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OK, I admit the title looks deceptively simple but I am not going to go into a discourse on valuations because it is a dry and boring topic and one is probably better off reading “Security Analysis” by Benjamin Graham and David Dodd. This post serves as a sort of warning and wake-up call that valuations, in time, will always revert to the mean and that “cheap” valuations will not stay for the long-term. Just as irrational exuberance was expounded as a leading cause of high and unsustainable valuations, irrational pessimism is the exact opposite and leads to the converse.
Of course, one may argue that just 9 months ago, economists and many educated individuals were pronouncing that global growth would be negative and that the stock market may stay at depressed valuations for 10 years at least. The doomsayers and prophets foretold of a dark period where wages struggled to remain at current levels and economic growth was all but non-existent. On hindsight, everyone (including myself) believed them because the situation back then seemed so bleak, so hopeless, that one could not have imagined otherwise.
There is a certain limit to human imagination and certain events are of such a huge magnitude that it literally blows one’s mind away, leaving it to struggle to absorb new realities among the vestiges of the broken financial system. Such an event occurred one year ago in September 2008 with the collapse of Lehman Brothers; which propelled the world on the brink of financial disaster akin to the effects of an atomic bomb spreading out like a mushroom cloud across the world. That single event was cataclysmic in its effects and a huge destructive ripple spread across all financial institutions, threatening to shut down the global finance system and wreck chaos. In disaster movie jargon, we would have called it “Financial Armageddon”, or so it seemed. Read more...[caption id="attachment_1979" align="alignright" width="150" caption="Photo by coda"][/caption]
OK, I admit the title looks deceptively simple but I am not going to go into a discourse on valuations because it is a dry and boring topic and one is probably better off reading “Security Analysis” by Benjamin Graham and David Dodd. This post serves as a sort of warning and wake-up call that valuations, in time, will always revert to the mean and that “cheap” valuations will not stay for the long-term. Just as irrational exuberance was expounded as a leading cause of high and unsustainable valuations, irrational pessimism is the exact opposite and leads to the converse.
Of course, one may argue that just 9 months ago, economists and many educated individuals were pronouncing that global growth would be negative and that the stock market may stay at depressed valuations for 10 years at least. The doomsayers and prophets foretold of a dark period where wages struggled to remain at current levels and economic growth was all but non-existent. On hindsight, everyone (including myself) believed them because the situation back then seemed so bleak, so hopeless, that one could not have imagined otherwise.
There is a certain limit to human imagination and certain events are of such a huge magnitude that it literally blows one’s mind away, leaving it to struggle to absorb new realities among the vestiges of the broken financial system. Such an event occurred one year ago in September 2008 with the collapse of Lehman Brothers; which propelled the world on the brink of financial disaster akin to the effects of an atomic bomb spreading out like a mushroom cloud across the world. That single event was cataclysmic in its effects and a huge destructive ripple spread across all financial institutions, threatening to shut down the global finance system and wreck chaos. In disaster movie jargon, we would have called it “Financial Armageddon”, or so it seemed. Read more...
[/caption]
OK, I admit the title looks deceptively simple but I am not going to go into a discourse on valuations because it is a dry and boring topic and one is probably better off reading “Security Analysis” by Benjamin Graham and David Dodd. This post serves as a sort of warning and wake-up call that valuations, in time, will always revert to the mean and that “cheap” valuations will not stay for the long-term. Just as irrational exuberance was expounded as a leading cause of high and unsustainable valuations, irrational pessimism is the exact opposite and leads to the converse.
Of course, one may argue that just 9 months ago, economists and many educated individuals were pronouncing that global growth would be negative and that the stock market may stay at depressed valuations for 10 years at least. The doomsayers and prophets foretold of a dark period where wages struggled to remain at current levels and economic growth was all but non-existent. On hindsight, everyone (including myself) believed them because the situation back then seemed so bleak, so hopeless, that one could not have imagined otherwise.
There is a certain limit to human imagination and certain events are of such a huge magnitude that it literally blows one’s mind away, leaving it to struggle to absorb new realities among the vestiges of the broken financial system. Such an event occurred one year ago in September 2008 with the collapse of Lehman Brothers; which propelled the world on the brink of financial disaster akin to the effects of an atomic bomb spreading out like a mushroom cloud across the world. That single event was cataclysmic in its effects and a huge destructive ripple spread across all financial institutions, threatening to shut down the global finance system and wreck chaos. In disaster movie jargon, we would have called it “Financial Armageddon”, or so it seemed. Read more...
