November 25, 2001
From the desk of Jane Galt:We went to friends for
We went to friends for Thanksgiving, so on Friday, my mother cooked a whole new turkey just so we could have leftovers. Stuffed myself AGAIN.
Interesting discussion at the table about the meaning of the word "speculation" as applied to investments. My feeling is that any stock that's purchased with the expectation that some other idiot will buy it from you at a higher price is speculative. Basically, there are two different ways that stocks can be valued: either they are valued based on the cash that they will eventually return to their owners, either through dividends or through the company (or an aquisitor) repurchasing the stock; or they are valued based on the expectation that someone will pay a higher price for the stock later. This latter is called "the Greater Fool Theory".
So in other words, when you buy a stock, you are either betting on your ability to correctly evaluate a company's balance sheet and future growth potential, or you are betting that there is another, greater fool out there, and that you can correctly evaluate his psychology in order to sell at the right moment. That's why its speculative -- because unless you are PT Barnum, few of us have any idea which way the suckers are going to jump.
I think that we are still in the throes of the great idiot boom of the late nineties. Valuations seem to me, by any mathematical metric, to be insane -- no one could possibly think they're going to get that kind of money back out of these companies. But it's like the end of a relationship. We just can't believe it's over. We go out to dinner to see how things are going, and the next thing you know, we're giving it one more try. The rising market -- hey, it's just like it was a couple of years ago. Maybe this can work. We all know how this ends up -- you, a bottle of whiskey, and a lost weekend, followed by months trying to recollect that tattered shreds of your dignity.
To sum up -- THIS MARKET IS INSANE. Where is the good news coming from -- other than a relentless will to believe -- that would justify the resurgance of the Dow?
Interesting side note -- most people believe that the down bottomed out during the crash of '29. Actually, it bottomed out two years later, after several tenative rises. A warning light goes on in my head.
Posted by Jane Galt at November 25, 2001 08:39 AM | TrackBack | Technorati inbound links