We came across a fantastic Google Talk with Arnold Van Den Berg. He is a value investor who founded Century Management in 1974 and is noted on the list of SuperInvestors at the Graham Doddsville blog - http://www.grahamanddoddsville.net/?page_id=825#vandenberg
The whole talk is worth a watch for two reasons: 1) He talks about his interesting life story and the evolution of his investment philosophy and 2) He walks through some very interesting periods in investing, specifically being a bull when everyone is a bear (and vice versa) and how inflation affects value multiples like P/E.
Our Notes - #1 “The Death of Equities”
Whether it is a bubble or a bust, you usually get some fun headlines. Case in point is BusinessWeek calling for the “Death of Equities” in 1979. Of course, it is easy to say in hindsight that it was obvious (find me a Pets.com believer), but when you are in the thick of it you need a philosophy to get through. We, of course, focus on value just like Arnold.
As an aside, The Economist has also been wonderfully wrong about oil throughout the years. They have an uncanny ability of having their cover stories mark the peak of bullish and bearish sentiment of oil.
How does inflation affect market P/Es and stock prices? How does inflation creep up?
Money is free. Inflation is benign. COVID-19 aside, we are in a Goldilocks moment where things are just right, and everything is fine! Well, at least when you look at market multiples that is the case with the Googles of the world trading at 30x+ P/Es (i.e. a <=3% earnings yield) and mediocre businesses multiples making us queasy. And maybe everything will be just fine, but when you buy a stock at lofty valuations you have to have things go fine for a while to be OK. Pandemics and record deficits be damned! Buy baby buy.
Many investors today are too young to recall the inflation issues of the 1970s. Arnold has an excellent chart, shown below, of how something is not a problem until suddenly it is.
And how can inflation affect what someone is willing to pay today for a dollar of earnings (what the P/E ratio means fundamentally)? Well with low rates and benign inflation, like our Goldilocks world, multiples in the 20s make sense. At higher rates of inflation? Not so much. Assuming equal earnings, a change in inflation assumptions from today to the 70s would get you an average 66% decline in the average P/E stock. Something worth keeping in mind.
