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Economic Analysis

Equity Valuation Is Dead

Many analysts still struggle with equity valuations. This is an exercise in futility in this new era of investors looking for a “store of value.”

Edit 12/14/2017: This article was posted before the market open on Wednesday, December 13, 2017. During the Fed meeting in the afternoon Fed Chair Janet Yellen said the stock market is highly valued but that does not mean it’s overvalued.

If bitcoin is a store of value, then why not AAPL or AMZN? After all, these companies pay dividends and offer real products and services that many people like.

This is an investment environment where value of a software coin has rocketed from about 5 cents to more than $17,000 in less than 8 years:


If software tokens that pay no dividend and just promise a transition to a wonderful Utopian world where there is no central authority can yield exponential gains of this size, then I have a good reason to justify a 295 P/E for Amazon or even 1,000 P/E.



At the same time, I see no excuse for those who use outdated valuations, such as the CAPE ratio:



Traditional valuations may not apply in a new investment environment where people are looking for a “store of value” and do not care about the price. This is a positive feedback loop as you may have noticed.

In such environment, as the new cryptocurrencies and ICOs have demonstrated, price is not the issue. The focus is on perceptions of the future. 

Actually, AMZN and AAPL stocks are as good or even better stores of value than bitcoin. If you can exchange bitcoin for fiat currency to buy things or for money transfers, you can also do the same with these stocks. Their current value or valuation is irrelevant. It is relevant only to those who are stuck in an outdated mode of thinking of the last century when valuations and associated metrics were used to induce buy and sell cycles so that market makers, also known as specialists, could amass huge profits at the expense of investors.


This is now a new environment, at least some hope it is. It may turn out that the disruption artificial intelligence is bringing about may be detrimental for the human race and a global collapse will occur. Black swans may also affect perceptions and turn previous stores of value into worthless bytes on computer disk.


But looking at P/E ratios is not the way to go now. Valuations are dead. Bitcoin and AMZN show this. Unless something derails this process, we are at an early stage of an exponential rise in selected equities that are perceived as a “store of value.”

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