and now, a brief rant about historic valuation

Sorry, have to get this off my chest.

One of the dumbest thing’s I’ve seen this entire summer (no small feat) is this thing where Deutsche Bank says that the combination of stocks, bonds and real estate haven’t been as overvalued as they are now in 200 years.

It’s all here if you need to see it:

DEUTSCHE BANK: We examined 200 years of data and concluded stocks, bonds, and housing are at ‘peak valuation’ (Business Insider)

I’m sure the DB researches are smart guys and that they mean well, but comparing stock and bond and real estate valuations to 200 years ago (or 100 years ago) is as meaningless an endeavor as you can think up. Because a hundred years ago, there were no investors. Just speculators and the company founders who owned the majority of the shares. There was no such thing as retirement, nor were there portfolios or IRAs or 401(k)s. Therefore, of course valuations for these assets had lower baselines in general. There wasn’t a need for hundreds of millions of people to hold onto trillions of dollars’ worth.

You know what your retirement plan was a hundred years ago? You fucking died.

And don’t even get me started on the valuations of two hundred years ago. I know of the guys who originally put this data together. They’re geniuses at the London Business School (Dimson, Staunton and Marsh). Even they would tell you, these historic indices weren’t exactly carved into stone tablets and left in a storage locker somewhere. All of this stuff had to be pieced together and pulled from hugely varying sources with all sorts of restorative methodologies. We have a good approximation of what historical prices were and even some sense of earnings, book value and revenue – but an approximation is not a fact.

Even today we don’t know what real earnings are. 20% of the S&P 500 is made up of tech companies and about half of them play games with GAAP on a regular basis. They pretend that employee and executive comp can be expensed as an item that may or may not appear in future quarters. Cisco does it. Google does it. Anything that might lower reported EPS is treated like a non-recurring freak accident of some sort. And then bathtubs full of stock options are handed out and they do the same thing 90 days later. And then there’s goodwill, and tax-advantaged write-downs and all sorts of other fun stuff that wasn’t going on even a decade ago. And you’re going to tell me you feel good about the PE multiples of railroad monopolies from the fucking Civil War era?

Stop it.

And I won’t even get into the massive differences in profit margins between a company like Facebook, which makes millions of dollars per employee, and the S&P 500 of the 1970’s, which was dominated by steel companies and oil companies and mining companies and other low-margin, capital-intensive “filthy” industries.

200 years ago, there was no indoor plumbing or electricity, kind of like present-day Camden, New Jersey. Married couples had eleven children each with the expectation that only three or four of them would make it to junior high school, after which they’d become chimney-sweeps or horse-dentists or whatever the hell you did in those days.

No planes. No cars. No guac.

No similarities with the modern era.

Historical context is excellent for understanding financial markets. But let’s remember that the numbers on a spreadsheet don’t exist in a vacuum. They are a function of what’s happening in the world, as progress steadily mows down the economic realities of the past.

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. 운동자극노래 commented on Oct 16

    … [Trackback]

    […] Read More on on that Topic: thereformedbroker.com/2015/09/08/and-now-a-brief-rant-about-historic-valuation/ […]

  2. DevOps as a service commented on Nov 18

    … [Trackback]

    […] Find More here on that Topic: thereformedbroker.com/2015/09/08/and-now-a-brief-rant-about-historic-valuation/ […]

  3. too much thc commented on Dec 07

    … [Trackback]

    […] Find More Information here on that Topic: thereformedbroker.com/2015/09/08/and-now-a-brief-rant-about-historic-valuation/ […]

  4. manulife bank commented on Jan 14

    … [Trackback]

    […] Read More here to that Topic: thereformedbroker.com/2015/09/08/and-now-a-brief-rant-about-historic-valuation/ […]

  5. DevSecOps Solutions commented on Jan 17

    … [Trackback]

    […] Info to that Topic: thereformedbroker.com/2015/09/08/and-now-a-brief-rant-about-historic-valuation/ […]

  6. best franchise opportunities commented on Jan 26

    … [Trackback]

    […] Find More on on that Topic: thereformedbroker.com/2015/09/08/and-now-a-brief-rant-about-historic-valuation/ […]

  7. syarat lulusan sma jadi pns commented on Jan 31

    … [Trackback]

    […] Read More here on that Topic: thereformedbroker.com/2015/09/08/and-now-a-brief-rant-about-historic-valuation/ […]

  8. The Meaning Of “Retirement” commented on Mar 25

    […] intensely modern notion.  The Reformed Broker put this quite colorfully when he recently wrote “You know what your retirement plan was a hundred years ago? You fucking died.”  My father talks about when his grandparents got their first old-age security check.  They […]