hi i'm jimmy in this video we're looking
at whether or not the stock market is
still too high despite the fact that
it's already fallen by about 18
from the start of the year we're going
to look quickly at the p e ratio we're
also going to look at the buffett
indicator and then we're going to look
quickly at something known as the
schiller p e ratio basically this is a p
e ratio that adjusts for inflation and
since that's a problem today it probably
makes sense to look at that but before
we jump in i just want to tell you about
a website that we're building where we
can punch in the ticker of the stock
that we're interested in in this case we
used apple and it kicks back the fair
value of the stock using whatever
required rate of return we enter in for
me i'm using a required rate of return
of seven and a half percent we can see
we get a fair value of 147 dollars per
share now i actually bought apple stock
when it fell below 141 that was my 147
plus a margin of safety a little bit of
gap just in case the estimates are a bit
long but basically the way this
calculation works is it takes analyst
estimates for free cash flow and
discounts those back to today so in this
case if the company we're growing out by
this amount by the amount that analysts
are telling us grows out for the next
few years and then grows forever at two
and a half percent i'm using the
perpetual growth rate for that one well
it grows forever at two and a half
percent what would we pay what should we
pay for that stock today
if we want to get a minimum return of
seven and a half percent so that's why i
jumped in and bought it because it fell
below my calculation of fair value plus
i think apple's a really good company
but one of the things that we can look
at is how many analysts are covering
this in this case we could see that we
have more than enough analysts
projecting each individual year what
free cash flow numbers do they are they
projecting for us and we do we think
those are reasonable if we do then it
could be a stock that we want to do a
deeper dive on and if we like it after
that
hopefully this this tool helps us come
up with a fair value or where we want to
buy that stock so if you want to sign up
to get access to that i will leave a
link in the description below for how to
sign up
the website's not up and running yet it
will be up and running we're hoping in
the next few weeks and if you sign up
before it goes live well we're locking
in the price so it never goes up on you
okay with that being said let's jump
back in and look at how overvalued the
stock market is or isn't today so like i
said the stock market year to date has
fallen about 18
but when we switch over to a longer term
chart and this chart we can see goes all
the way back to 1954.
well broadly speaking the stock market
has pulled back now there was a few
years in the middle here the stock
market didn't go much of anywhere and
then recently we could see we've had a
decent pullback in the market okay now
to see if the stock market really looks
undervalued i think it might make more
sense to go to a p e ratio which is
price to earnings take the price of the
stock in this case the s p 500 divided
by the earnings of that same company in
this case s p 500 so this is a chart of
the s p 500 going all the way back to
the 1950s this is the p e ratio for the
s p 500 and we can see with the recent
pullback in the stock market well it
looks like the s p is getting close to
the long term average in fact the long
term average over this entire time
period period again back to the 1950s is
about 17 17 and a half x
so on average over this entire time
period we would pay about
17.5 times
if we would pay 17.5 dollars for every
one dollar of earnings that's what the
pe ratio ultimately means now i'm not
sure it really makes sense to go this
far back and say hey over the past you
know 70 years the stock market has been
trading at 17x that's what we're waiting
for to get to because during some of
this time period for example back in the
1950s we're still in the gold standard
back in the time period of the late 70s
early 80s well interest rates for the
government were double digits there were
government bonds are paying 13 14
so i'm not sure how comparable we're
complaining about interest rates going
up right now they're like three percent
so back then things were significantly
different so it might make more sense to
roll forward in time and when we look at
the s p 500 this is the chart of the s p
500 over the past 10 years well over the
past 10 years the average p e ratio over
the past 10 years has been about 20 x
now what i've done here is i've added a
chart for the s i've added a chart for
the p e ratio the yellow line here shows
what the p e ratio would have been what
the line
what the 20 what 20x would have
represented at each point in time and we
can see that right now well it looks
like the s p 500 is about fairly valued
in fact the s p 500 is trading at about
19x
now we might argue some of us might say
you know what 20x is too high we just
saw 50 years 70 years whatever it was
it should be 17 and a half x well if
we're curious add 17 and a half x to
this chart so now the blue line is what
17.5
times a dollar of earnings would look
like so ideally what we want to do just
so we understand how to read this chart
is that if the if the blue line
representing the s p 500 is lower than
our multiple it's a good buy if it's
higher it's a in theory it's overpriced
so i personally think 20x is a more
reasonable situation given the economic
environment today first 50 years ago
but and if we do and if we do believe 20
x it looks about fairly valued right now
if we believe 17 and a half x it's a
it's slightly overvalued now if we did
if we do believe that 17 and a half x
is the right number to go with there
really would have only been a few points
in time in the past 10 years that would
have made would have been appropriate
buys for the stock market and if we
bought during those times we would have
made out quite well for sure although
again i'm not completely sure that those
were the only appropriate times to buy
either way let's keep moving out of
curiosity i actually was curious what if
some people believed that we should be
on the high end of this let's say 22 and
a half x so this gray line represents
22.5 times earnings
again if that's the case the stock
market looks undervalued right now
although according to this chart the
stock market was undervalued all the way
until the recent bull market coming out
of 2020.
uh the after cove it happened and the
government started infusing all sorts of
capital we had the obscene run in the
stock market
so i think that we could pretty much
cross 22.5 x off the table so 22.5 x
implies that the stock market should be
right around 4 500 the s p 500 should be
right around 4 500. i'm not sure i agree
with that i think that the 20x makes
more sense maybe even 19x that's about
where the stock market is right now now
i'm not suggesting for one second that
means the stock market's going to stop
falling i think we have to continue our
research
and it's possible the market as it
usually does overreacts on both the
downside and the upside but either way
let's shift over now to the buffet
indicator so this is the buffet
indicator which is basically it takes
the market cap of the stock market and
compares it to gdp
now i've heard people say that you
should only buy it when it's when
it's below 100
which seems silly to me given it has
only been below 100
in the most extreme of situations now
besides 100
i was curious so i pulled down the
average of the buffett indicator over
the past going back to 1972
and the average during this time period
is about 83 percent
again a lot of that is including the
very high interest rate environment of
the 70s and 80s and i'm not sure that's
completely comparable so i think a
better method to use is to use a rolling
10-year average a rolling 10-year
average it does exactly what it sounds
like we take the average buffett
indicator over the past 10 years and
just keep averaging out going back
trailing 10 years for each point in time
and we could see that right now it looks
like the stock market is still a bit
overvalued we are right now we have a
buffet indicator of 161 percent but our
rolling 10-year average implies it
should be closer to 135
so in this case it looks like the stock
market is still a bit overvalued okay
now let's jump over to the schiller p e
ratio so this is the shiller p e ratio
also known as the cape ratio which is
short for a cyclically adjusted price to
earnings ratio and basically what it
does is it takes an average earnings
over a period of time and then adjusts
it for inflation so now we're talking
about what is the real p e ratio what
should it be on an inflation-adjusted
basis that being said you could tell by
looking at this chart it still looks
like it's a bit high again the average
over this entire time period if we just
averaged it all out implies that the
stock market is a bit overvalued
but again i think it makes more sense to
use a rolling average call it a 10-year
rolling average and if that's the case
it still looks like it's overvalued less
so but still overvalued so no matter
which of the three major stock market
indicators we use as far as evaluation
of broad valuation matrix both the p e
looks like it's either fairly valued or
slightly overvalued depending on what we
think is a fair p e multiple for the
stock market the buffett indicator
implies it's still overvalued the
shiller p e ratio implies it's still
overvalued so it looks like we could
have a bit more of a pullback in the
stock market now with that being said i
actually i truly believe that this is a
good time for value investors i think
that value investors that focus on
buying great companies at good prices
this is the time you get set up we saw
the charts of the stock market if you
can buy when it's low and you can buy
good companies that are going to excel
in the next let's say the next decade
well we're likely to really outperform
this is far better than buying a year
ago you know i i recently bought a stock
like apple i recently did an analysis of
amazon saying i like the stock but i
want to pull back a bit more because it
looks slightly overvalued that's one of
the reasons we're launching the tool the
website that we're doing to try to help
people come up with a fair value give
them an idea of what stocks they should
do the research on so again if you'd
like to sign up to get access to this
website i will leave a link right here a
link in the description below and thank
you so much for sticking with me all the
way to the end of the video i really do
appreciate it thank you and i'll see you
in the next video