I Can Has Cheezburger?

More than awkward grammar and poor spelling, that odd phrase is (perhaps regrettably) a rapidly spreading meme. If you dare—see what the buzz is about here: https://icanhascheezburger.com/. Besides being disturbingly fascinating and possibly fodder for psychoanalytical study, this web site has behavioral finance applications. How can snapshots of tumbling wide-eyed kittens, fluffy cats in awkward poses, and even the occasional walrus, bunny, or otter possibly instruct our investing? Check the captions. The contributors to this quaint community have adapted a shared syntax. For example:

• im steelin som ur foodz k thx bai (https://icanhascheezburger.com/2007/01/14/steelin-som-foodz/)
• OH HAY GUYS IT WUZN'T DECAF LIEK U SED (https://icanhascheezburger.com/2007/01/13/it-wuznt-decaf-liek-u-sed/)
• OH HAI. I HAS DUN THE SUMZ, WE CAN BUYS ‘NUTHER CHEEZBURGER (https://icanhascheezburger.com/2007/05/26/i-has-dun-the-sumz/)

Part IM shorthand, part intellectually-challenged feline, largely food-related. (Maybe a touch of twisted loneliness? It's hard to say.) Yet, you know exactly what the cat, ahem, cat-owner is trying to say.

Our brains have evolved as masterful pattern recognizers. Our ancestors used imagery and symbols to communicate for millennia. Even when written language is badly garbled, our brains force sense from word formations. You've likely received the email beginning "fi yuo can raed this, yuo hvae a sgtrane mnid. Cna yuo raed tihs?" Using the same, jumbled spelling, the email purports an academic study at Cambridge (not true—an urban myth) found humans can easily read as long as the first and last letter are correctly positioned—the middle can be a jmubeld mses (which is pretty much true).

Words, we get—but investing is a new and counterintuitive problem for humans and cats—(https://icanhascheezburger.com/2007/05/30/i-has-a-money/). When information is framed in a context we don't get easily, we struggle. Many common investor errors are caused by human brains gone haywire—such is the problem with the price-to-earnings ratio (P/E). Investors widely believe a high P/E is risky and a low P/E less so—but why? We've shown here that historic data doesn't support the fear. There's no credible, bet-able correlation between P/Es—high, low, or middling—and subsequent stock returns. But, our brains didn't evolve to quickly grasp the complex relationship between what the market currently says a stock is worth and an enterprise's earnings. So, we retrofit another meaning—heights.

Our ancestors learned easily and well high heights mean a long fall and possible death or dismemberment. Heights are scary! (https://icanhascheezburger.com/2007/04/02/hi-i-fall-off-ur-roof/) When we see high P/Es, we assign the same fear of heights—we think the stock, or even the whole market, is too high and has a long way to fall.

One easy trick to counteract a misbehaving brain is to reframe information—look at it from a different angle (https://icanhascheezburger.com/2007/05/30/kiti-haz-malfunkshind-pliz-raturnz-to-uprite-pozishin/). Put the earnings over the price for the E/P—and now you have an earnings yield. Expressed as a percentage, our brains comprehend this new figure easily. First and foremost, we can compare stock earnings yields to bond yields—bonds and stocks compete for our money, so we should consider them comparably.

Another application we've frequently talked about is assessing the economics of cash-based mergers and acquisitions. Currently, earnings yields are healthily above bond yields around the globe. A company's bond yield is effectively their before-tax borrowing rate (the earnings yield is after-tax). In today's environment, companies can acquire a firm with an earnings yield above their borrowing cost. If done right, the deal finances itself and gives the acquirer an earnings boost to boot!

Because we know there's a significant yield spread, we know mergers are likely to occur in mass volume (and certainly have been)—juicing earnings and reducing stock supply, which can both drive higher stock returns. We know stocks are likely to do very well this year, and we can even get excess returns from overweighting those sectors most likely to consolidate. All that from flipping the P/E!

What would our friends say? Moar stocks! (https://icanhascheezburger.com/2007/02/23/moar/)

ok thx bai