Citigroup Inc (C), Wal-Mart Stores, Inc. (WMT): Two Types of Risk, 2 Types of Bubbles

A valuation bubble is the just the opposite. The company’s valuation gets crazy, but the way it’s making money is solid and sustainable. Wal-Mart Stores, Inc. (NYSE:WMT) is a good example. In 2000, Wal-Mart Stores, Inc. (NYSE:WMT) stock traded for more than 50 times earnings — astronomical for a retail stock. That sky-high valuation kept returns low over the following decade. But there was nothing wrong with Wal-Mart Stores, Inc. (NYSE:WMT) the company. Business boomed from 2000 to 2010. Earnings per share grew threefold. Shareholders received almost $30 billion of dividends. Investors’ pain was entirely due to starting valuations. That was the bubble.

Just like deep-versus-shallow risk, the difference between income and valuation bubbles has to be appreciated. We talk about them as if they are a single topic when they can mean very different things and lead to very different outcomes. I’m all for keeping things simple, but as Einstein put it, “Everything should be made as simple as possible, but not simpler.”

The article 2 Types of Risk, 2 Types of Bubbles originally appeared on Fool.com is written by Morgan Housel.

Fool contributor Morgan Housel has no position in any stocks mentioned. The Motley Fool owns shares of Citigroup.

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