Value Investing: Tools and Techniques for Intelligent Investment

Chapter 33. Revulsion and Valuation^[33]

We have long argued that the final stage of the de-bubbling process is revulsion. This phase is characterized by overwhelmingly cheap asset prices. Recent price moves in the UK and European stock markets have taken us to levels that have generally been associated with revulsion (i.e. 10×). Of course, cheap markets can always get cheaper, but for the long-term investor this may provide an excellent entry point. From a bottom-up viewpoint, the general cheapness of the market is confirmed. Of special note is the quality of stocks that are currently passing our deep value screens – names like Microsoft, BP, Novartis and Sony!

• The hallmark of revulsion is unambiguously cheap asset prices. The speed of the market's unravelling means that we are rapidly approaching the levels of valuation that are normally associated with revulsion. For instance, the UK and European markets are trading on 10× Graham and Dodd PEs (current price over 10-year moving average earnings).

• Of course, valuation isn't a binding constraint in the short term. Cheap stocks can always get cheaper, and more expensive stocks can always get more expensive. However, for long-term investors these are compelling valuations indeed.

• In the past I was often told that my favoured valuation measures were anachronistic, that they failed to capture growth, and were at best simplistic and at worst stupid. However, in recent weeks, investors have started to raise a different question. Rather than ...