Hussman Weekly Market Comment: Reported Earnings versus "Owner Earnings"
Over the years, I have frequently emphasized that stocks are not a claim on "forward operating earnings." They are not even a claim on reported net earnings (and should not be valued as a blind multiple to a single year's results in any event). They are a claim on a very long-term stream of future cash flows that will actually be delivered to investors as dividends, or retained on their behalf as an increment to the book value of the company.
The differences between these various measures of corporate performance are striking. If it seems like this point is simply academic, ask Warren Buffett (who refers to those actual, deliverable cash flows as "owner earnings"). Every year, the first page of Berkshire Hathaway's Annual Report contains a table of the company's year-by-year performance. The table does not report the stock price performance of Berkshire Hathaway. Rather, it shows the annual growth in the company's book value, compared with the total return for the S&P 500. Since
While stocks are often recommended to investors based on analyst estimates of the operating earnings expected over the coming year, it is important to recognize that these estimates are invariably lowered over the course of the year - even up to the day before actual earnings reports are released. So an "earnings surprise" is typically defined as the difference between reported operating earnings and the consensus estimate immediately preceding that report. Moreover, operating earnings omit a multitude of charges, including so-called "extraordinary" and "non-recurring" losses, even when these charges are clearly ordinary and recurring aspects of the business. Reported net earnings do reflect those losses, however, it turns out that even net earnings are optimistic.
- Hussman Weekly Market Comment: A False Sense Of Security
One of the aspects of the market that is most likely to confuse investors here is the wide range of opinions about valuation, with some analysts arguing that stocks are cheap or fairly valued, and others - including Jeremy Grantham, Albert Edwards, and...
- Hussman Weekly Market Comment: Whack-a-mole
As of last week, the S&P 500 has declined to the point where we now expect 10-year total returns averaging about 5.7% annually on the index. This is certainly higher than the 3.4% prospective return we observed earlier this year, but is still a prospective...
- Hussman Weekly Market Comment:
Last week, I had the pleasure of speaking to investors at the Ibbotson-Morningstar 2011 investment conference. Since I rarely travel outside of charitable work, it was a nice opportunity to talk with shareholders and other investors. The topic was "Useful...
- Hussman Weekly Market Comment: Valuing The S&p 500 Using Forward Operating Earnings
It is impossible to properly estimate long-term cash flows based on a single year of earnings, regardless of whether one uses actual net earnings or projected operating earnings. It is impossible to properly value the stock market based on a single year...
- Hussman Weekly Market Comment: Misallocating Resources
On a valuation basis, the S&P 500 remains about 40% above historical norms on the basis of normalized earnings. The disparity between our valuation assessment and the putative undervaluation being touted by Wall Street analysts is so great that a...