregate index. More importantly it tells you nothing of profitability, which is arguably a much greater driver of economic value. Large companies like those in the S&P have become more consistently profitable over the last decade, so it would make sense that they would be more valuable too:
https://www.economist.com/news/briefing ... good-thing

The S&P 500 is an artificial index, and the exposure has shifted quite a bit over time. Some sectors have higher EV/Revenue multiples than others, such as those that rely more heavily on intangible assets to drive economic profit.

I agree assets are expensive by historical standards, but that does not necessarily mean a catalyst towards a more 'reasonable' valuation is coming in the near future. It could, but perhaps not. Asset values are closely tied to interest rates and trade offs between current and future aggregate consumption preferences. There really isn't a good way to tell what is the right level.

venkman
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Re: Offensive Valuations

Post by venkman » Wed Oct 11, 2017 10:13 pm

dcarste wrote:
Wed Oct 11, 2017 8:07 pm
You guys will love the forgotten asset class 'Cash' (i.e. 1.25% savings accounts like Ally which can go way up or down based on interest rates to protect from inflation).
Cumulative inflation so far this year is already around 1.7%. When does the yield go up on the savings account to protect against that?

visualguy
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Re: Offensive Valuations

Post by visualguy » Wed Oct 11, 2017 11:03 pm

F150HD wrote:
Wed Oct 11, 2017 6:53 pm
4. What is the alternative? 2% yielding bonds?
But if not stocks then what?
This is the $1000 question(s)
When I ask friends and family about that, they say rental real estate for taxable investments... It does seem to work for them. I'm in both stock and real estate, and I'm certainly more worried about my stock than my real estate. I have to admit that I'm very tempted to pull partially out of the stock market at these lofty valuations and invest in more real estate, but I haven't done it so far. I think it's a combination of my tendency to diversify and laziness, and I'll probably regret it!

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packet
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Re: Offensive Valuations

Post by packet » Wed Oct 11, 2017 11:55 pm

dcarste wrote:
Wed Oct 11, 2017 8:07 pm
I guess all I saying is please if you are within 10/15 years of retirement please at least only have 100-your age in stocks...I'm also not a greedy idiot.
Am I an idiot?

80/20 ... 50 years old ... < 10 years from retirement.

:beerCheers,
packet
First round’s on me.

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JoMoney
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Re: Offensive Valuations

Post by JoMoney » Thu Oct 12, 2017 3:47 am

dcarste wrote:
Wed Oct 11, 2017 6:09 pm
..
Why in the world would I buy more shares of this "business" (S&P 500) right now, at a multiple of twice the historical average?

In fact, why am I not selling a lot of my business to others when I can get a great multiple/price on my business?
...
I assume you would be the expert on why you would do what you do. For myself, the simplest answer is there isn't anything else attractive to me to purchase right now... If there was something else I wanted, even outside of investments, I would buy that.
Furthermore, I've committed to a strategy of averaging over time which will get my aggregate purchases 'average' pretty close to whatever the 'average' price multiple is available over the period of my accumulation, and likewise on a gradual withdrawal. There will almost certainly be periods of time across that horizon where opportunities will be revealed where I could have 'sell high/buy low' but it's not as easy as some suggest to do this successfully. The price multiple can go (and has been) higher than it is now, and it only explains part of the equation, higher future growth of the business income and assets can compensate for a high price multiple paid today, but you have to take a 'growth' philosophy/strategy rather than 'value' style to justify it. Selling at the end of 2008/2009 when price multiples were especially high would have been a losing strategy.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

grettman
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Re: Offensive Valuations

Post by grettman » Thu Oct 12, 2017 4:02 am

packet wrote:
Wed Oct 11, 2017 11:55 pm
dcarste wrote:
Wed Oct 11, 2017 8:07 pm
I guess all I saying is please if you are within 10/15 years of retirement please at least only have 100-your age in stocks...I'm also not a greedy idiot.
Am I an idiot?

80/20 ... 50 years old ... < 10 years from retirement.

:beerCheers,
packet
I am 90/10. 47 years old...depending How I am feeling i am somewhere between 10-15 years from retirement. So welcome to the idiot club.

lazyday
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Re: Offensive Valuations

Post by lazyday » Thu Oct 12, 2017 6:05 am

A key question is what mean reversion we will see in PE and profit margins.

In the US, PE10 is high and on top of that, E is high because of high margins. We are paying a high multiple of high earnings. If both fully revert to the long term mean, the market will get slaughtered. And they could drop well below the mean.
TigerNest wrote:
Wed Oct 11, 2017 9:40 pm
Enterprise Value/Revenue is higher than historical averages, but 2x is an exaggeration. It's about 50% more right now: http://www.multpl.com/s-p-500-price-to-sales
That's only a 16 year chart. Both PE10 and margins have been high for a long time.

There are some good reasons why they should be a little higher than in the past. Grantham has written about this topic in shareholder letters at gmo.com. For example the recent one where he says he's "obsessed" with the 20 year period ending now.

lazyday
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Re: Offensive Valuations

Post by lazyday » Thu Oct 12, 2017 6:10 am

kosomoto wrote:
Wed Oct 11, 2017 6:25 pm
4. What is the alternative? 2% yielding bonds?
Maybe. Bonds have a much shorter duration than stocks. If everything returns to normal, you will lose less money.

Though I don't believe in big market timing moves away from equities while yield+growth is still significantly more than long term TIPS yield. My personal solution includes a little more bonds, and a big move from US to international equity.

tigermilk
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Re: Offensive Valuations

Post by tigermilk » Thu Oct 12, 2017 6:20 am

grettman wrote:
Thu Oct 12, 2017 4:02 am
packet wrote:
Wed Oct 11, 2017 11:55 pm
dcarste wrote:
Wed Oct 11, 2017 8:07 pm
I guess all I saying is please if you are within 10/15 years of retirement please at least only have 100-your age in stocks...I'm also not a greedy idiot.
Am I an idiot?

80/20 ... 50 years old ... < 10 years from retirement.

:beerCheers,
packet
I am 90/10. 47 years old...depending How I am feeling i am somewhere between 10-15 years from retirement. So welcome to the idiot club.
Well neither of you are as dumb as I - 48 and around 93/7. Can retire in 7+ years. Last year I was even dumber at 100/0.

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CyclingDuo
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Re: Offensive Valuations

Post by CyclingDuo » Thu Oct 12, 2017 7:03 am

dcarste wrote:
Wed Oct 11, 2017 6:09 pm
I'd like to post this and get replies. I am a business analyst by trade for a mega corp, so this is how I think.

1. I treat the S&P 500 as a "business", for which I can buy shares of this business.
2. As an analyst I know how fudged most of the accounting is, and so I use what nobody can really 'adjust' - REVENUES.
3. If I am a business owner, in which I can buy and sell the S&P 500 (the business, or "part of the business")...
4. Business are bought and sold on a "multiple" of say EBITA/EV etc,...or in my mind, a multiple of this business' (S&P 500) revenue.

Why in the world would I buy more shares of this "business" (S&P 500) right now, at a multiple of twice the historical average?

In fact, why am I not selling a lot of my business to others when I can get a great multiple/price on my business?

Now I know the market is psychological/behavioral game, but everything screams "CAUTION".

I know I'll get "you can't predict future returns". Your "timing the market". But I'm simply applying what every merger and acquisition group follows on buying companies at multiples, and selling companies if they can get a good multiple on their business.

I think a lot of us will look back at this valuation and hit ourselves in the head for not SELLING a good portion of our business to another buyer.

(Note I follow Benjamin Graham, own 50% stocks at fair valuation, 25% at what you view as high valuation, and 75% at good values)

I sure hope at the very least anyone within 10 years of retirement is following the "100 minus your age in stocks" rule from Bogle.
Back again to warn us again, are ye?

Gee, it's only been since February 21st that you posted your last warning:

viewtopic.php?f=10&t=211707&p=3248691#p3248691

Do you promise to warn us when prices are undervalued and we should buy, buy, buy? Or do you only warn when things in your opinion are too high, high, high?

:beer

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midareff
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Re: Offensive Valuations

Post by midareff » Thu Oct 12, 2017 7:18 am

kosomoto wrote:
Wed Oct 11, 2017 6:25 pm
1. Valuations can go higher, easily. Only half of Americans own stocks.
2. Valuations are artificially high based on accounting changes from the 90s.
3. Look at cash flow.
4. What is the alternative? 2% yielding bonds?
5. Even at current valuations, earnings yield is 4% which beats bonds and earnings grow over time.
Bold added to original post....

and IMHO that is where a big section of the issue is. A 5 year treasury is 1.5%, a 10 @ 2.3% and VG's Total International is yielding 2.6%. If it drops 25% it will probably be yielding near 3.4%, or nearly the same in total dollars as it does now. My holding period is forever, I'm retired and spend the dividends. Same story with the S&P yielding about 1.85% and if it drops 25% it will be yielding about 2.4%, or nearly the same in total dollars as it does now. My holding period is forever, I'm retired and spend the dividends. LOL, I am looking at the cash flow, MY cash flow. HAving said that if this continues through the end of the month I may be forced to sell some and buy a new car.

Grt2bOutdoors
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Re: Offensive Valuations

Post by Grt2bOutdoors » Thu Oct 12, 2017 7:38 am

Hypothetically, I have a 40 year horizon. I anticipate revenues will continue to rise into the future, way into the future. Purchasing today I anticipate will be the equivalent of buy low, sell high. Problem with all of these calculations are you are looking but just one dot on a big map. Take in the entire view of the landscape, then make your decision. If you are a business analyst, you'll know to keep sufficient liquidity available at all times to be able to capture those opportunities as they arise. However, some businesses never understand that part about liquidity, and hence those are the ones that are no longer with us today.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Dottie57
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Re: Offensive Valuations

Post by Dottie57 » Thu Oct 12, 2017 7:54 am

60 years old at 50/50. I want fixed income for spending before SS. Up to 10 years.

Current valuations don't bother me. I've seen irrational exuberance. Just kept putting money into market. Only time I was really scared was 2008/2009. Which is really why I am now 50/50.

kathyauburn
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Re: Offensive Valuations

Post by kathyauburn » Thu Oct 12, 2017 10:05 am

dcarste wrote:
Wed Oct 11, 2017 6:09 pm
Why in the world would I buy more shares of this "business" (S&P 500) right now, at a multiple of twice the historical average?
Because everyone else is doing it?

I heard someone the other day say that when he worked in the financial industry during the '87 crash, a poll (by fax!) was taken. The question: "Why are you selling stocks?" The most prevalent answer: "Because the market is tanking."

Haha. Many people, of course, are sheep.

So I agree with you. If you ascribe to the old saw "be fearful when others are greedy," then now is certainly not the time to be buying.

wrongfunds
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Re: Offensive Valuations

Post by wrongfunds » Thu Oct 12, 2017 3:17 pm

CyclingDuo wrote:
Thu Oct 12, 2017 7:03 am

Back again to warn us again, are ye?

Gee, it's only been since February 21st that you posted your last warning:

viewtopic.php?f=10&t=211707&p=3248691#p3248691

Do you promise to warn us when prices are undervalued and we should buy, buy, buy? Or do you only warn when things in your opinion are too high, high, high?

:beer
Ha ha!! Internet makes it too easy to go back and look up previous prediction.

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nedsaid
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Re: Offensive Valuations

Post by nedsaid » Thu Oct 12, 2017 6:33 pm

dcarste wrote:
Wed Oct 11, 2017 6:09 pm
I'd like to post this and get replies. I am a business analyst by trade for a mega corp, so this is how I think.

1. I treat the S&P 500 as a "business", for which I can buy shares of this business.
2. As an analyst I know how fudged most of the accounting is, and so I use what nobody can really 'adjust' - REVENUES.
3. If I am a business owner, in which I can buy and sell the S&P 500 (the business, or "part of the business")...
4. Business are bought and sold on a "multiple" of say EBITA/EV etc,...or in my mind, a multiple of this business' (S&P 500) revenue.

Why in the world would I buy more shares of this "business" (S&P 500) right now, at a multiple of twice the historical average?

In fact, why am I not selling a lot of my business to others when I can get a great multiple/price on my business?

Now I know the market is psychological/behavioral game, but everything screams "CAUTION".

I know I'll get "you can't predict future returns". Your "timing the market". But I'm simply applying what every merger and acquisition group follows on buying companies at multiples, and selling companies if they can get a good multiple on their business.

I think a lot of us will look back at this valuation and hit ourselves in the head for not SELLING a good portion of our business to another buyer.

(Note I follow Benjamin Graham, own 50% stocks at fair valuation, 25% at what you view as high valuation, and 75% at good values)

I sure hope at the very least anyone within 10 years of retirement is following the "100 minus your age in stocks" rule from Bogle.
Keep in mind that changes in Generally Accepted Accounting Principles have created a more conservative definition of earnings over time. Today's P/E is not your father's P/E! Larry Swedroe estimates these changes could be as much as 4 points on the P/E. If S&P Forward Estimated P/E is about 20, then P/E stated with 1970 accounting standards might be more like 16. We would not even be having this discussion if S&P 500 forward P/E was at 16!
A fool and his money are good for business.

John Laurens
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Re: Offensive Valuations

Post by John Laurens » Thu Oct 12, 2017 6:44 pm

OP, seems reasonable. May I ask a question? Were you pouring money into the S&P 500 in 2010? Were you borrowing on margin and hocking everything to purchase shares in 2010? If not, you were either WRONG then or are WRONG now. Which is it? I didn’t proclaim that the S&P was undervalued then and I don’t proclaim to know that it is overvalued now. I have been buying more bonds and less equities lately but that is only to maintain my AA according to my IPS.

Regards,
John

JBTX
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Re: Offensive Valuations

Post by JBTX » Thu Oct 12, 2017 7:25 pm

dcarste wrote:
Wed Oct 11, 2017 6:09 pm
I'd like to post this and get replies. I am a business analyst by trade for a mega corp, so this is how I think.

1. I treat the S&P 500 as a "business", for which I can buy shares of this business.
2. As an analyst I know how fudged most of the accounting is, and so I use what nobody can really 'adjust' - REVENUES.
3. If I am a business owner, in which I can buy and sell the S&P 500 (the business, or "part of the business")...
4. Business are bought and sold on a "multiple" of say EBITA/EV etc,...or in my mind, a multiple of this business' (S&P 500) revenue.

Why in the world would I buy more shares of this "business" (S&P 500) right now, at a multiple of twice the historical average?

In fact, why am I not selling a lot of my business to others when I can get a great multiple/price on my business?

Now I know the market is psychological/behavioral game, but everything screams "CAUTION".

I know I'll get "you can't predict future returns". Your "timing the market". But I'm simply applying what every merger and acquisition group follows on buying companies at multiples, and selling companies if they can get a good multiple on their business.

I think a lot of us will look back at this valuation and hit ourselves in the head for not SELLING a good portion of our business to another buyer.

(Note I follow Benjamin Graham, own 50% stocks at fair valuation, 25% at what you view as high valuation, and 75% at good values)

I sure hope at the very least anyone within 10 years of retirement is following the "100 minus your age in stocks" rule from Bogle.
I will agree the market feels overvalued, at least relative to history. I’d also agree conservative allocations are probably appropriate.

As to earnings being overstated, to some degree,but they are probably more accurate than pre 2000. As to using revenues as a valuation basis, that is deeply flawed because the nature of business has changed.

1. We have moved more towards technology and services and they tend to be more profitable relative to revenue. You can’t compare Microsoft or google to a grocery store. Profit relative to revenue is really a meaningless statistic in itself. The likes of Microsoft and google make tons of money. Pharmaceuticals make gobs of money.

2. We have moved more to an oligopoly model in many industries with less competition

3. Interest rates are very low which decreases that expense on the income statement

4. Technology and globalization have decreased labor input cost faster than competition has decreased pricing. See #2.

Also major US corporations get a good chunk, nearly half, of their earnings from overseas. It wasn’t always that way. I’m not sure if that plays into the increased level of profit margins or record earnings but it may.


Now will it stay this way forever? Probably not but it is impossible to say when it will reverse. It could stay this way awhile.

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patrick013
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Re: Offensive Valuations

Post by patrick013 » Thu Oct 12, 2017 8:04 pm

nedsaid wrote:
Thu Oct 12, 2017 6:33 pm
Keep in mind that changes in Generally Accepted Accounting Principles have created a more conservative definition of earnings over time. Today's P/E is not your father's P/E! Larry Swedroe estimates these changes could be as much as 4 points on the P/E. If S&P Forward Estimated P/E is about 20, then P/E stated with 1970 accounting standards might be more like 16. We would not even be having this discussion if S&P 500 forward P/E was at 16!
Conservatism related to Accounting reduces net income not enhance it. But you're
right, incomes today are probably slightly higher than yesteryears. Not amortizing
goodwill is the main culprit. Bad. Should be amortized. I'd change it.
Comprehensive income is extra paperwork and we could really do without it.
EPS calc'd there includes items not realized and employee benefit adjustments
that should be. I'd can it too. Ho hum. But net income otherwise is OK.
age in bonds, buy-and-hold, 10 year business cycle

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czeckers
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Re: Offensive Valuations

Post by czeckers » Thu Oct 12, 2017 8:15 pm

The markets can remain irrational far longer than you can remain solvent.
The Espresso portfolio: | | 16% LCV, 16% SCV, 16% EM, 8% Int'l Value, 8% Int'l Sm, 8% US REIT, 8% Int'l REIT, 20% Inter-term US Treas | | "A journey of a thousand miles begins with a single step."

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nedsaid
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Re: Offensive Valuations

Post by nedsaid » Thu Oct 12, 2017 9:56 pm

patrick013 wrote:
Thu Oct 12, 2017 8:04 pm
nedsaid wrote:
Thu Oct 12, 2017 6:33 pm
Keep in mind that changes in Generally Accepted Accounting Principles have created a more conservative definition of earnings over time. Today's P/E is not your father's P/E! Larry Swedroe estimates these changes could be as much as 4 points on the P/E. If S&P Forward Estimated P/E is about 20, then P/E stated with 1970 accounting standards might be more like 16. We would not even be having this discussion if S&P 500 forward P/E was at 16!
Conservatism related to Accounting reduces net income not enhance it. But you're
right, incomes today are probably slightly higher than yesteryears. Not amortizing
goodwill is the main culprit. Bad. Should be amortized. I'd change it.
Comprehensive income is extra paperwork and we could really do without it.
EPS calc'd there includes items not realized and employee benefit adjustments
that should be. I'd can it too. Ho hum. But net income otherwise is OK.
Yep, conservatism reduces net income and does not enhance it. That was my point. Net income would look better if we were still using 1970 GAAP. The other thing is that incentives like stock
options have to be expensed now and not a balance sheet adjustment as it was in the past, this inflated tech company earnings during the 1990's and Warren Buffett made a big point about this. The changes to GAAP are not off the wall but are an ongoing effort to make the financial statements more accurately reflect economic reality. Stock options are real compensation, for example, and should be reflected as compensation. Another issue is that impairment of assets have to be reflected on the financial statements, goodwill isn't the only such asset.

Anyway, thanks for your comments. They add a lot to the discussion.
A fool and his money are good for business.

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patrick013
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Re: Offensive Valuations

Post by patrick013 » Fri Oct 13, 2017 1:53 pm

nedsaid wrote:
Thu Oct 12, 2017 9:56 pm
Another issue is that impairment of assets have to be reflected on the financial statements, goodwill isn't the only such asset.
Most of the companies I worked for had low book values for fixed assets so
doesn't seem like a problem. Prior values for fixed assets were matched
with prior revenues. If anything an upward revaluation could be done if
allowed. But lower of cost or market is just fine with just a handful of
footnotes IMO. FASB is always snooping around looking for something to
revalue that usually isn't lower of cost or market as it should be. :)
age in bonds, buy-and-hold, 10 year business cycle

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nedsaid
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Re: Offensive Valuations

Post by nedsaid » Fri Oct 13, 2017 3:50 pm

patrick013 wrote:
Fri Oct 13, 2017 1:53 pm
nedsaid wrote:
Thu Oct 12, 2017 9:56 pm
Another issue is that impairment of assets have to be reflected on the financial statements, goodwill isn't the only such asset.
Most of the companies I worked for had low book values for fixed assets so
doesn't seem like a problem. Prior values for fixed assets were matched
with prior revenues. If anything an upward revaluation could be done if
allowed. But lower of cost or market is just fine with just a handful of
footnotes IMO. FASB is always snooping around looking for something to
revalue that usually isn't lower of cost or market as it should be. :)
Going from foggy memory, my companies had securities on its balance sheet that it had to
mark down for impairment. This happened in the aftermath of the 2008-2009 financial crisis. These were probably held in the foundations that my employer had associated with its hospitals. Of course, we know that Goodwill is written down when impaired. When I studied accounting theory in college during the early 1980's, lower of cost or market was the rule. I think this has changed somewhat, I am studying GAAP again to refresh my knowledge.
A fool and his money are good for business.

snarlyjack
Posts: 475
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Location: Montana

Re: Offensive Valuations

Post by snarlyjack » Fri Oct 13, 2017 7:52 pm

Here is Warren Buffett big prediction of
1 Million on the Dow in the next 100 years,
by 2117. So I guess the markets going up...

https://www.usatoday.com/story/money/20 ... 707440001/

HenrysPlan2
Posts: 47
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Re: Offensive Valuations

Post by HenrysPlan2 » Sat Oct 14, 2017 12:23 am

snarlyjack wrote:
Fri Oct 13, 2017 7:52 pm
Here is Warren Buffett big prediction of
1 Million on the Dow in the next 100 years,
by 2117. So I guess the markets going up...

https://www.usatoday.com/story/money/20 ... 707440001/
Sorry I can't be there to enjoy even Dow hits $100m

HenrysPlan2
Posts: 47
Joined: Tue Dec 06, 2016 9:19 pm

Re: Offensive Valuations

Post by HenrysPlan2 » Sat Oct 14, 2017 12:27 am

JBTX wrote:
Thu Oct 12, 2017 7:25 pm
dcarste wrote:
Wed Oct 11, 2017 6:09 pm
I'd like to post this and get replies. I am a business analyst by trade for a mega corp, so this is how I think.

1. I treat the S&P 500 as a "business", for which I can buy shares of this business.
2. As an analyst I know how fudged most of the accounting is, and so I use what nobody can really 'adjust' - REVENUES.
3. If I am a business owner, in which I can buy and sell the S&P 500 (the business, or "part of the business")...
4. Business are bought and sold on a "multiple" of say EBITA/EV etc,...or in my mind, a multiple of this business' (S&P 500) revenue.

Why in the world would I buy more shares of this "business" (S&P 500) right now, at a multiple of twice the historical average?

In fact, why am I not selling a lot of my business to others when I can get a great multiple/price on my business?

Now I know the market is psychological/behavioral game, but everything screams "CAUTION".

I know I'll get "you can't predict future returns". Your "timing the market". But I'm simply applying what every merger and acquisition group follows on buying companies at multiples, and selling companies if they can get a good multiple on their business.

I think a lot of us will look back at this valuation and hit ourselves in the head for not SELLING a good portion of our business to another buyer.

(Note I follow Benjamin Graham, own 50% stocks at fair valuation, 25% at what you view as high valuation, and 75% at good values)

I sure hope at the very least anyone within 10 years of retirement is following the "100 minus your age in stocks" rule from Bogle.
I will agree the market feels overvalued, at least relative to history. I’d also agree conservative allocations are probably appropriate.

As to earnings being overstated, to some degree,but they are probably more accurate than pre 2000. As to using revenues as a valuation basis, that is deeply flawed because the nature of business has changed.

1. We have moved more towards technology and services and they tend to be more profitable relative to revenue. You can’t compare Microsoft or google to a grocery store. Profit relative to revenue is really a meaningless statistic in itself. The likes of Microsoft and google make tons of money. Pharmaceuticals make gobs of money.

2. We have moved more to an oligopoly model in many industries with less competition

3. Interest rates are very low which decreases that expense on the income statement

4. Technology and globalization have decreased labor input cost faster than competition has decreased pricing. See #2.

Also major US corporations get a good chunk, nearly half, of their earnings from overseas. It wasn’t always that way. I’m not sure if that plays into the increased level of profit margins or record earnings but it may.


Now will it stay this way forever? Probably not but it is impossible to say when it will reverse. It could stay this way awhile.

This time is no different , if it's too much overvalue, it will crash. When I hear this time is different scared me. Your reason 1,2,3,4 is not an reason to justify this time is different

JBTX
Posts: 1522
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Re: Offensive Valuations

Post by JBTX » Sat Oct 14, 2017 12:42 am

HenrysPlan2 wrote:
Sat Oct 14, 2017 12:27 am
JBTX wrote:
Thu Oct 12, 2017 7:25 pm
dcarste wrote:
Wed Oct 11, 2017 6:09 pm
I'd like to post this and get replies. I am a business analyst by trade for a mega corp, so this is how I think.

1. I treat the S&P 500 as a "business", for which I can buy shares of this business.
2. As an analyst I know how fudged most of the accounting is, and so I use what nobody can really 'adjust' - REVENUES.
3. If I am a business owner, in which I can buy and sell the S&P 500 (the business, or "part of the business")...
4. Business are bought and sold on a "multiple" of say EBITA/EV etc,...or in my mind, a multiple of this business' (S&P 500) revenue.

Why in the world would I buy more shares of this "business" (S&P 500) right now, at a multiple of twice the historical average?

In fact, why am I not selling a lot of my business to others when I can get a great multiple/price on my business?

Now I know the market is psychological/behavioral game, but everything screams "CAUTION".

I know I'll get "you can't predict future returns". Your "timing the market". But I'm simply applying what every merger and acquisition group follows on buying companies at multiples, and selling companies if they can get a good multiple on their business.

I think a lot of us will look back at this valuation and hit ourselves in the head for not SELLING a good portion of our business to another buyer.

(Note I follow Benjamin Graham, own 50% stocks at fair valuation, 25% at what you view as high valuation, and 75% at good values)

I sure hope at the very least anyone within 10 years of retirement is following the "100 minus your age in stocks" rule from Bogle.
I will agree the market feels overvalued, at least relative to history. I’d also agree conservative allocations are probably appropriate.

As to earnings being overstated, to some degree,but they are probably more accurate than pre 2000. As to using revenues as a valuation basis, that is deeply flawed because the nature of business has changed.

1. We have moved more towards technology and services and they tend to be more profitable relative to revenue. You can’t compare Microsoft or google to a grocery store. Profit relative to revenue is really a meaningless statistic in itself. The likes of Microsoft and google make tons of money. Pharmaceuticals make gobs of money.

2. We have moved more to an oligopoly model in many industries with less competition

3. Interest rates are very low which decreases that expense on the income statement

4. Technology and globalization have decreased labor input cost faster than competition has decreased pricing. See #2.

Also major US corporations get a good chunk, nearly half, of their earnings from overseas. It wasn’t always that way. I’m not sure if that plays into the increased level of profit margins or record earnings but it may.


Now will it stay this way forever? Probably not but it is impossible to say when it will reverse. It could stay this way awhile.

This time is no different , if it's too much overvalue, it will crash. When I hear this time is different scared me. Your reason 1,2,3,4 is not an reason to justify this time is different
I think you missed the point of my post. My point was I don't think using revenue as metric is terribly helpful, for various reasons. But the market may in fact be highly valued in historical terms. I didn't say it wasn't. In fact, it probably is. I'm hesitant to say "overvalued", because it would be pretty irrational for P/E's to be 15 when long term bonds are less than 3.0%. Will the market mean revert. Most likely. When? No idea. It really could be a while.

As to the problem with using revenue:

Revenues across all firms are not additive. Think of a comparison - one firm that is vertically integrated from bottom to top, and another that is five different firms, from the bottom raw materials, to the very top, selling of some sort of consumer goods.

Lets say that both sides sell the same amount of consumer goods - equal revenue. For the single vertically integrated company, the consumer sales IS the total revenue. The internal revenue from all levels below are eliminated. However, in the case of 5 separate firms, each of the firms has their own set of revenues. If you add up the revenues of all 5, it could be 2 to 3 times the revenue of the single vertically integrated fund, yet the end consumer sales are the same thing.

It is not common for revenues to be duplicated between firms, and is appropriate in GAAP in some cases. It may make sense for an individual firm. But if you added up all the revenues of all companies, you would have a lot more revenue than there actually is.

VaR
Posts: 385
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Re: Offensive Valuations

Post by VaR » Sat Oct 14, 2017 1:14 am

To the point about revenue - FASB issued a new standard on revenue recognition in 2014. I don't know whether its impact was to reduce or increase revenue in the current year. Their stated goal was to standardize revenue recognition practice across industries so I imagine that some went up and some went down relative to the old standard.

My intent here is to point out that even within revenue recognition, accounting standards changes can result in changes to the revenue part of an earnings statement. The biggest point of impact is with revenue recognition and discount or rebate recognition for multi-year contracts.

Another big way revenue can be impacted is by the way sales are made. For example, if you're a car company and more of your cars are leased rather than sold, I think you end up with a reduction in immediate revenue because your lease revenue has to be recognized.

And then there's the financial services sector where revenues are almost irrelevant to value. It's all about earnings. And thinking about this, I am starting to agree with the other posters who have said that earnings are important too - even outside the financial sector. If a companies are able to use automation to reduce costs and become more profitable, they will be worth more and so price-to-sales will go up. Interestingly, they don't even need automation. If they are in a capital intensive industry and their cost of capital goes down (say because interest rates go down or if credit spreads tighten), then they will become more profitable and they should be worth more.

magneto
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Re: Offensive Valuations

Post by magneto » Sat Oct 14, 2017 9:56 am

Thanks OP, for prompting an intriguing discussion and alerting those approaching or in retirement to stop and think.

The 'where else can I put the money' line of thought can lead to irrational AAs if not outright danger.

As pointed out Cash is so often overlooked.
And also as mentioned Rental Real Estate is an option.
As maybe is Private Equity (with some care).

Being well into retirement we have moved into a Ben Graham-like defensive allocation for the liquid portfolio :-
25% Trailblazers (Stocks)
25% Defensives
50% Cash

We are not new to Variable Ratio (valuation driven) Investing, having side-stepped speculative episodes, survived Stock meltdowns, since starting our investing career in the 70s and were fortunate to take advantage of those slumps.
Yes, we may be wrong and wrong for a long time, but we can afford to be patient, maybe for some years, rather than risk precious capital at less than propitious pricing.

For a relatively young investor none of this will make sense or be applicable.
But as pointed out the older investor should be quite clear in their minds about current imbalance between updside potential and downside risk.

Incidentally find wide stock measures conflict, but individual positions indicate unduly expensive.

Thanks again.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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patrick013
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Re: Offensive Valuations

Post by patrick013 » Sat Oct 14, 2017 5:23 pm

nedsaid wrote:
Fri Oct 13, 2017 3:50 pm
patrick013 wrote:
Fri Oct 13, 2017 1:53 pm
nedsaid wrote:
Thu Oct 12, 2017 9:56 pm
Another issue is that impairment of assets have to be reflected on the financial statements, goodwill isn't the only such asset.
Most of the companies I worked for had low book values for fixed assets so
doesn't seem like a problem. Prior values for fixed assets were matched
with prior revenues. If anything an upward revaluation could be done if
allowed. But lower of cost or market is just fine with just a handful of
footnotes IMO. FASB is always snooping around looking for something to
revalue that usually isn't lower of cost or market as it should be. :)
Going from foggy memory, my companies had securities on its balance sheet that it had to
mark down for impairment. This happened in the aftermath of the 2008-2009 financial crisis. These were probably held in the foundations that my employer had associated with its hospitals. Of course, we know that Goodwill is written down when impaired. When I studied accounting theory in college during the early 1980's, lower of cost or market was the rule. I think this has changed somewhat, I am studying GAAP again to refresh my knowledge.
Well writing down securities is pretty routine. With goodwill, more equity method
use, and amortizing pensions in comprehensive income, and redeemable non-controlling
interest can't see much else different.
age in bonds, buy-and-hold, 10 year business cycle

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