Bed too hard; stock too expensive

Alchemy dates back some 2,000 years and was practiced throughout Europe, Africa and Asia. “Alchemists attempted to purify, mature, and perfect certain material,” the historical definition. Actually, these men—and women like Mary the Jewess and Paphnutia the Virgin—were interested in turning lead into gold and creating an elixir of immortality.

You have to give them credit for aiming high.

Around 1720, a distinction began between alchemy and chemistry, and the rest is history. Modern chemistry helped create the world we live in—from the clothes we wear, the gadgets we use, and the abundance of food we eat.

A company’s Financial Statement (FS) is a simple document. The Balance Sheet enumerates what is owned and what is owed. The Income Statement shows how much and from what sources money comes in and to whom and for what purposes money is spent.

A Financial Analyst performs a serious function by examining the details of the FS and the facts behind the numbers. This is to insure that the truth of the company’s finances is accurately reflected in the FS.

At some point though, the Financial Analysts decided that they could use their experience with Financial Statements to determine what a listed company’s stock price should be. In 1939 Australian pharmacologist Howard Florey and his team of chemists figured out a way of purifying penicillin in useable quantities. What the financial analysts did was like Florey deciding then to create an elixir of immortality.

The analysts would become like Goldilocks, who was an expert on which bed was too hard. Of course Papa Bear’s bed was hard because it was built for a bear that weighed 250 kilograms not a 40 kg little girl. Goldilocks did not understand that. The analysts would decide which stock price was “expensive” and which one was “cheap.” They used all their financial formulas not unlike the ancient alchemists.

But they are mostly like English alchemist James Price who committed suicide when challenged to perform the turning of mercury into gold in front of credible witnesses.

What cost $10,000 in 2000 would cost $15,000 in 2020, so you need a 50 percent return to break even. The Dow Jones Industrial Average made history in January 2000 at about 12,000. It recently set a new record at about 28,000 for a 130 percent increase. But with inflation, that increase is only about 80 percent and after 20 years, a $10,000 investment is worth $18,000. That is only about 3.5 percent annual return, which is nothing.

Certainly, individual stocks can be fantastic like we have seen even this year with issues like Tesla, Apple, and Amazon. Using a Price Earnings Ratio—sometimes the Gold Standard for financial analysts—all these issues are beyond expensive. But then the analysts will justify the price by saying, “Well investors are buying for the future.” Note, all investors in all stocks are always “buying for the future.”

Yet we saw that the long-term prospects from 2000 were dismal—barely higher than bank rates. However, riding the “way too expensive” wave with individual issues made you rich.

It is great to create “formulas” to determine and measure expensive and cheap. But every retail store knows this truth: Too expensive prices go down when buyers stop buying. Prices that are too cheap go up when buyers are actively buying. The same is true for the stock market. Follow the money, not the analysts.

E-mail me at Visit my web site at Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.


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