Warren Buffett's first television interview
Invaluable lessons about investing that haven’t changed to this day.
Paying for stability
The valuation gap between stocks with stable growth and volatile growth is larger today than at any time in at least the last 35 years. The 20% of S&P 500 stocks with the most stable EBITDA growth during the past 40 quarters currently trade at a median forward P/E of 21x. This represents a 23% premium to the median S&P 500 stock's multiple of 17x. Since 1985, this premium was only exceeded in early 2000 at the peak of the Tech Bubble. The 25% discount carried by the stocks with the most volatile earnings growth (13x vs. 17x) has been deepening for a decade and is now the largest on record.
While the valuations of stable growth and volatile growth companies look extreme relative to history, valuations have generally not been a useful signal for predicting the forward returns of these stocks in the past. Exhibit 14 below shows the weak historical relationship between the valuations of stable growth stocks and their forward 12-month returns relative to volatile growth stocks. In the past, large valuation spreads have not indicated above-average risk of a reversal in valuations and performance. In fact, the times in the past when stable growers carried the largest valuation premia relative to volatile growth stocks were often been followed by further stable growth stock outperformance.
Ever seen a 0.00% R squared before?*
*R-squared is a statistical measure that explains to what extent the variance of one variable (valuation premium in this case) explains the variance of the second variable (forward 12-month excess returns in this case).
Bond and dividend yields since 2005
Tech IPOs aren't working for the masses
Many of the seemingly hot debuts this year have been much less so for most ordinary investors. Most big new tech issues from this year are trading below their opening prices from their first day of trading. For most new tech issues, the biggest gains come upfront. Relatively few investors get access to new shares at the listing price. But for the majority of investors who have to wait for trades to open, the returns aren’t so glamorous.
