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Bruce,
the bulls are back again - nice to hear from you..
> If you read my message concerning the market bubble / bear market
> myth, you already know HOW (in my opinion) the market has been going
> up and will continue to do so. The baby boomer effect on the
> economy is creating enormous amounts of real money that is flowing
> into the market.
The baby boomer argument has been you favourite argument for quite
some time now.
You should get yourself this week Economist. There is a very
interesting small article about the savings ratio of the American
public.This figure has fallen sharply recently because of the way how
it is calculated. They have changed the method and are now excluding
mutual fund distributions.
Taking this into consideration it boils down to the fact that
savings in relationship to income are at a record low.
Furthermore it seems that the average American public has been on a
spending frenzy because they felt that they were rich because their
mutual funds had gained in value.
So what happens when the mutual funds go down and people do not feel
so rich anymore ?
BTW: At which levels do you want to see the P/E ratios ? Are we
looking for Japanese style P/E's when we were hitting 36,000 ?
Stocks are expensive and no "Baby boom" or whatever argument will
change that fact. When P/E ratios are approaching the average life
expectancy of the investing public then you get into the danger zone.
No one can imagine a company's earnings 40 years in advance because
you will be dead by then.
Gerrit
> In explaining the myth of irrational exuberance, I
> want to point out a few important reasons WHY investors are choosing
> stocks over other investments, and holding them during corrections.
>
> The primary reason can be explained using another basic concept of
> economics- opportunity cost. In terms of investing, the opportunity
> cost of any investment decision is what you could have earned had
> you invested in something else. Even though I would agree that most
> stock buyers have never even heard of the term opportunity cost,
> more and more of them are catching on to the effect this principle
> has on their investment returns. That is, they are accepting the
> fact that more people have LOST money by being OUT of the stock
> market than by being IN it.
>
> If you had your money in a bank CD last year because you thought the
> stock market was overvalued, you didn't earn 3%, you actually lost
> 27% because you could have earned 30% in the stock market. I
> obviously realize you can take the opportunity cost argument to
> extremes. Somebody could say most stock investors lost 70% last
> year because they had their money in the market as a whole and not
> in DELL exclusively (I'm using ballpark figures here).
>
> However, if you just look at the generally accepted benchmarks of
> investing- the S&P 500, Treasury Bonds, cash and CD's, precious
> metals, etc., I honestly believe that the average investor is
> catching on to the fact that being out of the stock market and in
> other investments is, over the long run, costing them money.
>
> Bears love to talk about the market crash of '87, but just how bad
> was it really? Investors who bought stocks on Jan 1, 1997 and
> didn't panic and sell, actually FINISHED UP for the year! Even the
> poor souls who invested every penny they had the day before the
> crash got all their money back within a couple of years, and within
> about four years they were well ahead of their cash and bondholder
> counterparts. Was investing all their money in the stock market the
> day before the crash and leaving it there really that bad of a
> decision?
>
> What the 1987 crash showed investors was that trying to time the
> market for most of them is a recipe for disaster. Everyone on this
> list knows timing the market can be profitable, but that simply
> doesn't ring true for the average investor. Once again, they know
> from personal experience that they've lost more money by being out
> of the market than by being in it.
>
> Magnifying this reason to "buy and hold" are the tax implications of
> selling. We all know these implications, but there's one important
> point to them that is easily overlooked. The more the market goes
> up, the harder the "penalty" for selling becomes to recuperate.
>
> For example, take an investor who bought shares of Dell just a year
> and a half ago at $20 per share. Suppose Dell's stock price
> collapses from its current price of 107 down to 80. Because of
> this, the investor contemplates selling his position, because he
> thinks he will get the chance to buy it back at an even lower price.
> Although the drop in stock price has been huge, this investor is
> still looking at a capital gain of $60 per share. Let's just use an
> even number for his capital gains tax rate and assume it's 20%.
> This means on his $60 per-share gain, he's going to have to pay $12
> per share in taxes.
>
> If you think about it then, this means Dell would have to drop from
> $80 to $68 in price before this investor could buy back his Dell
> position AND JUST BREAK EVEN! It's similar to options analysis. If
> you buy an option with an $80 strike price for $5, and the stock
> goes from 80 to 81, are you in the black? Of course not, that stock
> has to go to at least 85 before you're out of the red. When this
> investor knows that the long term track record is up, does it makes
> sense for him to give up 20% of his profits in an attempt to catch
> the bottom?
>
> I obviously understand anything taxed on a percentage basis is all
> relative, but the important thing to remember is that with every
> passing year that the market goes up, a smaller and smaller
> percentage of investors have any stock LOSSES to offset the gains,
> which therefore magnifies their importance. I also realize a lot of
> stock is held in tax-free retirement funds, which definitely offsets
> this effect somewhat. But I think the fact that money in 401Ks and
> IRAs can't be used until retirement also gives people a strong
> incentive to leave it alone and to leave it fully invested with a
> long term outlook. That outlook tells them stocks are the place to
> be.
>
> People aren't buying and holding stocks because it's "fashionable,"
> they're buying and holding them because it's the rational,
> intelligent decision when the long term track record of the stock
> market is looked at by itself, when compared to other investments,
> and when the tax consequences of selling are considered.
>
> Bruce
>
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