Market Valuations - What do they really mean?

[NW-Bound]

Quote:

Originally Posted by audreyh1 I don’t believe in efficient market theory, at least not in the short term, and all of this is a giant Fed put, IMO. There is no where else for the money to go and investors expect to be bailed out at any sign of panic. Call it asset inflation.

To be fair, an EMH proponent would say that the Fed put has to be taken into consideration, and that justifies the market going higher.

Quote:

Originally Posted by sengsational Greater fool theory 1. Efficient market theory 0.

I think it's more about FOMO.

[OldShooter]

Quote:

Originally Posted by Lsbcal Or momentum?

I think they are basically all the same. An expectation that a greater fool will take the asset off your hands with your indifference to the financial parameters of the asset. Some descriptive names are more gentle than others, I guess.

[NW-Bound]

Quote:

Originally Posted by OldShooter I think they are basically all the same. An expectation that a greater fool will take the asset off your hands with your indifference to the financial parameters of the asset. Some descriptive names are more gentle than others, I guess.

But the above is my main gripe with EMH. People who bid up a stock without regard to its fundamental will say that a stock commands higher and higher prices because it "deserves" it. Wisdom of the crowd and all that jazz. If it were not good, how would people pay that much for it?

Once a stock gets propelled to the troposphere, people will come up with all reasons to justify its price, and it gets boosted further to the stratosphere. Mars is the next step.

[OldShooter]

Quote:

Originally Posted by NW-Bound But the above is my main gripe with EMH. People who bid up a stock without regard to its fundamental will say that a stock commands higher and higher prices because it "deserves" it. Wisdom of the crowd and all that jazz. If it were not good, how would people pay that much for it? Once a stock gets propelled to the troposphere, people will come up with all reasons to justify its price, and it gets boosted further to the stratosphere. Mars is the next step.

Yes. Old news. Tulip bulbs, the South Sea bubble, ... Apparently this is in the basic nature of us humans.

If you haven't looked at the video I linked in post #4 above I encourage you to do so. It may calm you down.

The first three chapters of this book Volume 1: https://en.wikipedia.org/wiki/Extrao...ness_of_Crowds are great fun reading. I sort of ran out of steam after that but I'm sure there is more good stuff in there. The book was published in 180 years ago. (Gutenberg has it for free. Memoirs of Extraordinary Popular Delusions and the Madness of Crowds by Mackay - Free Ebook)

[NW-Bound]

I am quite calm, and amused at the moment.

I am not a vampire to live long enough to experience the Tulip and the South Sea bubble, but remember the dot-com mania just as yesterday. Analysts were tripping over each other to raise their targeted prices for stocks, when they shot up like roman candles. "What do you mean your 12-month target price is $400 when it closed at $500 just now? Aren't you ashamed to call yourself an analyst?"

Yep, I have been there. But I have not done that.

Well, maybe I did too. Never owned any dot coms, but lost out on a bunch of tech stocks. I thought that compared to the dotcoms, my "good companies" were real corporations, with real products, plus their P/Es were only 100 or so, compared to the dotcoms who did not have any sales let alone profit.

And that's why I lost only 50% counting from the top in March 2000 to March 2003, instead of losing 100% if I had the dotcoms.


PS. About Farma and his talk, I read "A Random Walk down Wall Street" by Malkiel a long time ago. I got the gist of the subject from this book, and have not found anything substantial by anybody to add to that. Malkiel may not be the 1st to write about this subject, but I liked his style a lot.

[OldShooter]

Quote:

Originally Posted by NW-Bound ... About Farma and his talk, I read "A Random Walk down Wall Street" by Malkiel a long time ago. I got the gist of the subject from this book, and have not found anything substantial by anybody to add to that. Malkiel may not be the 1st to write about this subject, but I liked his style a lot.

FWIW, the video I linked has little to do with Malkiel or the random walk. It is Fama and Thaler discussing exactly your topic, the rationality/irrationality of stock market pricing. But if you're not interested there's no reason to watch.

[NW-Bound]

I have skipped through the video, but read the transcript.

While the term "Random Walk" is in Malkiel's book title, he talks about a lot more than that, including past market mania, and how investors place a value on stocks, what EMH and indexing are, etc...

Wikipedia claims that "Random Walk" is the book most often cited by EMH advocates.