john hussman: two thoughts on valuation based on multiples

The use of forward P/E multiples is a valid shorthand for discounted cash flow valuation only when profit margins reflect a level that is actually likely to be sustained over several decades. 


P/E multiples subsume a whole set of assumptions regarding the entire future path of growth rates, profit margins, return on invested capital, and other factors. The common practice of valuing the stock market based on “forward operating earnings times arbitrary P/E multiple” in not only misguided – it’s an utterly disappointing display of Wall Street’s willingness to dumb-down the investment process.