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Investing In The Age Of Anomalies

More important than ever to follow the flows of capital
Wednesday, February 25, 2015, 10:06 AM
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Executive Summary

  • Will global capital continue to push US stocks higher, despite their stretched valuations?
  • Global capital is becoming more cautious
  • S&P outperforming as capital seeks the safety of "blue chip" companies
  • Investing in the age of anomalies

If you have not yet read Part 1: Time To Toss The Playbook available free to all readers, please click here to read it first.

This leads us to equities and, again, this very important concept of being flexible in thinking and behavior. Historically, valuation metrics have been very important in stock investing. Not just levels of earnings and cash flow growth, but the “multiple” of earnings and cash flow growth investors have been willing to pay to own individual stocks. This has been expressed in valuation metrics such as price-to-earnings, price relative to book value, cash flow, etc. To the point, in the current market environment, common stock valuation metrics are stretched relative to historical context.

In the past we have looked at indicators like total stock market capitalization relative to GDP. The market capitalization of a stock is nothing more than its shares outstanding multiplied by its current price. The indicator essentially shows us the value of stock market assets relative to the real economy. Warren Buffet has called this his favorite stock market indicator.

The message is clear. By this valuation metric, only the...

 

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