1/🧵
P/E and its variant CAPE (Cyclically Adjusted P/E) are popular metrics in predicting what future holds for stock markets. But there’s a better way.
In this thread I'll explain how INTEGRATED EQUITY works and what it is telling about today’s market.
Grab a cup of java!
P/E and its variant CAPE (Cyclically Adjusted P/E) are popular metrics in predicting what future holds for stock markets. But there’s a better way.
In this thread I'll explain how INTEGRATED EQUITY works and what it is telling about today’s market.
Grab a cup of java!
2/🧵
I was originally introduced to “Integrated Equity” by a fantastic 2019 writing by OSAM’s @Jesse_Livermore, “The Earnings Mirage: Why Corporate Profits are Overstated and What It Means for Investors”.
This extensive 100-pager can be found at:
osam.com/pdfs/research/…
I was originally introduced to “Integrated Equity” by a fantastic 2019 writing by OSAM’s @Jesse_Livermore, “The Earnings Mirage: Why Corporate Profits are Overstated and What It Means for Investors”.
This extensive 100-pager can be found at:
osam.com/pdfs/research/…
3/🧵
The core thesis is that reported book values are misleading due to inflation and share repurchases.
Firstly, book values are not revised over time with inflation.
Secondly, repurchases reduce company book value (see e.g. $SBUX, $AZO). Book value as is has its shortfalls.
The core thesis is that reported book values are misleading due to inflation and share repurchases.
Firstly, book values are not revised over time with inflation.
Secondly, repurchases reduce company book value (see e.g. $SBUX, $AZO). Book value as is has its shortfalls.
4/🧵
The approach for adjustments to formulate "integrated equity" is simple.
Firstly, earnings - excluding dividend payouts - stay within the company as equity.
Secondly, instead of nominal figures, use real figures that account for inflation impact on overall prices.
The approach for adjustments to formulate "integrated equity" is simple.
Firstly, earnings - excluding dividend payouts - stay within the company as equity.
Secondly, instead of nominal figures, use real figures that account for inflation impact on overall prices.
5/🧵
Now, just like when calculating price per book value (P/B), we can calculate price per integrated equity (P/IE).
Using Shiller's online data from 1871, the results for SP500 look as follows. (1871 assumed at P/IE 1,00)
Results for today are 14th highest ever (top 0.8%)
Now, just like when calculating price per book value (P/B), we can calculate price per integrated equity (P/IE).
Using Shiller's online data from 1871, the results for SP500 look as follows. (1871 assumed at P/IE 1,00)
Results for today are 14th highest ever (top 0.8%)
6/🧵
Now you may ask – so what?
Well, when we compare the predictive power of popular P/E and CAPE with P/IE in different investment periods, P/IE consistently provides the best correlation with future results.
The better (pos or neg) correlation, the better predictive power.
Now you may ask – so what?
Well, when we compare the predictive power of popular P/E and CAPE with P/IE in different investment periods, P/IE consistently provides the best correlation with future results.
The better (pos or neg) correlation, the better predictive power.
7/🧵
This approach can also be used with individual companies.
No metric works every time but for these selected examples ( $SBUX, $BRK.A, $MNST, $AZO ), “Price per Integrated Equity” has been quite a predictive force.
This approach can also be used with individual companies.
No metric works every time but for these selected examples ( $SBUX, $BRK.A, $MNST, $AZO ), “Price per Integrated Equity” has been quite a predictive force.
8/🧵
If you would like to access the source data, the modified Shiller online data can be downloaded for the next 7 days from the following link:
we.tl/t-27Fxk2eoF2
If you would like to access the source data, the modified Shiller online data can be downloaded for the next 7 days from the following link:
we.tl/t-27Fxk2eoF2
9/🧵
This was "integrated equity" in a nutshell.
For more investment insights, highly recommend following some of my favorites e.g. @FocusedCompound, @jessefelder, @vetleforsland, @daniel_toloko and @ValueStockGeek
If you made it this far, thanks a lot for your attention 🙏
This was "integrated equity" in a nutshell.
For more investment insights, highly recommend following some of my favorites e.g. @FocusedCompound, @jessefelder, @vetleforsland, @daniel_toloko and @ValueStockGeek
If you made it this far, thanks a lot for your attention 🙏
@FocusedCompound @jessefelder @vetleforsland @daniel_toloko @ValueStockGeek 10/🧵
S&P500 Dec'21 update for P/IE (price per integrated equity).
Latest figures have hit the highest number (1.67) in the past 100 years.
S&P500 Dec'21 update for P/IE (price per integrated equity).
Latest figures have hit the highest number (1.67) in the past 100 years.
11/🧵
Things get even more interesting when we add 10-year forward total returns for S&P500 to the picture.
Generally speaking, not a great outlook through this lense.
Things get even more interesting when we add 10-year forward total returns for S&P500 to the picture.
Generally speaking, not a great outlook through this lense.
12/🧵
The strong correlation is especially visible in a scatter plot.
As we stand today at 1.71 (bottom right corner), 100-year history does not suggest positive 10-year total real returns for S&P500.
The strong correlation is especially visible in a scatter plot.
As we stand today at 1.71 (bottom right corner), 100-year history does not suggest positive 10-year total real returns for S&P500.
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