Thursday, November 13, 2014

Competition: The Key To The Coming U.S. Corporate Profit Mean Reversion

Advisor Perspectives released a great article this week with the following quotes and chart. Can corporate profits move higher relative to the size of the overall economy...forever? The stock market has priced in that scenario, but two of the greatest investors in history believe mean reversion will eventually arrive.

Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system and it is not functioning properly.” 

– Jeremy Grantham 

You know, someone once told me that New York has more lawyers than people. I think that's the same fellow who thinks profits will become larger than GDP. When you begin to expect the growth of a component factor to forever outpace that of the aggregate, you get into certain mathematical problems. In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well.” 

– Warren E. Buffett


1 comment:

  1. I just added this article and chart to my notes as Reason #8 why I will not invest in this market. I'm finally old enough to recognize a hyped market, take profits now, and let dumb money make way for the day when stocks will once again be on sale.

    Thanks Future Sense!

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