Do you believe in the Golden Rule?

In my opinion, the Golden Rule is an example of something that taps into being universal and timeless. "Universal Truths" extend beyond periods and circumstances. Yet they are not perfect, exceptions can happen. But such anamolies are indeed exceptions to the rule.

In finance, we have a few, and valuation is one of them. That is, higher valuations predict lower forward returns, and lower valuations predict higher forward returns, typically.

JP Morgan has a great chart in their guide to the markets on this. (or at least they used to) And over short periods of time, like 1 year, the dispersion is all over the place. So the relationship is not as clear. Over longer periods of time, like 5 yeras, the relationship is very clear.

I've thought about this as the rhetoric on the Bloomberg terminal becomes inundated with talk of AI. Interestingly, AI stocks have been around for years, but somehow, all of a sudden, people have decided to bid these stocks to ridiculous levels. My guess is that the viral success of ChatGPT has awakened people to the possibilities. And then the FOMO kicks in.

I'm not saying I don't think AI will be huge. It will probably be as transformative as the Internet, AND hopefully not as destructive as the Terminator movies portray.

What I do know is that I've seen this type of speculation before. One example, Cisco was trading at a near 200 P/E in the months before the 2000 Tech Crash started. Nvidia is about 195. If you bought Cisco then, it would have taken 18 years to break even. Yes, 18 years. (Authers, Bloomberg)

The attached chart looks at it another way with the P/S ratio and companion speculative darling Tesla.

I'm sure there is a lot more money to be made in the AI space in the coming years, and I will be exploring that. But price does matter. Manias are extremely difficult to trade or even invest for the long term. Behavioral finance mistakes, industry changes, regulation, all those things and more, will influence how much money you make or lose.

All I'm saying is be thoughtful about the price and one of the long term financial universal truths regarding valuation and future returns. It's a universal truth for a reason.

NOTE: THIS IS NOT A BUY OR SELL RECOMMENDATION FOR ANY OF THE STOCKS MENTIONED IN THIS POST. THIS IS INTENDED FOR EDUCATIONAL PURPOSES ONLY.