“Mean Earnings” Explained And Why Value Investors Like It

So some folks were wondering about he S&P “Mean” earnings from this post SPDR S&P 500 ETF Trust (NYSEARCA:SPY)

“Davidson” responds:

It is the mean of the long term trend. The dashed line representing the channel one gets by connecting EPS Upper Band and EPS Lower Band.

S&P mean earnings

The reason for using this value and not the current EPS is that it captures the behavior of Value investors like Buffett who buy the long term earnings trend. At market lows the earnings trend values capitalized by the “prevailing Rate’ gives the SP500 price level at which these investors enter the equity markets in force. Enough force to create market lows. In other words, Buffett sees earnings in the economy as a long term trend and can buy stocks based on this perception while all about are pulling their hair out in fistfuls and currently reported  earnings are collapsing.

Buffett has learned by reading a great deal of history, A GREAT DEAL OF HISTORY. This is why I recommend reading The Ultimate Resource by Julian Simon.  Value investors are the world’s true optimists because they understand human nature and our ability to pick-up after financial excesses and move forward.

Once you begin to see how investors perceive the markets, you come to see a very select few as getting it right, ie Buffett and etc, the rest are trend followers and say many silly things which confuse the average investor, even professional investors to no end. This is why I call the approach I use ‘The 1% Solution’ It is probably less than 1% of all investors who qualify as true Value Investors. The other 99% are following someone else or they are trend  followers.

It takes a while for people to come to grips with this. It is very different from the accepted thinking and the billions of Sprint Corporation (NYSE:S) spent in business schools, CFAs and CFAs.

Via ValuePlays



About the Author

valueplays
Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a RealMoney.com contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.