This piece is based on academic research done in-part by KCR’s expert in behavioral finance.

Bhojraj & Co-Authors Provide Compelling Proof that “Price is What You Pay, Value is What You Get”

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The chart below, derived from the same research, shows if the earnings of the average firm in a given year managed to justify their starting valuations.[1] The dashed line shows the threshold for when the average firm in a given year managed to earn enough over its subsequent lifetime to justify the market cap at the start of that year.

  • The paper’s authors note that the primary explanatory factors for these outcomes include “…initial valuations, market sentiment, and initial profitability.”[2]
  • When the bars are > 1, that means future profits justified the average stock price
  • When the bars are < 1, that means future profits failed to justify the average stock price and suggests a speculative market

Summarily: By 2019, stock prices were so elevated and suffered so many fundamental demerits that one should expect their lifetime earnings to sum to less than half their market capitalization – a level indicating far more risk in 2019 than in either 2000 or 2007.

What You Pay and What You Get Matters The Impact of Starting Valuation and Firm Quality

For the complete paper please see Lifetime Earnings by Sanjeev Bhojraj, Shiva Rajgopal, and Ashish Ochani. For those looking for an excellent summary, please read this piece by Bloomberg’s Lu Wang.

For investors who believe in quaint items like profits, margins, valuations, and earnings quality, the brute force applied to this research might seem excessive. Unfortunately, much of the financial industry has been swept up in frenetic day-trading as “shillfluencers” and casino-like trading apps enchant investors of all kinds into some of the most expensive stocks in history. Our academic colleague has the unfortunate task of bringing empirical rigor to put proof to the comical idea that markets are efficient. A topic we covered in our take-aways from legendary Harvard professor Andrei Shleifer’s book, “Inefficient Markets.”

Our research has been relentless in advocating the idea that what you pay for an asset matters. We believe Warren Buffett, Paul Singer, Seth Klarman, and many other legendary investors will be proven right once again when this mania ends.

The chart below shows that using the Buffett Indicator, the market has never traded at such a high price relative to GDP. Buffett’s holding company, Berkshire Hathaway, recently trimmed equity holdings despite already sitting on record piles of cash. Considering this is the priciest stock market in history, we believe this is just common sense.

As they always do, people have forgotten about the brutal outcomes that await those who overpay for equities. If you don’t want to read our brief takeaways on Galbraith’s primer on bull markets and their consequences, contemplate the chart below. If GDP stays constant and the market reverts to GDP multiples seen in 2009, equities would have to fall by 72%. Reminder: Share prices of S&P 500 Index ETFs can decline without warning.

Stocks Would Need to Fall 72 with GDP Stable to Get Back to The Trough of the GFC

Considering the reckless lending, the bloated debt levels carried by many companies in the world’s most expensive stock market, we think investors should stop trying to guess who the next Amazon is and get back to the basics of long-term investing.

As measured by market capitalization, some of the largest companies in the world have risen relentlessly despite constantly increasing the number of outstanding shares. We live in a time when losing money and shareholder dilution are not just tolerated but encouraged as companies chase top-line growth.

Despite being composed of “equities,” the KCR research team believes that the stock market has become almost a liability for the United States at today’s never-before-seen valuations. Via financial repression, the Federal Reserve has bastardized fixed income and driven investors to rank speculation.

We have updated the market cap of the stocks too expensive to make sense of…particularly if rates normalize. The navy blue line shows that firms over 10x price to sales have now hit $14 trillion vs. only $4 trillion for the cheapest 20% of companies in the market – an all-time record spread between the impossibly priced and the cheap.

Today Stocks with Price to Sales greater than 10x are at a Record Premium to Cheap Stocks

CONCLUSION: Dr. Bhojraj’s Secrets to Success for Stock Market Promotors in Today’s Mania

  • The secret to success in the stock market for a firm is providing hope to investors and having them bid up stock prices
  • The reason hope is important is that earnings rarely catch up with expectations when starting valuations are at levels like today
  • This is true even if firms have extended periods of time (2 or more decades) to deliver earnings to justify valuations at the start – so if the mania ends, be prepared to sit on large losses for potentially decades

A List of the Most Expensive Stocks

Note: We only put stocks over $1bn that lose money as there are 280 of them. If you would like the complete list of stocks > 10x P/S, please reach out to Be warned, the full list is comprised of 861 companies! Is it time to consider bear market trading strategies?

The 280 Stocks greater than 10x Price to Sales Losing Money Greater Than 1bn Market Cap Sorted by Market Cap

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.


[1] Lifetime Earnings include realized and terminal values based on extant metrics of valuation and price

[2] Bhojraj, Sanjeev and Ochani, Ashish and Rajgopal, Shivaram, Lifetime Earnings (October 27, 2021)., page 20 – 21


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November 19, 2021 |

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