Author Topic: decreasing stock performance over time  (Read 3917 times)

schoenbauer

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decreasing stock performance over time
« on: October 06, 2013, 08:33:32 AM »
Hey all,

as more and more money on this planet is moved into the stock market (currently about 51% of global wealth is stored in stocks) the long-term p/e-ratios must rise, mustnīt they? So over (a long period of) time stocks will become less profitable?!?!

Regards,
schoenbauer

matchewed

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Re: decreasing stock performance over time
« Reply #1 on: October 06, 2013, 09:06:43 AM »
Why?

Do you know what a P/E Ratio is? It is just share price divided by the earnings per share. What does the amount of money in the overall market have to do with either a company's individual share price or earnings per share?

So no stocks don't have to decrease performance over time given your assumptions since they are not related.

schoenbauer

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Re: decreasing stock performance over time
« Reply #2 on: October 06, 2013, 09:10:38 AM »
my thought is just that companies profits grow slower than money is flooding the market. so share prices rise faster than absolute profits (dividends). so over long time the relative performance should decrease (relative dividend yield).

matchewed

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Re: decreasing stock performance over time
« Reply #3 on: October 06, 2013, 09:18:55 AM »
I'm still confused. How do those relate? How is money going into the overall market relate to an individual company's profits? You seem to be connecting things that aren't actually connected to support your prediction of the future.

schoenbauer

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Re: decreasing stock performance over time
« Reply #4 on: October 06, 2013, 09:26:32 AM »
money goes into the market (bc the global total amount of money rises) -> stock prices rise (faster than companies growth) -> P/E ratio rises ("shares are expensive because many people want to have them while the companies profits remain rather constant") -> high p/e ratios translate into low yield

iīm not talking about any individual company but about the market in its entirety/as a system.

do u c where iīm coming from?

edit: my basic concern is that the same profit is not anymore distributed among a market capitalization of letīs say 1 million dollar, but rather more 1+x million dollar (=lower yield)
« Last Edit: October 06, 2013, 09:29:29 AM by schoenbauer »

matchewed

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Re: decreasing stock performance over time
« Reply #5 on: October 06, 2013, 09:38:08 AM »
money goes into the market (bc the global total amount of money rises) -> stock prices rise (faster than companies growth) -> P/E ratio rises ("shares are expensive because many people want to have them while the companies profits remain rather constant") -> high p/e ratios translate into low yield

iīm not talking about any individual company but about the market in its entirety/as a system.

do u c where iīm coming from?

edit: my basic concern is that the same profit is not anymore distributed among a market capitalization of letīs say 1 million dollar, but rather more 1+x million dollar (=lower yield)

I bolded the part I am focusing on. Why that? How does more money into the system cause individual stock prices to rise?

Also P/E ratio is an evaluation of a single company and is meaningless in the whole market. Given that a P/E ratio for a technology company will be very different compared to an energy company what does the P/E ratio mean for a whole market? What should it be at? What is high and what is low? Again I think you're connecting unrelated things here.

schoenbauer

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Re: decreasing stock performance over time
« Reply #6 on: October 06, 2013, 09:49:55 AM »
money goes into the market (bc the global total amount of money rises) -> stock prices rise (faster than companies growth) -> P/E ratio rises ("shares are expensive because many people want to have them while the companies profits remain rather constant") -> high p/e ratios translate into low yield

iīm not talking about any individual company but about the market in its entirety/as a system.

do u c where iīm coming from?

edit: my basic concern is that the same profit is not anymore distributed among a market capitalization of letīs say 1 million dollar, but rather more 1+x million dollar (=lower yield)

I bolded the part I am focusing on. Why that? How does more money into the system cause individual stock prices to rise?

thatīs called inflation ;). iīm not neccessarily talking about individual stocks. but in the long term average stock prices will rise (thatīs at least what i assume as a consequence of more money in the market)

iīm talking about the p/e of "the market" (for example p/e of s&p500). the branch doesnīt matter in the long run. s&p500's historical mean is 15.50 (median is 14.50). i consider everything above "high" and everything below "cheap". but again due to inflation of stock prices that logic might not be so stringent. and again, iīm having the big picture in mind...talking of a very long time frame (50+ years)

(nice source for p/e ratios: http://www.multpl.com/)

matchewed

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Re: decreasing stock performance over time
« Reply #7 on: October 06, 2013, 10:02:25 AM »
money goes into the market (bc the global total amount of money rises) -> stock prices rise (faster than companies growth) -> P/E ratio rises ("shares are expensive because many people want to have them while the companies profits remain rather constant") -> high p/e ratios translate into low yield

iīm not talking about any individual company but about the market in its entirety/as a system.

do u c where iīm coming from?

edit: my basic concern is that the same profit is not anymore distributed among a market capitalization of letīs say 1 million dollar, but rather more 1+x million dollar (=lower yield)

I bolded the part I am focusing on. Why that? How does more money into the system cause individual stock prices to rise?

thatīs called inflation ;). iīm not neccessarily talking about individual stocks. but in the long term average stock prices will rise (thatīs at least what i assume as a consequence of more money in the market)

iīm talking about the p/e of "the market" (for example p/e of s&p500). the branch doesnīt matter in the long run. s&p500's historical mean is 15.50 (median is 14.50). i consider everything above "high" and everything below "cheap". but again due to inflation of stock prices that logic might not be so stringent. and again, iīm having the big picture in mind...talking of a very long time frame (50+ years)

(nice source for p/e ratios: http://www.multpl.com/)

That in fact is not what inflation is called. Inflation is called an increase in the price of goods and services. And you hit my point on the head. You are just assuming more money means stock prices rise.

Also given the fact that you're making 50 year predictions means I think I'm done with this conversation. No offense but no one can predict the future that far out. Your crystal ball no matter how many terms you throw at it won't be any more or less accurate than mine.

KingCoin

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Re: decreasing stock performance over time
« Reply #8 on: October 06, 2013, 03:48:25 PM »
I think the simple answer is that we'd expect investable resources to grow roughly in line with the global economy so that the market cap of global corporations rises with their total earning power.

Also, when you say more money is moved into the stock market, do you mean as a percentage of investable assets or total absolute dollars? Care to offer a citation backing either claim?