Thanks aswath! It's so refreshing in this day and age to hear something of substance rather than the usual superficial sound bytes and production heavy videos that's all just fluff
Interesting, I always thought asset heavy companies can pass inflation onto its consumers, while capital light businesses will get hurt by inflation (ie software and cloud services stocks).
I guess that's because capital intensive companies tend to finance their big ticket items, e.g., airlines financing their new 787 will have higher cost due to higher interest.
Thanks so much for a comprehensive discussion Professor Damodaran. Inflation is like the genie in the bottle which is hard to put back in once it gets out - that hit hard! Perhaps the other aspect that the Fed should not claim it can manage is to produce an exact Inflation print that policy makers seek to handle the US indebtedness. In that respect, Inflation is like trying to pour tomato ketchup from a bottle !
Even though the money-printing has been insane (look at a chart of M2...), I lean toward thinking that the deflationary forces we've been living with for decades will overcome it, and this inflation will in fact be transitory. Productivy is up post-pandemic, workers still have less bargaining power than in decades past, demographics are weak, economic growth is weak, technology makes everything cheaper and better, etc. The recent high CPI was due mainly to base effects and a small handful of categories with huge increases such as used cars. If you annualize inflation over the last *two* years so that you include both 2020's deflation along with 2021's inflation, then it's only a little above 2%, not the 4.2% from April '20 to '21. I'm far from certain, and I admit that my thinking could very well be influenced by recency bias. I'm young enough that I have no memory of any notable inflation. I'm almost hoping that we do get some lasting inflation just because it'd be something new and interesting. I don't rule out 5% inflation, even if my base case is
Thanks Professor! If I am central bank I would more worried about price stability than growth. At least in the medium term if prices are stable, growth should come back.
Mate, your lecture is unbelievably darn good! Thanks very much for taking the effort of doing this. As a non economist, all these forces are beginning to make some sense.
Fed- **speak less, act more** epic one!! An amazing content. Thank you very much for your valuable teachings. Never I’ve completed watching your videos without learning more and more.
@@yingyeungsin8634 We are not yet at hyperinflation. But in general there is a significant problem with the difficulty to plan spending. At a personal level, we often can plan a month ahead. So, if we know our income each month, we can plan for what we buy that month. If we have non monthly spending we ideally would buy dollars and then sell them to spend a few months later. But in practice we do loose a lot to the liquidity we keep in our own currency. Difficulty to exchange currency definitely hurts our everyday lives. The only legal way to buy dollars takes around 3 days and 3 different bank accounts, which not everyone can get at a low price.
@@ManuelReynamanuelmreyna what about crypto currencies - is it easier to buy those? For example some stable coins, which are not changing value to usd/eur...
@@horijakkamnavlese5513 I would say cryptos are harder to get. I don't mean to say that dollars are in any way impossible to get. There are ways to get them, both legal and illegal. But they are complex enough to only be accessible to those who have I would say at least 200 dollars to spare a month, which is what a big proportion of argentines earn in a month.
Thank you for the usual, excellent and thoughtful analysis. Not being a monetarist, I also see global supply chain disruptions as contributing to a lowering of the efficiency of global markets and thereby contributing to inflation.
i quitted school because i started a bussines young, focused on my bussines. Now 7 years later i still growing. But dude you just had my full attention for 27min. I could never do that when i was in school. 27years btw. Great video + sub
Thank you for sharing the insigtful framework. It is extremely helpful. One quick comment on typo: on slide 19, 'Expected Inflation' should be 'Real inflation'.
I have a lot of growth stocks that are down a lot I sadly invested when they were booming and wanted to hold long term but they are down alot now I just want to get some insight should I sell now before it gets worst or hold ? Stocks like sol bngo nio gevo pltr ect..
My portfolio includes stocks, long-term treasuries, gold, and commodities. All of the asset classes in my portolio have increased over the past month. But gold and commodities have significantly outperformed the stocks and treasuries. Stocks have actually been the WORST performer in my portfolio (despite still increasing). So real assets>treasuries>stocks.
13:10 why would I set the coupon only at 2% as a buyer when the inflation is at 3%? Wouldn't I want the coupon to cover the inflation at least and some more?
excelent explanation ! if inflation is a monetary phenomenon. Then it is influenced by two factors: size of money available for a specific currency and velocity of its circulation. But Wall street seems only concerned about the size of money printing and CPI.
Professor, I watched your video in June and you guided us to wait till October to understand if inflation is transitory or not. We just received October's inflation numbers and those are the highest in 30 years at 6.2%. Can we confirm high inflation now?
Thanks so much for all the wisdom and knowledge you share! I’m wondering if you or anyone can answer a question or point me in the right direction. If a large portion of the lowered returns on stocks during inflationary periods are, like you said, due to higher equity risk premiums, wouldn’t that mean that returns during those periods are disproportionately low in relation to intrinsic values? Assuming inflation eventually goes back down, if you can manage to hold on to the stock until equity risk premiums go back down and P/Es return to normal levels, wouldn’t you receive the returns at that point? It’s way beyond my pay grade (I play music for a living), but it there any way to account for that and measure it?
In a DCF valuation, the equity risk premium affects only the discount rate. The discount rate is the *opportunity cost* of investing in the company vs investing in cash. So if you are omniscent and produce a 100% correct DCF valuation, then if a higher equity risk premium causes a company to be overvalued, then that means that you'd have higher expected value staying in cash (or finding other opportunities) than buying the stock at the present moment. Looking at P/E ratios or ERPs on a historical basis to say that the market is skewed and will revert to the mean is a type of pricing, not valuation. (Not that this can't be *correct*, but it's based on different premise than fundamental cashflows. The market almost always reverts to the mean... except when it doesn't, c.f. Japan's lost decades.)
@@FireEverLiving oh right, I think I get why I was confused! Thanks! Ha, wow! You’re saying it’s about the cash worries. The stock actually goes up price verses the expected cash flows, because at least it’s better than cash, if cash is probably falling. I think I was confused because I was thinking P/Es were down in the 70s, when inflation was high in the US. But I did a quick search and Investopedia says P/Es go down because “earnings tend to rise more quickly than the stock price.” I wonder if the age of big data will speed that lag up at all, since investors might be projecting earnings more accurately now. Or it also seems like it could be partly a result of the added uncertainty to the overall economy, rather than simply a lag. I think I might have been confusing economic concern with equity risk premium. If you are worried about the economy or specific company’s outlook, it seems you’d want higher returns on your investment, or higher profits compared to the price you’d be willing to pay (but that doesn’t mean returns if the market’s pricing remains low, like in Japan’s lost decade). I was thinking of lower P/E ratio as an imprecise but quick way of communicating the concept of higher value for the price. Maybe saying Price/Value would be a more correct term, even though it’s unknowable. Or P/DCF. Is that a thing? I guess you’d have to clarify P/myDCF. Haha! Geez, inflation is tough. I feel like I’m probably still not even understanding your response completely, even though it was very clear. Just tough concepts. I really appreciate the help!
@@pocketsoundsmusic7379 "Buy and hold" doesn't always work. Time doesn't heal all wounds. Cisco's P/E was *lower* than the Nasdaq's average at its peak in 2000, but if you'd bought then, you'd *still* be in the red, not even accounting for inflation. Lehman Brothers had about the same P/E as Goldman Sachs in 2006, and it went bankrupt a couple years later: shareholders lost everything. You'd have been better off holding cash in both cases. If future inflation will be high, then cases like this (where you'd be better off in cash) are more likely, especially for companies where most of their potential value is far in the future (like Cisco in 2000, e.g. Tesla today). P/Es are mainly determined by risk, growth rate, and payout. A high-risk, low-growth company will probably have a low P/E; that doesn't make it a good value. A low-risk, high-growth comapny will probably have a high P/E; that doesn't make it a poor value. P/Es are best for comparing similar companies at a certain point in time. I don't think that it's very useful to look at a graph of historical P/Es, either for a single stock or for the market as a whole, since this is affected by things like overall sentiment, interest rates, etc. Prof. Aswath puts up his courses for free on TH-cam. He just finished uploading his spring 2021 valuation course (30+ hours of content). If you want to understand this stuff, these are good.
@@FireEverLiving thanks! I should clarify that wasn’t trying to say buy and hold always works, and obviously you have to pick stocks. Also I do realize that P/Es are affected by growth or decline expectations both for businesses and entire economies. Let me be more specific about what sparked my question. My understanding is that Berkshire Hathaway created a lot of value during the 70s that wasn’t fully realized in the stock price until the 80s when market sentiment overall went up. The lower market sentiment for stocks seemed to help them make acquisitions at good prices, which created value for shareholders. Also, some of their companies, like See’s Candy benefited from inflation by being able raise prices quicker. But this is my question. If there are other companies like Berkshire, where some portion of their stock price returns didn’t catch up with intrinsic value until market sentiment became more optimistic in the 80s, doesn’t looking at stock price returns skew the picture, at least a little? I have listened to a full semester of both the corporate finance and valuation class lectures, and I’m sure I forgot a lot of it, but one thing I learned was that market prices don’t always align with intrinsic value. Like the dot com bubble, when buying and holding was a horrible idea, like you point out, or perhaps in the 30s or 70s when maybe buying and holding was a somewhat better idea. I’m not saying it’s a good idea currently. Just trying to learn more about inflation strategies, and also talk some about investing, so thanks for both!
@@FireEverLiving one more thing. I’m reading a little about the equity risk premium, since you pointed out that I had a misunderstanding of it. I actually think we might both be right, in a way. It’s a backward looking measure, but if you apply the principle to the present it would lead you to want higher expected returns from the stock for the same current price. That would drive the price down in the short term, but only because, based on the current view of the future, the market has less demand for the stock. So it goes down because no one wants it. That’s because the future is more uncertain. If it after that the market decides the future is less uncertain, then the price goes back up. Since pricing is generally based on a multiple of some sort of value measure, all the value created during the period of uncertainty will also be multiplied along with any new value creation that occurs. So as a principal it backs up a buy and hold approach, if the market sentiment eventually gets better. Especially if you buy after market sentiment has already gone down. I understand that it’s not guaranteed to come back up, but you’d have hopefully chosen a good company, in which case you’ll still get returns, even based on the current pricing multiples. It should be noted that as a measure it requires the CAPM model, which assumes an efficient market. I don’t think either of us believe in a perfectly efficient market. But that’s why as a backward looking measure, you’re right, at the top of the dot com bubble the equity risk premium of the market appeared higher. A short time later it appeared much lower. So from a standpoint of the investor actually making the decision about what premium to expect, there was probably a lot of discrepancy. I actually think the professor might use a different measure than what I was looking at (I need to go back and watch that video), but either way, as a present tense decision making tool, it’s based on different expectations and different time horizons. If an individual’s equity risk premium goes up, that means they don’t buy the overpriced stock. If the entire market’s ERP goes up, the stock price falls and then the individual might now have the price he wants. That’s the situation I’d like to prepare for, I guess. That’s why I’m trying to learn about this stuff. And it’s fun. Anyway, that’s my thoughts based based on the bit of reading I just did, my extremely fuzzy memory and my intuition.
If we are seeing 2-3% inflation numbers already, won't economies opening up increase the chance of inflation once people start spending with less fear?
Add to that: 1 - People are unwilling to work which drives up prices 2 - Politics are raising min wage at the exact wrong time, this drives up prices 3 - Shortages of everything drives up prices. It seems like a powder keg.
The real financial analysts,economists etc r not worried about consumer inflation. They r worried about monetary inflation. In monetary inflation the asset prices,stock prices and commodity prices increase because of supply shortage but because they act as constant against the money supply, u automatically see an exponential rise in asset prices and once asset prices increase everything associated with it increases. Example- steel is not getting manufactured at a very fast pace because of iron ore shortage, the ppl who have monopoly on steel govern the price action and automatically the prices move very fast. This increases the selling price of the house and the cycle continues in those who own the real estate and the ones who rent or pay the rent for that real estate. Asset inflation is already here. Apple is worth more than entire sensex. Big tech(apl,google,micrsft,fb,amzn) r worth 3 times india's gdp.
18:10 Why would you define unexpected inflation as what sounds like just a measure of deviation? Wouldn’t a more natural definition consider treasury to TIPS premia in the preceding period as expected inflation?
When inflation goes up people behave escaping from liquidity. This means they prefer real assets, as real estate for example, since they may think that their purchasing power could decrease overtime. Viceversa, in a crisis like the one happened in 2008, people run towards liquidity and that's why housing market crashed during those years.
Please dont comment like you know what youre talking about, no offense. When interest rates increase due to the Fed countering inflation, loans become less attainable so the demand for real estate goes down. In the past decade we had the lowest interest rates while inflation was also lowest, yet real estate prices went up which contradicts your narrative. The crashein 2009 didnt happen because people wanted liquidity, it Happened because plenty of loans had be given to people who had no capital. That increased real estate prices. Once those loans couldnt be paid off anymore, and it became clear that prices had increased based on defaulting credits, the market collapsed.
I guess I live in an irrelevant country, Lebanon. The inflation here has skyrocketed around 500% over the past year and expected to continue its upward trajectory over the next years. I don't know if I should be happy or sad that we are not included in the prof's data.
Can't explain how much I love him for the work he has done to impart wisdom to us. Thank you so much sir ❤We love you.
Thanks aswath! It's so refreshing in this day and age to hear something of substance rather than the usual superficial sound bytes and production heavy videos that's all just fluff
Thank you Sir!
Great to hear a clear voice about this inflation mess...!
Thank you so much professor! This is the best inflation research I've ever seen!
You deserve more. Real knowledge. Thankyou very much sir. You are grate teacher
Thank you. According to Buffett capital intensive companies are more sensitive to inflation than capital light businesses.
Interesting, I always thought asset heavy companies can pass inflation onto its consumers, while capital light businesses will get hurt by inflation (ie software and cloud services stocks).
I guess that's because capital intensive companies tend to finance their big ticket items, e.g., airlines financing their new 787 will have higher cost due to higher interest.
First, I smash that like button, then watch the video. Totally enjoy your content
Thanks so much for a comprehensive discussion Professor Damodaran. Inflation is like the genie in the bottle which is hard to put back in once it gets out - that hit hard! Perhaps the other aspect that the Fed should not claim it can manage is to produce an exact Inflation print that policy makers seek to handle the US indebtedness. In that respect, Inflation is like trying to pour tomato ketchup from a bottle !
Thank you for the awesome free lecture, Prof.
All the way from Malaysia.
Even though the money-printing has been insane (look at a chart of M2...), I lean toward thinking that the deflationary forces we've been living with for decades will overcome it, and this inflation will in fact be transitory. Productivy is up post-pandemic, workers still have less bargaining power than in decades past, demographics are weak, economic growth is weak, technology makes everything cheaper and better, etc. The recent high CPI was due mainly to base effects and a small handful of categories with huge increases such as used cars. If you annualize inflation over the last *two* years so that you include both 2020's deflation along with 2021's inflation, then it's only a little above 2%, not the 4.2% from April '20 to '21.
I'm far from certain, and I admit that my thinking could very well be influenced by recency bias. I'm young enough that I have no memory of any notable inflation. I'm almost hoping that we do get some lasting inflation just because it'd be something new and interesting. I don't rule out 5% inflation, even if my base case is
Thanks Professor! If I am central bank I would more worried about price stability than growth. At least in the medium term if prices are stable, growth should come back.
"If Argentina had an inflation number it would be red" haha 😂👍
Aswath my brother from Madras. You are the GOAT and a legend. The info on your TH-cam channel help many people.
Thank you, appreciate your presentation!
Man's a genius! @Aswath Damodaran
Mate, your lecture is unbelievably darn good! Thanks very much for taking the effort of doing this. As a non economist, all these forces are beginning to make some sense.
Professor, thank you for your efforts and sharing the knowledge..
Great analysis, thank you Professor.
Fed- **speak less, act more** epic one!!
An amazing content. Thank you very much for your valuable teachings. Never I’ve completed watching your videos without learning more and more.
Thank you Professor for your valuable insights. 🙏
Wow you were right on 25:47 👀
Thanks Prof. Aswath for putting out this invaluable content for free! Thanks!
Thanks for the excellent presentaion and talk
I'm from Argentina and definitely is red. Brillant class, thanks you so much!!
Lo es... Igual, hoy confiaría en el indec, no está moreno.
May I ask how you guys plan your spendings under a hyperinflationary environment？ much appreciated
@@yingyeungsin8634 We are not yet at hyperinflation. But in general there is a significant problem with the difficulty to plan spending. At a personal level, we often can plan a month ahead. So, if we know our income each month, we can plan for what we buy that month. If we have non monthly spending we ideally would buy dollars and then sell them to spend a few months later. But in practice we do loose a lot to the liquidity we keep in our own currency. Difficulty to exchange currency definitely hurts our everyday lives. The only legal way to buy dollars takes around 3 days and 3 different bank accounts, which not everyone can get at a low price.
@@ManuelReynamanuelmreyna what about crypto currencies - is it easier to buy those? For example some stable coins, which are not changing value to usd/eur...
@@horijakkamnavlese5513 I would say cryptos are harder to get. I don't mean to say that dollars are in any way impossible to get. There are ways to get them, both legal and illegal. But they are complex enough to only be accessible to those who have I would say at least 200 dollars to spare a month, which is what a big proportion of argentines earn in a month.
Thanks Professor , in-depth knowledge and data
So much great straight talk! Fantastic video
Thanks for your lessons Sir
"Speak less, act more" 💯
Thank you very much for sharing your extensive view on the imminent issue!
Love your videos. Trying to get through the backlog. Thanks for the content
Thank you for the usual, excellent and thoughtful analysis. Not being a monetarist, I also see global supply chain disruptions as contributing to a lowering of the efficiency of global markets and thereby contributing to inflation.
Thanks Professor...an enlightening speech for no~voices like us...
Thank your for your brilliant insights and selfless sharing as usual!
Thank you for your lecture.
I watched this entire video and I want to say that I can't believe you published this for free. You're very generous. Thank you!
Thank you for a very informative video
this is an excellent summary - thank you very much!
Just perfect. Thanks from Belgium 🇧🇪.
His subs just doubled in a very short time good job
Most informative i hard in a long time. Thank you very much! 😀
Once again, an excellent presentation and hypothesis.
This is fantastic. Thanks so much Professor!
Great speaking, thank you professor.
Thank u sir .
i quitted school because i started a bussines young, focused on my bussines. Now 7 years later i still growing. But dude you just had my full attention for 27min. I could never do that when i was in school. 27years btw. Great video + sub
Thank you, professor
Very clear, thank you
Thank you for another great video professor!
Really Good - More Please!
Thanks for the tutorial.
Wonderful lecture ...Have been looking for some article to understand impact of inflation on market...This has been apt.
Thank you for the session
These insights are gold. Love them
So I hope they’ll hedge me against inflation
@@matteoperini19 lol, I’m sure they will.
Thank you for sharing the insigtful framework. It is extremely helpful. One quick comment on typo: on slide 19, 'Expected Inflation' should be 'Real inflation'.
How is it rational to expect 3% inflation and accept a 2% coupon? Have followed and loved your work for years- thanks for making it available.
23:54 summary…thank me later.
great review. ill have to check your other videos out
Love me a good power point presentation.
Thanks Uncle.
I have a lot of growth stocks that are down a lot I sadly invested when they were booming and wanted to hold long term but they are down alot now I just want to get some insight should I sell now before it gets worst or hold ? Stocks like sol bngo nio gevo pltr ect..
Thanks! I’ve applied to university to study economics this autumn because of videos like this.
Exellent material, thanks a lot.
great session! thank you
Beautiful work, one of the soundest minds in the investment/trading world
My portfolio includes stocks, long-term treasuries, gold, and commodities. All of the asset classes in my portolio have increased over the past month. But gold and commodities have significantly outperformed the stocks and treasuries. Stocks have actually been the WORST performer in my portfolio (despite still increasing). So real assets>treasuries>stocks.
Excelent professor 👏👏👏👏 eu tive a honra de traduzir uma de suas obras para o Português (Brasil) (Damodaran On Valuation)
Professor Damodaran é um gênio!
Great content
You know that the plural of "Real" is "Reais", I'm impressed.
just leant this now
Thanks!
love your channel!!!!!!!!
I don’t know how to thank you. If you have an online platform I will happily join it.
Is it possible you can do a video on silver vs gold vs inflation and how the two metals differ during crisis from a historical perspective?
Yes pls!
This topic has aged pretty well now :D
Really insightful talk. Is there any insights on why real estate does not perform very well during high inflation? Kind of counterintuitive.
Real estate often ties to loan. High inflation -> High interest rate -> expensive loans -> decreased demands
I believe technological innovation will have to be the hero for modern hyperinflation
Would be good to compare how commodities did during 60s and 70s, but oil embargo would probably throw things off
13:10 why would I set the coupon only at 2% as a buyer when the inflation is at 3%? Wouldn't I want the coupon to cover the inflation at least and some more?
He said it would be irrational to set coupon at 2%
@@sumitar2 ah makes sense, I heared rational
excelent explanation !
if inflation is a monetary phenomenon. Then it is influenced by two factors: size of money available for a specific currency and velocity of its circulation. But Wall street seems only concerned about the size of money printing and CPI.
Lucid as always, thank you.
Professor, I watched your video in June and you guided us to wait till October to understand if inflation is transitory or not. We just received October's inflation numbers and those are the highest in 30 years at 6.2%. Can we confirm high inflation now?
This is fantastic
Shall we convert us dollars to Australian dollars ?
Been waiting for this to be honest! Thank you as always. Cheers
hello!!
Excellent like as alwaya professor.
I'm from Argentina... I know something about inflation haha!
thank you for the insight sir! ;)
Thanks so much for all the wisdom and knowledge you share! I’m wondering if you or anyone can answer a question or point me in the right direction. If a large portion of the lowered returns on stocks during inflationary periods are, like you said, due to higher equity risk premiums, wouldn’t that mean that returns during those periods are disproportionately low in relation to intrinsic values? Assuming inflation eventually goes back down, if you can manage to hold on to the stock until equity risk premiums go back down and P/Es return to normal levels, wouldn’t you receive the returns at that point? It’s way beyond my pay grade (I play music for a living), but it there any way to account for that and measure it?
In a DCF valuation, the equity risk premium affects only the discount rate. The discount rate is the *opportunity cost* of investing in the company vs investing in cash. So if you are omniscent and produce a 100% correct DCF valuation, then if a higher equity risk premium causes a company to be overvalued, then that means that you'd have higher expected value staying in cash (or finding other opportunities) than buying the stock at the present moment. Looking at P/E ratios or ERPs on a historical basis to say that the market is skewed and will revert to the mean is a type of pricing, not valuation. (Not that this can't be *correct*, but it's based on different premise than fundamental cashflows. The market almost always reverts to the mean... except when it doesn't, c.f. Japan's lost decades.)
@@FireEverLiving oh right, I think I get why I was confused! Thanks! Ha, wow! You’re saying it’s about the cash worries. The stock actually goes up price verses the expected cash flows, because at least it’s better than cash, if cash is probably falling. I think I was confused because I was thinking P/Es were down in the 70s, when inflation was high in the US. But I did a quick search and Investopedia says P/Es go down because “earnings tend to rise more quickly than the stock price.” I wonder if the age of big data will speed that lag up at all, since investors might be projecting earnings more accurately now. Or it also seems like it could be partly a result of the added uncertainty to the overall economy, rather than simply a lag. I think I might have been confusing economic concern with equity risk premium. If you are worried about the economy or specific company’s outlook, it seems you’d want higher returns on your investment, or higher profits compared to the price you’d be willing to pay (but that doesn’t mean returns if the market’s pricing remains low, like in Japan’s lost decade). I was thinking of lower P/E ratio as an imprecise but quick way of communicating the concept of higher value for the price. Maybe saying Price/Value would be a more correct term, even though it’s unknowable. Or P/DCF. Is that a thing? I guess you’d have to clarify P/myDCF. Haha! Geez, inflation is tough. I feel like I’m probably still not even understanding your response completely, even though it was very clear. Just tough concepts. I really appreciate the help!
@@pocketsoundsmusic7379 "Buy and hold" doesn't always work. Time doesn't heal all wounds. Cisco's P/E was *lower* than the Nasdaq's average at its peak in 2000, but if you'd bought then, you'd *still* be in the red, not even accounting for inflation. Lehman Brothers had about the same P/E as Goldman Sachs in 2006, and it went bankrupt a couple years later: shareholders lost everything. You'd have been better off holding cash in both cases. If future inflation will be high, then cases like this (where you'd be better off in cash) are more likely, especially for companies where most of their potential value is far in the future (like Cisco in 2000, e.g. Tesla today).
P/Es are mainly determined by risk, growth rate, and payout. A high-risk, low-growth company will probably have a low P/E; that doesn't make it a good value. A low-risk, high-growth comapny will probably have a high P/E; that doesn't make it a poor value. P/Es are best for comparing similar companies at a certain point in time. I don't think that it's very useful to look at a graph of historical P/Es, either for a single stock or for the market as a whole, since this is affected by things like overall sentiment, interest rates, etc.
Prof. Aswath puts up his courses for free on TH-cam. He just finished uploading his spring 2021 valuation course (30+ hours of content). If you want to understand this stuff, these are good.
@@FireEverLiving thanks! I should clarify that wasn’t trying to say buy and hold always works, and obviously you have to pick stocks. Also I do realize that P/Es are affected by growth or decline expectations both for businesses and entire economies. Let me be more specific about what sparked my question. My understanding is that Berkshire Hathaway created a lot of value during the 70s that wasn’t fully realized in the stock price until the 80s when market sentiment overall went up. The lower market sentiment for stocks seemed to help them make acquisitions at good prices, which created value for shareholders. Also, some of their companies, like See’s Candy benefited from inflation by being able raise prices quicker. But this is my question. If there are other companies like Berkshire, where some portion of their stock price returns didn’t catch up with intrinsic value until market sentiment became more optimistic in the 80s, doesn’t looking at stock price returns skew the picture, at least a little? I have listened to a full semester of both the corporate finance and valuation class lectures, and I’m sure I forgot a lot of it, but one thing I learned was that market prices don’t always align with intrinsic value. Like the dot com bubble, when buying and holding was a horrible idea, like you point out, or perhaps in the 30s or 70s when maybe buying and holding was a somewhat better idea. I’m not saying it’s a good idea currently. Just trying to learn more about inflation strategies, and also talk some about investing, so thanks for both!
@@FireEverLiving one more thing. I’m reading a little about the equity risk premium, since you pointed out that I had a misunderstanding of it. I actually think we might both be right, in a way. It’s a backward looking measure, but if you apply the principle to the present it would lead you to want higher expected returns from the stock for the same current price. That would drive the price down in the short term, but only because, based on the current view of the future, the market has less demand for the stock. So it goes down because no one wants it. That’s because the future is more uncertain. If it after that the market decides the future is less uncertain, then the price goes back up. Since pricing is generally based on a multiple of some sort of value measure, all the value created during the period of uncertainty will also be multiplied along with any new value creation that occurs. So as a principal it backs up a buy and hold approach, if the market sentiment eventually gets better. Especially if you buy after market sentiment has already gone down. I understand that it’s not guaranteed to come back up, but you’d have hopefully chosen a good company, in which case you’ll still get returns, even based on the current pricing multiples. It should be noted that as a measure it requires the CAPM model, which assumes an efficient market. I don’t think either of us believe in a perfectly efficient market. But that’s why as a backward looking measure, you’re right, at the top of the dot com bubble the equity risk premium of the market appeared higher. A short time later it appeared much lower. So from a standpoint of the investor actually making the decision about what premium to expect, there was probably a lot of discrepancy. I actually think the professor might use a different measure than what I was looking at (I need to go back and watch that video), but either way, as a present tense decision making tool, it’s based on different expectations and different time horizons. If an individual’s equity risk premium goes up, that means they don’t buy the overpriced stock. If the entire market’s ERP goes up, the stock price falls and then the individual might now have the price he wants. That’s the situation I’d like to prepare for, I guess. That’s why I’m trying to learn about this stuff. And it’s fun. Anyway, that’s my thoughts based based on the bit of reading I just did, my extremely fuzzy memory and my intuition.
since this video is an asset people should invest in this
If we are seeing 2-3% inflation numbers already, won't economies opening up increase the chance of inflation once people start spending with less fear?
Add to that:
1 - People are unwilling to work which drives up prices
2 - Politics are raising min wage at the exact wrong time, this drives up prices
3 - Shortages of everything drives up prices.
It seems like a powder keg.
@@ii7990 The freezing of tax thresholds in some economies is effectively a tax increase which eats at the household margins as well.
Glad I liquidated my bond holdings earlier today
Hi sir
The real financial analysts,economists etc r not worried about consumer inflation.
They r worried about monetary inflation.
In monetary inflation the asset prices,stock prices and commodity prices increase because of supply shortage but because they act as constant against the money supply, u automatically see an exponential rise in asset prices and once asset prices increase everything associated with it increases.
Example- steel is not getting manufactured at a very fast pace because of iron ore shortage, the ppl who have monopoly on steel govern the price action and automatically the prices move very fast.
This increases the selling price of the house and the cycle continues in those who own the real estate and the ones who rent or pay the rent for that real estate.
Asset inflation is already here.
Apple is worth more than entire sensex.
Big tech(apl,google,micrsft,fb,amzn) r worth 3 times india's gdp.
Greetings from Brasil
18:10 Why would you define unexpected inflation as what sounds like just a measure of deviation? Wouldn’t a more natural definition consider treasury to TIPS premia in the preceding period as expected inflation?
TIPS were introduced in 1997 but he wanted to measure from 1930 onwards.
inflation is like fat, having a breakout of fat around belly is going to be hella tough to trim them back again.
Doesn’t real estate go down if inflation goes up, cos rates will go up as well?
When inflation goes up people behave escaping from liquidity.
This means they prefer real assets, as real estate for example, since they may think that their purchasing power could decrease overtime.
Viceversa, in a crisis like the one happened in 2008, people run towards liquidity and that's why housing market crashed during those years.
Please dont comment like you know what youre talking about, no offense.
When interest rates increase due to the Fed countering inflation, loans become less attainable so the demand for real estate goes down. In the past decade we had the lowest interest rates while inflation was also lowest, yet real estate prices went up which contradicts your narrative.
The crashein 2009 didnt happen because people wanted liquidity, it Happened because plenty of loans had be given to people who had no capital. That increased real estate prices. Once those loans couldnt be paid off anymore, and it became clear that prices had increased based on defaulting credits, the market collapsed.
Legend!
Professor, Do you rule out the possibility of USA hyper inflation in the near future?
I guess I live in an irrelevant country, Lebanon. The inflation here has skyrocketed around 500% over the past year and expected to continue its upward trajectory over the next years. I don't know if I should be happy or sad that we are not included in the prof's data.
the GOAT!
Not even Aswath can save me now from my impending mortgage renewal