Tuesday, February 02, 2010
In his weekly commentary, John Hussman explains something that few investment advisers seem to understand and even fewer would share if they did - that much of what passes as conventional wisdom in valuing stocks is nonsense.
Over the years, I have frequently emphasized that stocks are not a claim on "forward operating earnings." They are not even a claim on reported net earnings (and should not be valued as a blind multiple to a single year's results in any event). They are a claim on a very long-term stream of future cash flows that will actually be delivered to investors as dividends, or retained on their behalf as an increment to the book value of the company.Go read the whole thing if you've ever wondered why no one seems to care about dividends anymore. One shouldn't have to think too hard about why, over the last 20 years or so, Graham/Buffett style analysis of stocks has been usurped by more "contemporary" valuation techniques showing that stocks are not overvalued.
Importantly, the ability of companies to increase book value over time has been a critical determinant of long-term earnings growth, and is likely to be even more important in an economy where debt financing is increasingly constrained.