Valuations Do Not Matter - Ken Fisher

[NBL0303]

https://www.realclearmarkets.com/articles/2020/06/09/a_focus_on_valuations_is_the_time-tested_path_to_lousy_returns_495670.html

 

In the article above, Ken Fisher says that valuations do not matter and looking at P/E is actually harmful. Do you all agree? Or what do you think is wrong with his thinking?

[Foreign Tuffett]

Article seems to define "valuations" as trailing twelve month and next twelve month P/Es. I have yet to see anyone actually argue that, so it's clearly a straw man.

 

Ken Fisher has to know this, since his father many, many years ago wrote the definitive book on growth investing. So even many decades ago, knowledge investors were not just looking twelve months forward and twelve months back.

[LC]

Aside from the question of, "what is the right valuation metric":

 

If you assume a business is only worth the sum of its cash flows at a properly discounted rate, then valuation is all that matters. You invest, you get the cash flows over time, and if there is value then those CFs are higher than your investment.

 

But I wonder - is this definition of "what a business is worth" too limited?

 

For example, a business issues financial securities. Those securities are bought, traded, sold, shorted, borrowed against, derived against etc. etc. An entire chunk of the economy has been created to allocate these securities. Is that not valuable? And if so, to whom should that value be assigned?

[Gregmal]

Well, we can start by looking at all the folks who have been sitting on huge hoards of cash and crying about valuations for a damn near eternity and compare that to the people who just regularly invest....

 

 

or we can get a little more granular and realize that valuation only matters IF you have an expected rate of return requirement AND your metrics are right. Just because YOU do not agree with the valuation metric YOU choose to evaluate a company on, doesnt mean that EVERYONE ELSE, is wrong. Being flexible and openminded is probably the best approach.