P/E has become a rubbish metric now, because there's so much money in the market thanks to QE. Most of the money in stocks now is money that would have gone into commodity trading and bonds, etc. The former's prices have stabilized or declined, leading to really poor opportunities, while zero interest rates and neg rates battered the market of the latter. Hence all that money has entered the stock market, which is why past P/E behavior, or any metric's past behavior really, cannot be correlated to future behavior.

It isn't so much that P/E is rubbish but that its utility as a proxy metric assumes approximately flat revenue growth. This assumption is no longer true for a significant percentage of the largest companies, many of which are demonstrating large non-zero revenue growth rates, both positive and negative. If you are looking at companies with high revenue growth, there are other metrics used to determine if they are "cheap" or "expensive". Amazon is a great example of a company that is "expensive" by value metrics like P/E but actually pretty cheap by metrics with more applicability to revenue growth companies.

The problem is that many investors apply metrics, like P/E or book value, blindly without understanding the assumptions that must be true for the metric to be a meaningful measure of value. It is even more complicated inasmuch as some companies fall into an ambiguous gray area when it comes to appropriate valuation metrics (I'd argue Apple is one such company).

Like with any analysis, there is some work to make sure the statistical model actually captures what you intend to measure.

> The problem is that many investors apply metrics, like P/E or book value, blindly without understanding the assumptions that must be true for the metric to be a meaningful measure of value. It is even more complicated inasmuch as some companies fall into an ambiguous gray area when it comes to appropriate valuation metrics (I'd argue Apple is one such company).

This is obviously the core of the issue. But you'd be surprised at how often it is that these concepts surrounding P/E are parrotted constantly at many leading financial firms and schools.

But I think the opposite case still kind of holds, that with P/E you can at least see if a company is most likely not overvalued. And that was the issue in question ("everything is just gambling").

P/E doesn't even tell you that. Companies with negative revenue growth rates often have low P/E ratios but these are often overvalued and poor investments even then. Sophisticated investors, and therefore market pricing, take all of this into account when valuing companies. All trivial nominal measures of stock value were completely arbitraged out of the market many years ago.

There are still measures that correlate well with low risk and strong returns for some subset of companies, but identifying a subset and building valuation models for them is non-trivial (e.g. I typically use risk models for revenue growth in comparative valuation which don't even apply to most of the market). If it was as simple as looking at a trivial ratio of public numbers, everyone would already be doing it.

I've been investing a long time and the markets have changed a lot over the decades. At this point, I think most of the investing advice from several decades ago is obsolete because it is based on assumptions that aren't actually true today. Investment advice and heuristics have a shelf-life. Most people aren't going to build a portfolio strategy from first principles, it is a lot of work, hence the popularity of index funds.

I certainly didn't want to suggest that P/E is a reliable or sufficient indicator for good investments. It was just about this claim that everything is just gambling at this point.

Granted it was then perhaps a bad example, as it doesn't take into account the value of the companies possessions.

I just wanted to give an example to say that you can check things about a company beyond the stock price, which may be inflated by gambling. If a stock is "gambled" to the moon, it assume would have a very high P/E. I'm not actually an expert on those indicators, haven't looked into them much.

From a socialist (especially labor theory of value) perspective, you're buying and selling people's future labor. Socialists tend to think that the workers should get all of their labor. Obviously "root of all evil" is somewhat hyperbolic, but based on even passing knowledge of socialism, it is easy to see why a socialist might consider it to be an evil game.

Per your previous sentences though, a common refrain on /r/WSB is "Sir, this is a casino".

It doesn't make much sense, as owning a stock does not give you any entitlement to the future labor of employees. Also employees can buy stock themselves, which arguably is superior to forcing them to be stakeholders in the company they work for, as it is voluntary. But the labor theory of value also doesn't make sense to begin with (if you disagree, I'd like you to pay me 10000$ to dig a hole in front of your front door, which would be hard work and therefore definitely worth 10000$), it's probably moot to discuss.

I don't think /r/WSB is representative of the stock market as a whole.

The stock market is just people trading. Some do stupid trades, some do smart trades. To cherry pick some stupid trades and claim it is all a casino is crazy, imo.

Personally, I am a freedom guy - I think people's freedoms should be maximized.

The alternative to "letting the people trade" is to regulate what people invest in. In my country, it gets harder and harder to invest in anything but the government pension, as every other asset class is being destroyed with taxes and risk of socialist pawning. There are also rules. It is just another tentacle of the "nanny state", preventing people from making potentially harmful decisions. But it limits freedom. Especially people on Hacker News (formerly Startup News) should understand. Should people be allowed to do Startups? It's a very risky undertaking which might lose you money.

I don't really want to get into it here, but your first example is pretty disingenuous. AFAIK the assertion is not that "all labor creates value" but that "all value derives from labor". There is a difference in those assertions and you should at least be willing to steelman the position of someone you disagree with.

Which one do you mean? It is true that owning stock does not entitle you to labor of a company of employees. Paying wages does.

And the "value theory of labor" states that the value of labor is determined by how hard the work is. So why should I not be paid for digging a hole in front of your door?

If you say you didn't want that hole to begin with, we are veering into "people should only pay for what they want", and I think the "value theory of labor" already gets in trouble. You have to admit that how much people want something, or how useful it is to them, should factor into how much they should have to pay somebody else. So the theory that only labor should determine the price is debunked.

"All value derives from labor" is not even true (what about trading rare items, for example - or lets take a house. Is a house by the lake the same value as a house on a garbage dump, because they both take the same amount of labor to build?), and it seems a very vague statement. How do you derive the value of something from that statement?

Like I said I really don't want to get into this here, but I really would suggest reading more into this stuff, as you do seem to me to have a number of misconceptions about LTV.

Any pointers? I was under the impression that nobody besides socialists takes LTV serious anymore. And I gave some reasons why it doesn't make sense. I haven't heard any counterpoints that make me think investing more time into it would be worthwhile.

Edit: from Wikipedia ( https://en.wikipedia.org/wiki/Labor_theory_of_value ) it seems quite a mess, perhaps a bit like planning economy where they add yet another equation to account for yet another problem, but they can never really capture it all. But at the end of the day, what is it useful for, other than making "worker demands"? Can you use it to compute anything useful? I highly doubt it. In another way it might just be saying "energy determines the price of everything", in archaic terms when energy was mostly "labor".

It seems much more practical and sensible to simply go with market prices.

Value != price, nor does LTV make said assertion. Things like markets and preferences (time, kind, etc.) help determine price. The assertion of LTV is that all value created is created by labor, as it is the transformative aspect provided by humans of the "Labor + Raw Goods + Means Of Production = Final Product" view of production.

Then as I suspected, it is just mumbo jumpo to allow people to make demands (I created the "value", so I deserve that thing).

Again my question, what is the actual use for the concept? If you can not use it to determine price, what is it for?

And there are still examples that show how useless it is, like an apple has no value because it grows by itself? But apple juice (or sugar extracted from apples) has more value than an apple, because labor is used to extract it from apples? What possible use could be for that metric (and what is the unit of "value" - a vague feeling that stuff is owed to you?)? Even though the nutritious value of an apple is higher than apple juice or sugar?