Running_Man
Thinks s/he gets paid by the post
- Joined
- Sep 25, 2006
- Messages
- 2,844
Like OS, I don't buy that passive investing messes up valuations. The way I look at it, as long as there is a "critical mass" of traders that are looking at valuations (and not just buying the index), those are the ones that are setting the prices.
The biggest volume of traders is algorithmic and is mostly extremely short term. In other words this is efficient market hypothesis working trying to take advantage of short term fluctuations in expected value of asset classes. This has nothing to do with real value and everything to do with relative value. These algos are for the most part just hyped up and less leveraged versions of Long Term Capital Management. With changes in interest rates, junk bond debt, volatility, currency fluctuations, commodities etc the algorithms are utilizing complex trading systems determining which of the various asset classes have the highest expected value and switch between the classes. This is 70-80% of all daily trading.
Price Discovery comes in large clumps when prevailing wisdom shows it will not work anymore - examples General Electric, Valeant, Theranos. Weakness and flaws in the logic of the companies was evident far before the fall in most cases. But it takes an incredibly long time for the price discovery to actually work it's way through the system.
I always liked Charlie Munger, basically the brains behind the grandfatherly curtains, can't find the quote but he was once asked what he would do if he went bankrupt, he said if he had Value Line $10,000 and 20 years he'd be a millionaire again.