The Munch Scream – Moneyweb

Edvard Munch’s The Scream is one of the most reproduced images of the modern age – a figure on a bridge, hands pressed to its face, mouth open in a soundless howl, the sky behind it bleeding orange and red. Munch said he painted it after feeling “a great scream pass through nature”. Every portfolio manager who has held a genuinely good business through a bad multiple knows exactly the sensation he was describing.

Call it the Munch Scream: the moment a manager watches a company they are certain they priced correctly – sound balance sheet, growing earnings, a durable moat, every box on the checklist still ticked – falls 20%, 30%, even 60% in value, not because anything about the business broke, but because the market has simply decided to pay less for the same dollar of earnings.

The scream is not a reaction to bad news. It is a reaction to a rerating.

And it is one of the most dangerous moments in a manager’s career, because it is precisely when instinct and discipline pull in opposite directions.

The arithmetic behind the scream

A share price is the product of two numbers: Price = earnings per share (EPS) × price-earnings (PE) ratio.

Most analysis, understandably, is spent on the first term – forecasting revenue, margins and earnings.

But over any multi-year holding period, it is very often the second term, the multiple the market is willing to pay for those earnings, that determines whether the investment actually works.

A business can do everything right on the “E” and still deliver a miserable, flat, or falling return if the “PE” was bought on unwinds faster than earnings can grow into it.

This is not a theoretical risk. It is the single most reliable pattern in market history for high-quality, richly-priced compounders – and two examples, 20 years apart, make the mechanism impossible to miss.

Exhibit one: Microsoft’s lost decade

Between fiscal 2001 and fiscal 2013, Microsoft grew diluted earnings per share from $0.66 to $2.58 – a nearly fourfold increase, roughly 291%. Revenue compounded at about 9% a year, net income at about 10%, and margins held in a healthy 25-33% band throughout.

This was not a broken business; by any fundamental scorecard, it screened green almost everywhere – a fortress balance sheet, tens of billions returned via buybacks, and a dividend initiated in FY2003.

And yet the share price rose only about 53% over that span, and in nominal terms, Microsoft’s split-adjusted price – which had peaked near $59 in late 1999 – did not durably reclaim that level until late 2016.

Sixteen years of dead money, sitting on top of a business that had nearly quadrupled its earnings.

The entire gap was the multiple.

The market paid about 30x earnings for Microsoft in 2001, assuming its dot-com-era growth rate would be durable.

It paid as little as 7-8x by the end of 2011, once growth had decelerated toward a still-healthy ~10% and the business was repriced as a mature cash compounder rather than a growth stock – a rerating reinforced by antitrust overhang and a narrative that Microsoft was “missing” search, mobile and, early on, cloud.

Indexed to 100 at FY2001: EPS (orange) climbs relentlessly while the PE multiple (purple) is cut by ~75% into 2011 – trapping the share price (blue) between the two. Source: Microsoft Form 10-K filings; Macrotrends

Investors were right about the earnings. They still made almost nothing for a decade and a half, because they had paid a bubble-era multiple that the market spent years unwinding – and most of them were not still holding by the time it rerated back upward from 2013 onward.

Exhibit two: Zoetis, live

Zoetis is the contemporary mirror of the same story – and it is happening in real time rather than in a history book.

From 2015 to 2021, it was a near-perfect compounder: revenue, earnings, returns on capital and free cash flow – all rising while leverage fell, and on top of that, the market rerated the multiple upward, not down.

That combination carried the shares from roughly $45 in 2015 to an all-time high of $249.27 on 30 December 2021, at a PE of about 55x.

The fundamentals did not break on the way back down. Revenue kept rising, from about $6.7 billion in 2020 to $9.3 billion in 2024; diluted EPS climbed from roughly $3.40 to about $6.00; return on invested capital improved into the mid-20%s; return on equity held near 50%; debt-to-equity fell from roughly 4.5x to 1.4x.

By the scorecard, Zoetis stayed green throughout.

Zoetis’s year-end PE fell from ~55x (end-2021) to ~12x today – a ~78% derating, even as earnings kept growing. Source: Year-end price ÷ trailing GAAP EPS; Macrotrends

Yet from the December-2021 peak, the PE derated from ~55x toward ~21x by the end of 2025, and the shares fell roughly 30% even as earnings grew – the pure derating leg, exactly as Microsoft experienced two decades earlier.

Then 2026 delivered a second blow: first-quarter results on 7 May showed organic revenue growth roughly flat, US sales down about 8% organically, an EPS miss, and reduced full-year guidance.

The shares fell about 20% in a single day to roughly $75, taking the multiple to ~12x and the total drawdown from the 2021 high to about 70%.

Net of it all, Zoetis grew EPS by roughly 40% between 2021 and 2026 while the share price fell about 68%.

The entire gap – and then some – was the multiple.

A ~50x rating had silently priced in many years of uninterrupted premium growth; when growth merely decelerated, not collapsed, holders took a double hit as the multiple compressed and forward estimates came down together.

Zoetis, the business, did little wrong. Zoetis, the stock, had been priced for perfection, and perfection is a very high bar to keep clearing.

Not a one-off – the textbook pattern

Microsoft and Zoetis are separated by 20 years and sit in entirely different industries, yet they rhyme exactly, because the “great company, stagnant stock” pattern recurs whenever a high starting multiple meets decelerating – not collapsing – growth.

The roll call is long:

Cisco Systems entered 2000 at well over 100x earnings; the multiple collapsed, the stock lost roughly three-quarters of its value, and it had still not reclaimed its March-2000 high two decades later, despite growing earnings and revenue throughout the 2000s.
Walmart roughly doubled EPS between 2000 and 2011 while the share price was flat-to-down, as its PE compressed from the mid-40s at the 1999-2000 peak into the low teens – the canonical “great business, dead stock” decade.
Intel followed a similar post-2000 path, and Coca-Cola remains the classic earlier case: a “Nifty Fifty” darling trading near 45-50x in the early 1970s that spent years derating despite sound earnings, so price growth badly lagged earnings growth for a long stretch.

In every case, the fundamentals were defensible. The entry multiple was the problem.

Mr Market, and the discipline of equanimity

Benjamin Graham’s parable is worth restating in full at exactly this moment, because it describes the scream precisely.

Imagine you own a stake in a private business alongside a wildly moody partner named Mr Market. Every day he turns up and names a price at which he will either buy your stake or sell you his – and his price has nothing to do with the business’s actual value.

Some days, he is euphoric and names a price far above what the business is worth; other days, he is despondent and offers to sell you his stake for far less than it is worth.

Graham’s point was not that Mr Market is irrelevant – it is that you are free to ignore him whenever his mood does not suit you, and to take advantage of him when it does. The mistake is letting his mood infect yours.

“Markets can be treacherous – that is when a manager must re-check, and if the fundamentals are good, treat Mr Market with equanimity and ride out the storm.”

That recheck is the entire discipline. When a name a manager owns derates hard, the correct first move is not to defend the position out of stubbornness, nor to sell out of fear – it is to go back to the business itself and reunderwrite it from scratch, as honestly as if it were a new idea.

Has revenue actually decelerated, or merely wobbled for a quarter? Is the moat narrowing – new competition, pricing power eroding, customers leaving – or is the market simply demanding a lower multiple for the same durable earnings stream? Is the balance sheet still intact?

If the checks come back green, the case for holding – or adding – is, if anything, stronger than before, because the same quality business is now available at a cheaper price.

If the checks come back amber or red, that is a different matter entirely: the point of the exercise was never blind conviction. It was checking, not fleeing.

Good fund management is a minority sport

Good fund management is a minority sport for a structural reason: the behaviours that generate long-run outperformance are, in the short run, uncomfortable and lonely.

Most capital is managed – and most of it is invested – by people who find it very hard to keep watching a “right” call look “wrong” on a screen for months or years at a time.

Career risk, client redemption pressure, and plain human loss-aversion combine to make the scream nearly universal.

That is exactly why a reward exists for the minority who do not act on it: markets do not pay you simply for being right about a business. They pay you for being right and staying in your seat while everyone else is wrong about how long you will have to wait.

This is where the behavioural aspect stops being an abstraction and starts costing real money.

Investors rarely lose their capital by picking bad businesses – they lose it by correctly picking good ones and then selling at the trough of a derating because the scream became unbearable, converting a temporary, paper derating into a permanent, realised loss.

Microsoft’s multiple, which took a decade to compress, also eventually rerated back upward from 2013 onward – and the only investors who captured that recovery were the ones who never sold into the scream in the first place.

The way through

None of this is a case for blind holding.

It is a case for a specific sequence: when a holding derates sharply, re-check the fundamentals before reacting to the price; act on what the business is actually doing, not on how loudly the share price is screaming; and remember that the multiple you paid, and the multiple the market is currently prepared to pay, are opinions – while the earnings, the balance sheet and the moat are facts.

Equanimity is not indifference to risk. It is the discipline of letting the facts, rather than Mr Market’s mood, decide what happens next.

Sources: Microsoft Corporation Form 10-K and Form 8-K filings (FY2001-FY2019); Zoetis Inc company filings and earnings releases; Macrotrends. Prepared for internal and client educational use; contains no buy, sell or price-target recommendation.

Brought to you by Platinum Portfolios.

Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.

#Munch #Scream #Moneyweb