Jack Bogle Slams Wall Street's "Unrealistic" Earnings Guesses, Says Market Valuations "Rather High"

88-year-old investing icon John "Jack" Bogle, founder of the Vanguard Group, says that the market seems to be "fully valued," and suggests investors adjust their asset allocation.

In an interview with The Street, Bogle said:

"The valuations of stocks are, by my standards, rather high," adding that "my standards, however, are high."

When considering stock valuations, Bogle's method differs from Wall Street's. For his price-to-earnings multiple, Bogle uses the past 12 months of reported earnings by corporations, GAAP earnings, which include "all of the bad stuff," to get a multiple of about 25 or 26 times earnings.

"Wall Street will have none of that," said Bogle. "They look ahead to the earnings for the next 12 months and we don't really know what they are so it's a little gamble."


He also noted that Wall Street analysts look at operating earnings, "earnings without all that bad stuff," and come up with a price-to-earnings multiple of something in the range of 17 or 18.


"If you believe the way we look at it, much more realistically I think, the P/E is relatively high," Bogle said.

Bogle added that earnings growth in the years ahead might be "as low as 4% or 5%, maybe 6% lower than traditionally and historically."

"I believe strongly that [investors] should be realizing valuations are fairly full, and if they are nervous they could easily sell off a portion of their stocks."

Of course, earnings don't matter at all anyway... for now...

As a reminder, Bogle is not alone in his view that "valuations are high"...

Since Janet Yellen's first warning in July 2014: "Equity market valuations appear stretched"

  • S&P +29%
  • Nasdaq +53%
  • DOW +33%

So much for that warning, and, of course, it would not be Jack Bogle if he didn't conclude that...

"One thing that I strongly urge: Don't ever, ever, ever if you're an investor think of being out of the market or in the market," Bogle said.

Instead, an investor should adjust his or her asset allocation.


38BWD22 Tue, 10/10/2017 - 15:17 Permalink

  Everyone should own a little gold to hedge stock & bond risk.  CA$H and BTC (1% or so of net wealth) are OK to diversify as well.

spastic_colon Tue, 10/10/2017 - 15:30 Permalink

a flat or less than 0.1% positive day in the market is now considered a correction.earnings are easy - (revenue minus expenses) if (<0) then (enter buyback number here)

spastic_colon Tue, 10/10/2017 - 15:47 Permalink

as a reminder and sorry for the length.......a couple LOL's in here too.Benefits of Stock Buybacks

Increased Shareholder Value - There are many ways to value a profitable company but the most common measurement is Earnings Per Share (EPS). If earnings are flat but the number of outstanding shares decreases. . Voila! . . A magical increase in period-to-period EPS will result.  Higher Stock Prices - An increase in EPS will often alert investors that a stock is undervalued or has the potential for increasing in value. The most common result is an increase in demand and an upward movement in the price of a stock.  Increased Float - As the number of outstanding shares decreases, the shares remaining represent a larger percentage of the float. If demand increases and there is less supply, then fuel is added to a potential upward movement in the price of a stock.  Excess Cash - Companies usually buy back their stock with excess cash. If a company has excess cash, then at a minimum you can bank that it doesn't have a cash flow problem. More importantly, it signals that executives feel that cash re-invested in the corporation will get a better return than alternative investments.  Income Taxes - When excess cash is used to buyback company stock, in lieu of increasing or paying dividends, shareholders often have the opportunity to defer capital gains AND lower their tax bill if the stock price increases. Remember that dividends are taxed as ordinary income in the year they are received whereas the sale of appreciated stock is taxed when sold. Also, if the stock is held for more than one year the gain will be subject to lower capital gain rates.  Price Support - Companies with buyback programs in place use market weakness to buy back shares more aggressively during market pullbacks. This reflects confidence that a company has in itself and alerts investors that the company believes that the stock is cheap. Frequently you will see a company announce a buyback after its stock has taken a hit, which is merely an overt action to take advantage of the discount on the shares. This lends support to the price of the stock and ultimately provides security for long-term investors during rough times. 

Now that we've shown a few reasons to be bullish on "buyback stocks," should you go out and buy every buyback you can find? Definitely not. Not all buybacks are equal and some buybacks seem to be nothing more than an attempt to manipulate the stock price.  Potential Pitfalls

Manipulation of Earnings - Above we described how a buyback improves the earnings per share number. Analysts rate stocks on many factors, but one of the most important numbers is the Earnings Per Share. Assume that an analyst estimates earnings using a higher number of outstanding shares existing before a buyback is executed. If the timing is right, companies could buyback shares and appear to beat consensus estimates that were based on a larger number of outstanding shares. So, watch out for announcements just prior to earnings.  Buyback Percentage - The higher the percentage of the buyback, the greater the potential for profits. Unfortunately, the buyback percentage is not typically part of an announcement so in order to determine if there is any significance to the announcement you'll need to do some research. Don't assume that a large number of shares is necessarily a large percentage.  Execution of Buyback - There is a difference between announcing a buyback and actually purchasing the stock. A buyback announcement may initially boost the price of a stock, but this phenomenon (when it occurs) is usually short lived. Don't be fooled into believing that all announcements are implemented. A good portion of announced buybacks are not executed in full.  High Stock Prices - Beware of a buyback program announced when a stock is at or nearing an all-time high. A stock buyback can be used to manipulate less than desirable EPS expectations. One way of investigating this is to compare the P/E (Price/Earnings) ratio relative to other stocks in the sector or industry. If a higher than normal P/E ratio exists, then it doesn't make a whole lot of sense for a company to buy it's stock at a premium unless there is something in the works that will add substantially to earnings. 

The Bottom Line Stock buyback programs take advantage of supply and demand by reducing the number of shares outstanding, increasing EPS shareholder value, float and ultimately the price of stock. In addition, they are often a wise use of excess cash and can create tax opportunities for the investor. However, not all buybacks are actually implemented so caution and research is advisable.

JailBanksters Tue, 10/10/2017 - 18:56 Permalink

It's pretty much likeHi Mr Peebles, How much is that Gorilla in the Window ?Well, how much have you got ? Your not investing in the company or it's Future, your investing in how much money youcan make from reselling the piece of paper that says how much stock you own.Which is not that different from a Comex Gold Contract, it's got nothing to do with thereal value of Gold.