[Muted]

Warren Buffett has also talked about this in numerous interviews. He says that it really depends on what interest rates will do in the future that will determine whether stock prices are currently high. If they stay the way they are now for a while (close to zero, and even negative in some countries), stock prices are not high. The reason for this is that interest rates act like gravity on stock prices. If interest rates go to zero, P/E ratios can go to infinity. Mathematically this can be seen by looking at DCF or NPV analysis where you divide by the discount rate, which is highly correlated with the interest rate. Take for instance a security that yields $C/year in perpetuity. The NPV of that security is NPV=C/r. As the interest rate r approaches 0, the NPV goes to infinity and hence has infinite value. This means that it is ok to pay a very large amount for the security, since you can't get a better return anywhere else.

But of course the question is, will interest rates remain low? Basic economics would tell us the answer is no, because the FED and ECB have pumped billions and billions of dollars/euros in the economy on a monthly basis meaning the supply of money has greatly increased and hence the value should drop and lead to inflation and hence higher interest rates. But this clearly hasn't happened (yet) and I haven't really found anyone who has a good explanation. Warren Buffett, Charlie Munger and Bill Gates all expected this would of already happened a while ago. (TV interview on CNBC)

[lucozade]

That's not how PV is calculated. It's C/(1+r) where r is the rate between now and the time of the cashflow. When rates are zero, it just means that the cashflow is worth today the same as it'll be when it's paid. As rates increase, the PV of that cashflow reduces.

Also, although base rates are around zero, long term interest rates are higher. True they're not high by historic standards but you still get some discounting for cashflows beyond the short term.

[Muted]

NPV = SUM_t Rt/(1+i)^t (wikipedia). This is similar to your formula. If Rt=constant for all t and t is infinite (hence in perpetuity), the formula simplifies to what I have. More info can also be found here: http://www.investopedia.com/walkthrough/corporate-finance/3/...

[simo7]

You are missing the time in the formula, should be: (1+r)^t.

When t --> inf, it becomes r.

[simo7]

Right just replied the same. It's about the interest rates prevailing in the market.

But I do believe that there was and still is a lot of overvaluation in tech even after discounting at low interest rates.