Bubble Watching

The S&P500 Index crossed the 2000-mark this past week, fueling more wonderment at the lofty levels of equity prices. As I explained in a recent op-ed, high prices may be telling us something new about innovation that we don’t already know. But in recent meetings with investors, business leaders, and academics, there remains an undercurrent of concern about bubble-like conditions in the markets. The dominant question is, “How do we know if we’re in a bubble?”

What’s a “bubble”?

You must start with the fact that “bubble” conveys a general notion of excessive pricing and irrational investing—but it lends no clarity or bright line to distinguish really dangerous conditions from benign optimism. Peter Garber notes “bubble …is a fuzzy word filled with import but lacking a solid operational definition….if we have a serious misforecast of asset prices we might then say that there is a bubble. This is no more than saying that there is something happening that we cannot explain, which we normally call a random disturbance. In asset pricing studies, we give it a name—bubble—and appeal to unverifiable psychological stories.” [1]

Thus, the absence of science about bubbles summons two rules for bubble-watchers:

· Humility foremost. You have no crystal ball. Therefore, one’s assertions—no matter how emphatically believed—must be tempered with respect for the enormous uncertainty surrounding them.

· Bubbles are best-known in retrospect. Alan Greenspan, Chairman of the Federal Reserve, with all the power and informational advantage of that office, was unpersuaded of a bubble in housing in the mid-2000s. His memoir is worthy reading, on the difficulty of identifying bubbles and of implementing policies to deflate them.

How do we know if we’re in a bubble?

In our book, The Panic of 1907, Sean Carr and I summarized some prominent attributes near the peak of a bubble in asset prices:

  1. Dramatic rise in prices reflected in aggressively high valuation multiples and transactions compared to historical averages.
  2. Buoyant demand for the assets: oversubscribed initial public offerings in equities, numerous participants in auctions for companies, natural resources, and real estate.
  3. Optimism about the sustainability of future price increases.
  4. Entry into the market by naïve, inexperienced, and unsophisticated investors. Bernard Baruch sold his stocks in early 1929 when he started receiving unsolicited stock tips from his shoeshine boy.
  5. Talk of a “new paradigm” rendering long-standing investment maxims invalid. Such was the case during the Internet boom. “This time it’s different” is one of the most dangerous attitudes in investing.
  6. Jumbo deals. These deals change the competitive landscape and/or frame of reference for investors. Travelers Insurance acquired Citicorp in 1998, signaling the end of the regulatory ban on universal banking. The audacity of jumbo deals serves to reinforce “new paradigm” thinking.
  7. Innovations in instruments, institutions, and markets. Leading up to 1907 were the creation of trusts, new national consumer-branded products, and the spread of the telephone, automobile, and household electricity. Joseph Schumpeter heavily emphasized the role of the inventor and entrepreneur in triggering new phases in economic cycles.
  8. Aggressive financing. Banks lower their credit standards to the benefit of borrowers who lots of cheap credit.
  9. Regulators and other watchdogs relax their monitoring of financial intermediaries and investor behavior.
  10. Positive economic news. A recent stretch of growth.
  11. Media hype and considerable popular interest. Rising prices, huge profits, jumbo deals, often to the benefit of Everyman and Everywoman, garner front-page stories.

Several of the items on this list don’t fit the bubble profile as of Labor Day weekend 2014: #10 (positive economic news/growth—few people believe the global economic fundamentals are terribly buoyant); #9 (relaxed watchdogs—the SEC, CFPB, and DOJ seem more rather than less active these days); #5 and #3 (new paradigm thinking and optimism really don’t characterize the investment buzz these days). Absent these points, conditions don’t yet look like a bull market stampede.

On the other hand, some genuine jumbo deals are recently completed or currently pending (#6: USAirlines/American, Valeant/Allergan, Burger King/Horton’s, Family Dollar/Dollar General/Dollar Tree). Global M&A volume is at a seven-year high—so is the global volume of initial public offerings.

And the value of subprime loans is growing, which may go hand-in-hand with the entry of new and inexperienced players in the markets. Recently, the New York Times reported “explosive growth” in the volume of subprime loans for the purchase of used cars.

And, as I discussed in the previous post, prices seem high relative to historical price/earnings ratios. Here’s one measure, favored by Warren Buffett, the market value of US Companies as a percent of the Gross National Product (see more at Bloomberg).


Then, too, there is the concern about aggressive financing. While the whole economy may not feel growing indebtedness, some segments are booming—see the following graph on the call loan market, which fuels equity trading (see more at dshort.com):


Watchful Waiting—and Learning

There is no substitute for vigilance toward bubble-like market conditions. But this doesn’t seem like one of those moments, just before the bursting of the dot-com bubble in early 2000 or the peak of the subprime bubble in 2007. Conditions could melt down for a variety of reasons, unrelated to the bursting of a bubble.

One helpful resource for paying attention to market conditions will be this year’s University of Virginia Investing Conference—November 13-14—the theme of which will be “Investing in Innovation.” Innovation is perhaps the most important foundation for growth, and PVGO. The conference will offer insights about growth prospects in fields such as information technology, energy, health care, and monetary policy. Once again, we are booking an impressive collection of speakers. As of today, speakers will include these (additional speakers are in the offing):

Charles R. Cory (MBA ’82), Chairman of Global Technology Investment Banking & Managing Director, Morgan Stanley
• Richard Fisher, President & CEO, Federal Reserve Bank of Dallas (schedule pending)
• W. Barnes Hauptfuhrer (MBA/JD ’81), Chief Executive Officer, Chapter IV Investors
• Robert J. Hariri, Founder, Chairman & Chief Scientific Officer, Celgene Cellular Therapeutics
• Ned Hooper (MBA ’94), Partner, Centerview Capital
• Robert J. Hugin (MBA ’85), Chairman & CEO, Celgene Corporation
• Samuel D. Isaly, Managing Partner, OrbiMed
• Nancy Lazar, Partner, Cornerstone Macro
• John Siegel, Partner, Columbia Capital
• Michael Sola, Portfolio Manager, T. Rowe Price
• Kathy Warden, Corporate Vice President and President, Northrop Grumman Information Systems  

Today’s financial market conditions are due to a blend of buoyant investor psychology and genuine growth opportunities. If so, this puts a high premium on thinking critically about investment themes, trends, and market sentiment. Conferences are one excellent means of sharpening your own thinking. Join us in November!

  1. Peter M. Garber, Famous first Bubbles: The Fundamentals of Early Manias, Cambridge: The MIT Press, 2001, page 4. []
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Preparing Women for Leadership in Business–What Darden Is Doing

Last April, I blogged about my reflections on the status of women in business schools. My post followed various meetings I’d had with a range of corporate leaders, Admirals in the Navy, and senior counselors in the White House. I was struck by the unanimity with which they expressed the need to develop more women in the rising generation of leaders. I concluded that there is increased consensus regarding the importance of gender diversity and inclusion in American business society and that no one thinks the progress is acceptable—nor do I.

Women hold up half the sky, but they account for only a small fraction of senior and middle-managers, corporate directors, partners of professional service firms, entrepreneurs, etc. The reasons for this have to do with cultural, legal, and economic factors, many of which seem to be changing. Although the women’s movement, which began several decades ago, has led to increased opportunities for women, there still needs to be a larger societal commitment to developing extraordinary women leaders. This development should begin in early childhood and progress through post-secondary education. Leading business schools have a vital role to play.

Where is Darden in this? In 2015, Darden will celebrate 50 years of women business leaders. We want Darden to be the go-to place for women executives of exceptional talent and promise. We have undertaken a range of initiatives to prepare women for leadership in business. Let me describe these.

As preface to this sketch it is useful to state the obvious: schools will find it easy to do something—the question is, “Are schools doing the right things, to ensure that women are well-prepared to excel in business school and in the business world?” As I discussed earlier, b-schools are focused on trying to determine what is right. Therefore, this feels like a pivotal moment. No less is happening within Darden. There is no checklist, guidebook, or user’s manual that dictates what business schools should do right. Thus, Darden is intentionally trying a range of experiments, projects, and prototypes. Distinguishing doing the right thing from doing just something is our intention – both within Darden and in the world of practice. This requires careful design and evaluation that inform ongoing efforts. What follows is not just a list of some things, but rather our path toward the right things.

Consider these activities under three umbrellas:

· Educating women about business school and encouraging them to enroll at Darden.

· Providing opportunities for women to develop as leaders while they are students at Darden. The necessary conditions for development are intrinsic motivation and opportunity, which is why we emphasize “opportunities.”

· Empowering women graduates of Darden to advance their careers through networking and professional development

1. Darden aims to educate women about business school and to encourage them to enroll.

Program for Prospective Student Women. Darden is known for having a tight-knit community. In order to give women in the pipeline a more personalized introduction, the Office of Admissions and the Graduate Women in Business club offer the 1:1 Program for prospective women students. The program pairs prospects with a current woman student mentor in late summer to facilitate a one-on-one connection with a member of the Darden community. Previous participants have found that this is not only an excellent way to learn about the School, the student community and the myriad academic opportunities and resources but also to explore the many issues facing women pursuing graduate business education.

Sponsor of the Forté Foundation. Darden is proud to be a founding partner of the Forté Foundation, a non-profit consortium of top companies and leading business schools committed to helping women pursue leadership roles in business. While every woman at Darden can join Forté, each member school also has the opportunity to select Forté Fellows, who receive merit-based scholarships based on their outstanding professional, academic, and personal accomplishments. In addition to the financial support provided through fellowships awarded by individual Forté member schools ($45MM in scholarships awarded to 2,300+ recipients), Fellows gain exposure to leading companies in the Forté network, as well as an immediate peer group of Fellows that extends beyond their individual business school. Darden typically has approximately 40 Fellows per academic year. All women at Darden with a $10,000 scholarship or greater are Forté Fellows.

2. Darden provides opportunities for women to develop as leaders while they are students.

Darden’s student club, Graduate Women in Business (GWiB), is leading a range of initiatives.

  • Mentoring program. Each year, First Year (FY) and Second Year (SY) female students are paired up as mentor and mentee. This provides incoming women with a resource to ask any and all questions they may have – from how to best prepare a case to getting ready for an interview.
  • Relationships across Grounds. GWiB has connected with the University of Virginia McIntire School of Commerce’s women students in a networking and mentoring capacity. Seven Darden women sat on a panel hosted by McIntire to discuss the process of applying for graduate business school.
  • Annual conference and workshops. GWiB is active in sponsoring a well-attended annual conference, which often features alumnae in key speaking roles. They also sponsor smaller workshops and panels throughout the academic year. Additionally, GWiB held a negotiations workshop with Professor Melissa Thomas-Hunt to teach students how to become better at negotiating their pay/salary/signing offers.
  • Friends of GWiB. The impetus for the program was for women students to invite their male peers to be involved in the conversation about women in the workplace. Men have always been welcome to join as traditional GWiB members, but this initiative was developed to actively seek them out. Some of the goals and activities include: educating male peers on what exactly women discuss when they gather in professional settings and educate them on general “workplace issues”; including faculty members who have had a breadth of experience and could provide an alternate view and voice to the conversation.
  • Points of contact. GWiB has a 1:1 program that matches prospective women applicants with current women students.
  • C-suite contacts. Several prominent alumnae have reached out to GWiB to host small group gatherings in Charlottesville to provide engaging conversation and advice.

Women in Success Seminar (Professors Luann Lynch and Mary Margaret Frank). A popular seminar last academic year, it entailed field interviews of men and women business leaders; class discussions of readings on women leaders and the challenges facing women in leadership (such as Sheryl Sandberg’s book, Lean In); and essays on women leaders and personal reflections on success.

NOLS Leadership Program. Professor Yael Grushka-Cockayne led a National Outdoor Leadership School (NOLS) leadership program that took place in January. Each student had the opportunity to lead a daily expedition in the Arizona desert. Thirteen students attended (7 men and 6 women) and one alumna. The course focused on developing leadership through leveraging diversity and inclusion.

Newly Transformed Career Education for All Current Students. A series of discovery forums take place the first week on Grounds for FY students. The forums include:

· Perspectives on Career Success

· Being an Adviser to Corporations: Careers in Consulting and Investment Banking

· Becoming a Corporate Leader I: Careers in Marketing, Strategy and Business Development

· Becoming a Corporate Leader II: Careers in Finance, Operations and Supply

· Becoming an Owner: Paths to Consider Now and in the Future

· Mission-Driven and Global Opportunities: Perspectives from Darden’s Institute for Business in Society and Center for Global Initiatives

Second Year Coaches. A unique feature of Darden’s career development offerings is the SY Coaches program. In addition to being assigned a professional, functionally-aligned career advisor, all FY students are assigned a SY coach based on various industry categories.

Leadership Speaker Series. Darden actively seeks to bring to Grounds women who are role models of leadership. Four of the nine speakers last academic year were women:

Martina Hund-Mejean (MBA ’88), Chief Financial Officer of MasterCard Worldwide; Carolyn Miles (MBA ’88), President & CEO of Save the Children; Lorna Donatone, Chief Operating Officer, Sodexho; and Sharon Decker, Secretary of Commerce of the State of North Carolina.

Surveys of the Experience of Women Students and Alumnae. We conducted focus group meetings on the experiences of women in their learning teams. In addition, we prepared a survey with GWiB of SY women about their FY experience. Darden’s alumnae are more engaged than the alumnae population of business schools in general.

Women@Darden Initiative. The purpose of this initiative is to examine and recommend actions to improve the quality of the Darden experience for prospective and current women students and alumnae. We are at the beginning stages of an enterprise-wide effort to engage faculty, staff, alumnae and other key stakeholders on how Darden can bolster our women students and alumnae. Under the umbrella of a steering committee, three sub-committees will examine:

· Women student recruitment and admission. Increasing the number and quality of women students is very important to sustaining the strength of Darden’s learning experience. We will focus on increasing the number and quality of women prospectives applying to Darden. The aim is to increase the number of women students enrolled in all of Darden’s MBA programs.

· The experience of women both inside and outside of the classroom. Improving the Darden experience for women students benefits all students. We focus on curricular and co-curricular content and student experiences. And we will consider how to increase financial aid for women students.

· Alumnae engagement. A robust alumnae engagement effort is central to honoring Darden’s mission of developing and inspiring responsible leaders and advancing knowledge. We aim to increase the quantity and quality of alumnae engagement opportunities.

3. Darden empowers alumnae to advance their careers through networking and professional development.

Darden’s Armstrong Center for Alumni Career Services (ACS) provides career help for all alumni—and specific programs for assisting women:

  • One-on-one Career Advising and Coaching. ACS provides unlimited number of sessions to our alumni to assist in all areas of career management with the majority of that coaching in the area of career transition. In this capacity, ACS has worked with 33% of our total number of alumnae. Coaching on how to “stay in,” “get back in,” or “rise in rank” is common.
  • “Re-entering the Workforce” workshop for alumnae conducted by Darden ACS. This two-month long workshop (including pre-work, two day-long sessions and follow-up) has been delivered to over 200 participants in seven locations (Washington, D.C., Boston, NYC, London, Palo Alto, Atlanta, Chicago). The workshop includes self-assessment, evaluation of work-life fit issues, the redevelopment of one’s professional brand and job search techniques after a hiatus.
  • Pay Equity. ACS and CDC coaches assist individuals one-on-one with salary negotiations – assisting in research of market rates and strategies to negotiate for the highest possible compensation often pointing out gender differences in negotiating and helping women avoid common pitfalls.

Volunteer leadership positions on Darden’s boards, advisory groups, and local clubs. We are actively recruiting alumnae into leadership positions. This affords them opportunities to network and exercise skills such as communication, advocacy, facilitation, and team-building. This summer, Elizabeth Weymouth (MBA ’94) was elected Vice Chair of the Darden School Foundation Board of Trustees. She will rise to Chair of the Board in 2016. And the Women@Darden initiative has energized more alumnae to organize new local groups.

Alumnae Engagement. Generally, we are striving to improve and strengthen Darden’s engagement with alumnae. The mission of the alumnae groups in Washington, D.C. and New York is to:

· Engage – through networking and relationship building, our objective is to keep Darden’s women support for one another strong and valuable.

· Education – through relevant and provocative presentations, readings and discussions, our goal is to keep Darden as a key component of our ongoing professional development.

· Service – through monthly interactions, our objective is to collectively create opportunities to serve the Darden community.

In addition, alumnae groups are forming in other localities.

Executive Education. Darden’s highly ranked Executive Education open-enrollment programs focus on leadership development, including The Women’s Leadership Program and The Executive Program. Other programs include: Leading Organizational Effectiveness; Managing Individual and Organizational Change; Power and Leadership: Getting Below the Surface; and Servant Leadership: A Path to High Performance.


Darden’s Class of 2014 graduated last May having achieved some milestones. These include having the highest percentage of women enrolled (35%) and the highest percentage of women in positions of leadership of clubs and student government (60%) in Darden’s history. Women presidents ran some of the School’s largest clubs, including the Consulting Club, Marketing Club, Finance Club and General Management and Operations Club.

I heard the Class of 2014 student evaluation of their learning experience at Darden: women expressed a high level of satisfaction, consistent with men. And this month, two of the three new faculty members hired this year are women—adding strength to a great team of women professors. These and other metrics suggest that Darden is making strides in contributing to the preparation of women for leadership in business. I’m pleased to report that the Class of 2016, which we enrolled last week, is poised to make its mark.

…And I would say that work remains to be done, for Darden and all b-schools. Excellence is a moving target. The initiatives that schools take today are merely a foundation for strides we must make tomorrow. What is at stake is not just the role of women, but rather the caliber of all leadership: Sheryl Sandberg, COO of Facebook, wrote, “In the future there will be no female leaders. There will just be leaders.”

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From Quarterdeck to Forecastle: Welcome to the Class of 2016

[This afternoon, I welcomed the Darden Class of 2016 to the school. What follows are approximately my remarks.]

On vacation some years ago, I signed on as a crew member of a tall ship in the North Sea. This was a reproduction of an 18th Century frigate: three masts, a great deal of rigging, and cramped quarters. We stood watch, four hours on and four hours off, so it was impossible to get a good night’s sleep. When the wind changed, everyone was put to work hoisting sails or stowing them—this had to be done, in good weather and bad. I’m not wild about heights, especially when on a rope ladder high above a rolling ship. The food, prepared by a cook, was mediocre at best. By the end of the week I was exhausted.

When I returned from vacation, I told a friend that I had had a great experience. He shook his head in disbelief and said, “What was great about it? You’re a leader at Darden but you spent the whole week as an unpaid laborer who had to take orders from the captain. Lots of shouting; do this and do that. There was no rest and relaxation. What were you thinking?” My reply to him contains some ideas that are relevant as you embark on your own journey at Darden.

I should say that my reflections on that experience have continued over time. Ann Landers, the advice columnist, famously said that in school you get the lesson first and then the test; but in life, you get the test first and then the lesson. That sailing experience was a real test. And the learnings have followed.

In Herman Melville’s novel, Moby-Dick, the main character explains why he wants to go to sea as an ordinary sailor. The year is maybe 1850 and the voyage is to be on a whaler. It is hard and dangerous work. Why would someone do this? The lead character explains,

“I always go to sea as a sailor, because of the wholesome exercise and pure air of the fore-castle deck. …for the most part the Commodore on the quarter-deck gets his atmosphere at second hand from the sailors on the forecastle. He thinks he breathes it first; but not so. In much the same way do the commonalty lead their leaders in many other things, at the same time that the leaders little suspect it.”

Think about it. Melville is saying that the folks away from the seat of power know something more than do the leaders. To go down from the important place you are used to, to a place at the front of the ship teaches you things that you can’t get on the quarterdeck.

The post on the frigate that I liked best was standing watch at the bowsprit, the forward-most point of the ship. You are there all alone looking forward through the fog, trying to understand what you are sailing into and then communicating it in a way that the people back on the quarterdeck can understand. You are the first person to get a glimpse of the future. This is a view that can’t be had elsewhere on the boat. And the experience is magical. The playwright, Eugene O’Neill, wrote,

“I lay on the bowsprit, with the water foaming into spume under me, the masts with every sail white in the moonlight towering above me. I became drunk with the beauty and singing rhythm of it, and for a moment lost myself. Actually lost my life. I was set free—dissolved in the sea, became white sails and flying spray, became beauty and rhythm and the high dim-starred sky—I belonged within a unity and joy to life itself.”

To feel “lost,” “drunk,” and “dissolved in the sea” is akin to what many artists, athletes, and leaders have described as the sense of flow : fully immersed, energized, and feeling intense joy of being at the head of their field, the top of their game, at the point of the bowsprit. It’s easy to see why flow might happen at the bowsprit: it’s where one is looking out to the wider world, looking ahead, and indeed, looking inside oneself. At that kind of moment, you are fully invested in what you do.

Metaphorically, the bowsprit and forecastle represent the frontier of your field or your enterprise. It’s the place where one learns the most. Today, so much of what we value about business and capitalism—such as invention, efficiency, effectiveness, adaptability—depends on how organizations and people learn. Melville challenges us that the best learning may not be on the quarterdeck (at the back of a ship), but rather on the forecastle (toward the front).

The big idea here is that from time to time in one’s life, one must step down from the quarterdeck in order to take risks, get out in front, learn, and grow as a leader. The quarterdeck can be its own little world, freighted with tradition, security, and old assumptions about how the world works. From the back of the ship, it is certainly more difficult to look out ahead.

I’m telling you this because you-all are like me on the frigate: most of you have left interesting and comfortable circumstances to get out to the frontier of ideas and learning. You’ve been here one week and are probably wondering what you’ve gotten yourselves into.

This is the right time in your lives to be here. Many graduates have volunteered that Darden was a transformational experience; it changed their lives for the better. I believe you will say the same.

So, to conclude the story, what I replied to my astonished friend went something like this: “It was a great experience because of what I learned about myself and others; I grew in confidence. And I gained an incredible new perspective on teamwork and nature that couldn’t be obtained any other way. I learned that followers can lead the leaders. When you lose yourself in a worthy challenge, you can actually find yourself. And I found that the forecastle can be a better place than the quarterdeck. I had to live the experience to learn those insights.”

My experience on the frigate suggests the frame of mind you will need so that 21 months from now, you can say that Darden was a “great experience.”

  • Trust the process. Trust that the questioning by the professors is leading you somewhere. They want to help. And you came to study with the world’s best teachers. So, form a relationship with them that feeds your development. Don’t look for grandiose speeches, easy answers, or compliments; look for wise and candid feedback. Accept and admire professors who demand your very best.

  • Be present. I saw a sign once at a Las Vegas casino. It was hanging over the roulette table and said, “You must be present to win.” This meant that you could not place your bets and then leave the table to get a drink or see a friend, and return later to pick up your winnings. You had to be present when the winnings were declared, in order to get them. So it is at Darden. You must be present to win. “Being present” means being mindful: self-aware of your state of mind and your impact on others. And it means being socially aware of what’s going on around you. You can’t “zone out” and get the rich transformational experience that Darden offers. Mindfulness is one of the top attributes of high-performing leaders. So this is good practice for your future. When I describe Darden as a “high touch” community, I’m referring to a community where students, faculty, and staff are present and engaged actively in the learning process. “Being present” also means engaging others who may be very different from yourself—a different race, nationality, sexual orientation, or gender for instance. Make a serious effort to see the world through their eyes. Befriend those people. Share the Darden experience with them. If you find yourself drawn constantly to a few classmates just like yourself, you aren’t really present. If you don’t test your assumptions about people different from yourself, you aren’t really present. If at the end of two years, your comfort zone is no larger than it is today, you have not been really present.

  • It’s a marathon, not a sprint. Pace yourself. There are lots of enticing activities at Darden. And you don’t need to do them all at once. Find your sustainable stride and patiently head toward the finish line.

One final reflection: the bowsprit and forecastle are vivid metaphors for me yet today. As most of you know, in 11 months, I’ll make a transition from the quarterdeck of the Dean’s office to go back to the forecastle of faculty and staff. I’m content and think this makes great sense for Darden and for my life at this point.

So if I can model something for you this year, it is the virtue of periodically stepping down from the quarterdeck and moving to the forward-most point of your environment or enterprise. Being Dean has been tremendously fulfilling. And I’d like to get back on the bowsprit, looking forward through the fog. In the next 21 months, you and I will be there together.

I believe that you will succeed beyond your dreams if you commit very deeply to the experience ahead of you. Godspeed and good luck.

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Pricey U.S. Equities—Implied Innovation?

What are we to make of the following graphs? Figure 1 presents the long historical view of the Price-to-Earnings ratio on the S&P500 Index. Figure 2 presents a similar view, adjusting the P/E ratio for the impact of inflation on earnings.

Figure 1

Standard Price/Earnings Ratio for the S&P500 Index (average of all companies)

Source: Multipl.com
Current S&P 500 PE Ratio: 19.04 -0.19 (-0.97%)

4:29 pm EDT, Tue Aug 5

Mean: 15.52  
Median: 14.56  
Min: 5.31 (Dec 1917)
Max: 123.73 (May 2009)

Price to earnings ratio, based on trailing twelve month “as reported” earnings.
Current PE is estimated from latest reported earnings and current market price.
Source: Robert Shiller and his book Irrational Exuberance for historic S&P 500 PE Ratio.

Figure 2

Cyclically-Adjusted Price-Earnings Ratio for the S&P500 Companies


Source: Multipl.com
Current Shiller PE Ratio: 25.39 -0.25 (-0.97%)
4:29 pm EDT, Tue Aug 5

Mean: 16.54  
Median: 15.93  
Min: 4.78 (Dec 1920)
Max: 44.19 (Dec 1999)

Shiller PE ratio for the S&P 500.

Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10 — FAQ.

Data courtesy of Robert Shiller from his book, Irrational Exuberance.

Against these measures, stock prices today seem high. Looking over the last 130 years, you see big spikes in P/E ratios suggesting bubbles “irrational exuberance” in advance of capital market instability (1929 stock market crash, the Internet bust of 2000, and the Panic of 2008). Apart from those extreme events, the P/E ratios of 19x to 25x are relatively high. Is this a run-up to another bubble? What questions should the canny observer ask about high P/E ratios?

Let me frame a (wonkish) reply in terms of finance theory, which suggests that the size of a multiple is driven by two main factors: risk and expected growth. For instance, the widely-used Price/Earnings multiple can be decomposed into two factors:

Stock Price/E(EPS) = 1/r + PVGO/E(EPS)

E(EPS) is the earnings per share expected to be reported next year. The factor “r” is the required return on equity, which is determined by risk. And PVGO [1] is the present value of growth opportunities per share, an estimate of today’s value of investments expected to be made in the future. The term, “growth company,” is not defined by the growth rate of sales, earnings or assets, but by the size of PVGO relative to the market value of equity.

In other words, the P/E ratios of “growth firms” are typically sizable, and driven significantly by attractive future growth opportunities. One can decompose other ratios in a similar fashion. But the key idea is that multiples reflect important economic phenomena. To judge whether a multiple is appropriate, one should look into the underlying economic fundamentals and critically evaluate the assumptions of the model. [2]

So, let’s consider the possibilities. Suppose that “r” is 10%, the going risk-adjusted rate of equity return for the average low-growth firm, such as a public utility. Therefore, 1/r would equal 10.0. Compared to the average P/E ratios for the S&P500 (either 19 or 25), this implies that the present value of growth opportunities these days is simply enormous, accounting for 45-60% of the value of the S&P500. What might explain this huge growth component?

One possibility that you hear mooted on financial talk shows is that the market is “overheated,” “getting ahead of its skis,” and even, “a bubble.” We’ve certainly seen frothy conditions before and shouldn’t be surprised to see them again. The problem is that you could summon up some kind of psychological explanation for market conditions virtually any time. Psychology is always useful as a warning flag; but it won’t tell the investor exactly what to do. Generally, if you think that the market is getting overheated, you might cash out, buy put options, or sell short. But research suggests that trying to time the market by trading actively is an easy way to lose money.

A second possibility is that investors embrace some realistic growth phenomena that justify these huge PVGOs. If so, the canny investor should try to identify the source of these growth opportunities. One helpful resource will be this year’s University of Virginia Investing Conference —November 13-14—the theme of which will be “Investing in Innovation.” Innovation is perhaps the most important foundation for growth, and PVGO. The conference will offer insights about growth prospects in fields such as information technology, energy, health care, and monetary policy. Once again, we are booking an impressive collection of speakers. As of today, speakers will include these (additional speaker are in the offing):

  • Charles R. Cory (MBA ’82), Chairman of Global Technology Investment Banking & Managing Director, Morgan Stanley
  • Richard Fisher, President & CEO, Federal Reserve Bank of Dallas (schedule pending)
  • W. Barnes Hauptfuhrer (MBA/JD ’81), Chief Executive Officer, Chapter IV Investors
  • Robert J. Hariri, Founder, Chairman & Chief Scientific Officer, Celgene Cellular Therapeutics
  • Ned Hooper (MBA ’94), Partner, Centerview Capital
  • Robert J. Hugin (MBA ’85), Chairman & CEO, Celgene Corporation
  • Samuel D. Isaly, Managing Partner, OrbiMed
  • Nancy Lazar, Partner, Cornerstone Macro
  • John Siegel, Partner, Columbia Capital
  • Michael Sola, Portfolio Manager, T. Rowe Price
  • Kathy Warden, Corporate Vice President and President, Northrop Grumman Information Systems

“Early bird” registration discounts end tomorrow, August 8th. Sign up this week to get the highest return on your conference investment.

In all probability, today’s high P/E multiples are due to a blend of buoyant investor psychology and genuine growth opportunities. If so, this puts a high premium on thinking critically about investment themes, trends, and market sentiment. Conferences are one excellent means of sharpening your own thinking. Join us in November!

  1. Stewart Myers originally suggested the important role of growth options in the valuation of the firm. See his paper, “Determinants of Corporate Borrowing,” Journal of Financial Economics, 5:146-175 (1977). The decomposition of P/E presented here is discussed more fully by Myers in his book with Richard Brealey and Franklin Allen, Principles of Corporate Finance. []
  2. Though widely used, and simple to use, investing on the basis of P/E multiples is vulnerable to several potential problems, such as the dependence on GAAP accounting practices, which afford managers rather wide latitude in reporting the financial results of the firm. Also, the P/E ratio can be computed using backward-looking or forward-looking earnings. For growing firms, the difference in financial performance between the year just past and the year ahead will be material. In addition, a focus on Earnings per Share ignores important effects of capital investment, investment in working capital, and depreciation. []
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Should I work for this company?

The summer is a time of endings and beginnings. We’re about to enroll the Darden Class of 2016,
among whom many students are looking to end one career path and embark on another. Alums I’ve been
speaking with recently, took vacations, found the time to stop and reflect, and confronted the itch to
change employers. And for the Darden Class of 2015, who have had summer internships, this week is
probably the closing act: companies will start to make full-time offers. About two-thirds of Darden’s
summer interns get offers of permanent employment from their summer jobs. Common to all of these groups is a fundamental question: “Should I work for this company?”  Let me help you reflect on this. [1]

How not to decide

Start by dispensing with some of the most frequently-heard—and worst—reasons to sign on, such as money, power, fame, convenience, or lifestyle. Mind you, these aren’t trivial; and a partner or mentor may place them at the head of the parade. But these considerations can prompt one to make a decision that seems justified in the short run, but that in the long run may be regretted.

Where to start

The way to begin is to start with a sense of purpose, or intent, or calling. As Stephen Covey once wrote, you must “start with the end in view.” For a few people, this “end” will entail a clear vision of exactly what one will be doing in a few decades. But for most of us, the “end” will amount to an intuition about the kind of impact one wants to make, the kind of legacy one would want to leave, or the help one would want to give to others. If you have a vision or intuition about your “end” in view, everything else will be noise. As the Psalmist said, “Without a vision, the people wander.” If you don’t know where you’re going, any road will take you there.

The guiding principle

If you address the question of where to work with the end in view, then you get focused on how to get there. This focus drives you to one overarching principle: You should go where you believe that you can you do your best work. Thinking in terms of one’s “best work” necessarily focuses on the impact of one’s life and helps to define priorities. I don’t mean to suggest that defining one’s focus and priorities is easy. But finding the signal despite the noise is indispensable to charting a course. Think about the implications of this principle:

  • Go. This begs you to reflect on how you will leave where you are now, and how you will gain access to the place you should be. Is now the time to go? Is your team depending on you to finish some vital work? Will you slam the door behind you, and leave bitter co-workers behind? Leaving well is one of the hardest challenges in a career.
  • Where. In what sense is your best work you contingent on a place? Is it a physical location, close to friends and family? A virtual space that grants you connectivity to people who amplify your talents? A spiritual space that gets you in the zone for great work?
  • You. Are you waiting for someone else to decide for you? You must own the issue. Are you straining over the decision because you simply don’t want to face it?
  • Believe. This takes courage. When you decide to work for a company you must embrace a lot of uncertainty about the industry, company, your supervisor, and even yourself. Have you thoroughly assessed all of these uncertainties? Some are certainly groundless. But there may be good cause for doubts, and perhaps some fears. Ultimately, to decide requires a stroke of faith. Some people gain that faith through serendipity, “signs,” or a feeling of being called, a nagging idea that just won’t go away.
  • Work. What is the work that you want to do? Like to do? Are prepared to do? Will this company let you do it? Or at least grow into it? And let’s not define “work” too narrowly. Your life’s work could also include serving a community, nurturing loved ones, or repairing some nagging interpersonal problem. Think about the balance of all of these possible demands over the course of your life.
  • Best. This is the most important word in the whole question. You shouldn’t settle for just any old work. Life is too short for that. One wants to have an impact with one’s life and arrive at a good end. The notion of “best” should trigger some deep reflection on how you define success. If you start with some sense of the end in view, your best work will start to define itself.


“You should go where you believe that you can do your best work.” Spoken plainly, this principle seems obvious, hardly a slap-the-forehead insight. Yet in my decades of working with students, alums, and searchers of all kinds, I observe how slowly people come around to this conclusion. Often late in life, they will wrap their career choices based on money, power, fame, convenience and lifestyle in some rationalization about “best work”–but it always sounds hollow.

It is better to start with the end in view. That way, the steps to get there tend to define themselves.

  1. Those interns who are in the home stretch and really hope to gain an offer might find some of my past
    advice helpful. There is a range of things one can do to improve the odds of getting an offer:

    A. Actually ask for the job. Too many summer interns simply don’t “close the sale” (see this.)

    B. Become known. “Lean in,” in Sheryl Sandberg’s parlance. Too many summer interns lean back and fade out (see href="http://blogs.darden.virginia.edu/deansblog/2010/07/a-question-for-summer-interns-who-are-you/">this.)

    C. Finish at a sprint; don’t coast to the end. Research suggests that the most recent perceptions are very influential to decision-makers. Even if you’re finished with your summer project, walk around and volunteer to help anyone else (see this.)

    D. Quell any sense of entitlement; you must earn the offer. In most settings, arrogance damages, rather than strengthens, career prospects (see this.)

    E. Even if the news isn’t good, exit gracefully. (See this.)


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