It's very likely that Tuesday the market will see a buying opportunity and send it right back towards record territory. Which is insane.
I think there is a genuinely new factor at work: so much money flows into the market that it has bought up all of the possible future earnings.
That was all following reasonable advice, but that advice assumed that the market could absorb all of that money. If too much flowed in new capital opportunities would arise. But even before the AI bubble, that had ceased to hold.
Even when the market isn't bad, it's still a good idea to consider your balance between financial and non-financial assets. The whole point of holding financial assets is to eventually maximize your non-financial assets, after all.
Surely there is some time horizon at which we can admit that the market is effectively correct. After 100 years of being “overvalued”, can we call that the real value? 1000 years?
This seems like that meme where the guy is looking in the mirror and telling himself, “you’re not wrong, the market is wrong”[1]
Requires an alternate proposal about how to value stocks, and in aggregate, the stock market at large.
The only reasonable way to value stocks is in their potential, upon purchase, for the purchase price to be returned via dividends issued on future profits (even stock buybacks ultimately justify their price increase on dividends being divided among fewer shareholders).
> After 100 years of being “overvalued”, can we call that the real value? 1000 years?
Stocks are being priced at levels that will require longer than a full human lifetime to return their share price via dividends. "Overvalue" is subjective; some people will be fine with the idea that only their children (or, someday, only their grandchildren, and so on ad infinitum) will see a profit. People will also pay a premium for the liquidity of the stock market compared to less-liquid investments (e.g. real estate).
There is simply too much cash sloshing around compared to the opportunities for return available.
A parallel to draw very easily is an investment in commodities. Those will never pay a dividend, so therefore they're worthless? Obviously not, you invest in them because you expect their value to rise. Same with a stock.
An asset is worth what someone is willing to pay for it. That is its value. Intrinsic value is an element, but not the most important one.
Everyone loves the "you can't beat the S&P" trope, but that's also just ignorance. There's a reason that proprietary trading firms generate more profit per employee than any other business in the world.
> There's no gambling involved - investing is not dumb chance
First a gambling does not have to be a theoretically pure dumb chance in order to be gambling. Second, in practice it basically the same thing as betting on horses used to be.
There is a reason why small investors loose money on their investments on average despite markets going up. Because what they do is not investing.
> There are real companies behind these purchases with real expectations of future growth and thus increase in value.
Oh common, this relationship is quite broken for exactly the most known companies.
Source?
This seems like a willful misinterpretation.
They say “you won’t beat the S&P” because maybe some HFT firm with highly secretive and advanced technology and MIT PhD quants might… but you, Mr. Retail McDumbMoney, don’t stand a chance.
If the person who holds the share can never expect to be paid for holding the share, then you're describing a Ponzi scheme. Eventually you cannot find another sucker willing to pay in even more.
> commodities
Are used as manufacturing inputs and thus a commodity investment injects liquidity in exchange for a return, should manufacturing demand (for those inputs) rise. Their intrinsic value derives from their consummability.
Stocks/corporations do not have intrinsic value beyond the sum of the fair market prices of the assets belonging to the corporation, should they be liquidated and dispersed among shareholders... which would be a dividend. At the end of the day the only reasonable means to price a stock is a calculation of expected dividends.
Earnings do not justify the price, for the market as whole. There is only so much earnings to be had. It is overvalued by the metric of dividends or property (retainer earnings).
> Earnings do not justify the price
… maybe? I’m not sure I believe you conclusively, so you would have to prove this before I accept it.
PE ratios are higher than historical averages (according to Perplexity, S&P PE is 27, which is higher than the median of 18. The top 10 holdings hover between 12 and 80, excluding TSLA which is over 200).
However, I could see reasonable rationalizations for these PEs that could tell me that they’re expensive compared to historical trends, but not “overvalued.”
Maybe investors are assuming technological change will drive accelerating earnings growth (especially true for the top tech stocks) more than we’ve experienced historically. Top tech stocks are more efficient cash generating machines than they’ve ever been before, and the S&P has shifted to high multiple sectors like tech and away from lower multiple sectors like energy and financial services. So it’s possible our understanding of “expensive” stocks is miscalibrated if we just look at historical PE ratios.
I can’t say for sure that equities are priced “reasonably,” but I can say you haven’t convinced me they’re overvalued.
And the S&P.has been going up much faster than 4%. If there was ever a point where it was properly valued it must be overvalued now.
The S&P index isn't the whole story, especially in an expanding tech economy. But still, I'm looking at it as an absolute, rather than a relative number, and it strongly suggests that earnings cannot justify these pricings, even when we're not at the top of a bubble.
The only “yes, but…” I would add is that it seems to my retail, unsophisticated eye that:
1) while you could do better nominally in bonds, it seems like investors are pricing in a lot of earnings growth, not just static earnings in PE.
2) the market expects inflation, and blue chips can typically raise prices during inflation which protects shareholders, whereas bonds don’t offer this protection, other than TIPS etc
3) it also seems like (for now…) US equities are still a safe haven for international capital, so demand is still there (i.e. there is no alternative)