So here we are, again, in a time of great prosperity. As I venture out my door I see new Vehicles surrounding the Cul-de-sac. I am often amazed, in times alike, how cavalier people are with spending. There is so little thought towards the preservation of wealth in our society. Those considerate are often vilified. Ironically, nobody is pilling up Cash in their closet. At least not that I'm aware. It is always allocation of Capital. Do you want a Tattoo or do you want to accumulate Bonds to cover, or offset, your next car? In either decision, something is being bought. Money is being spent. Probably one of the greatest lessons in life, was playing on a see-saw. It can easily be associated with a lot of decisions in life. That has been the case for at least three days now. After hearing arguments about Price to Earnings indicating an eminent Market Sell-Off before our eyes, I had this on my mind. I'm not convinced, yet.
While I too must agree, it is important to keep your eye on the Price to Earning and when the Major Indices are averaging well above $20, things are expensive. You are buying the Walmart Creamer for the price of Silk Almond Vanilla. But, we should look deeper, as Investing is an odd action. Thankfully, through the Market, it's really the same as shopping in any Market. You could simply grab the cheapest coffee cream off the shelf. Or you could carefully run some analysis. What's in it? How much Sugar, fat, preservatives, etc...
The scenario of my analysis is quite repetitive. Almost mundane. It's like being forced to sit through a morning safety meeting at work. As investing generally continues; Quarterly earnings are reported. Revenue increased or decreased. Cost of revenue increased or decreased. We thereby extrapolate the coveted, "Margin". These are the most important aspects, in summary. We can start to grab some intrinsic value with other aspects applied.
Naturally, if the overall, "Revenue," decreased, it is concerning. That is depending on the Sector and timing. We wouldn't expect Kinder Morgan, for example, to have growth from the previous Quarter. Unless seasons are changing from Winter to the Spring. After all, they are a Pipeline, "Energy Company," (I see another Transport. From their Ships (Trucks, Trains, Planes, and Ships= Transportation) to Pipelines (Direct Transport), Storage Tanks (Warehouse), and Treatment Centers (Manufacturing). They're a specialized Transport).
But, regardless of Sector or industry, these factors, in my opinion, are the most important aspects of consideration. It doesn't matter what you think of their products or services. Revenue, Expenses, Earnings. Those are, as I see it, between Qualitative Measures and Quantitative measures (Something I struggle with identifying). Yes, they to parallel who is the CEO and what they're saying to the Public. What is Revenue, Expense, and Earnings. Let it be chopped up into measures of time. Look at ten, five and three year averages (Revenue, Expenses, Earnings). Look at ten, five, and three quarter measures (Revenue, Expenses, Earnings).
So now I turn the focus back to the larger, Macro-Market (If we shall). Still, a Micro-Factor of the overall economy. Modestly confused, prominent, and feared; The Indices. And the presumptive indicator of a crash, the Price to Earnings. Here I favor the DJIA. I have a lot of admiration for Jack Bogle (Successful Investor, Philanthropist, and Innovator) and his idea to buy the entire S&P 500. But I don't feel it's warranted for this measurement. I have the 30 DOW stocks averaging over $23+ P/E. That is with two stocks dragging down the DJIA (BA and CRM). They lack earnings at the moment. High, slightly. I reflect on Benjamin Graham, the first Professor of Finance (Columbia I believe), sighting to seek a margin of safety. He taught to stay below $22.50 Price to Earnings.
So now I turn to the Gorilla in the room, the Macro Economy. Should we not consider the astonishing amount of money that has just been released into circulation? Are we seeing wage growth and price appreciation in everything? Yes, and it seems! As we are playing see-saw in the School Yard, we must realize we have a feet on the ground, but that's a pretty big person on the other side. Yes, we are going to rise rapidly here in a second! The other side of the, "Price," in the, "Price to Earnings," is the, "Earnings". I think we should look forward and realize Businesses should be reporting greater numbers. Many selling Inventory (Acquired at discounted prices) at increased prices.
I don't see an immediate crash warranted here. I think the Macro Economy is going to lift everything upward. I have stronger thoughts on Lynch's well documented Price to Earnings compared to Earnings Growth Rate (1,3,5 year?). When the elite decrease Money in circulation, that will cause concern for myself. Margins will then adjust downward. I encourage any investor to buy Companies with Margins above Median of a major index. But, realize we are likely nearing a top. Pay close attention to the Fed, Senate, and Labor Market.