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Pastimes : The Naked Truth - Big Kahuna a Myth
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To: Defrocked who wrote (73605)11/4/1999 10:55:00 AM
From: BGR  Read Replies (2) of 86076
 
The analysis here is flawed for several reasons.

1. It tries to forecast future performance, but ignores
future cash flow estimates altogether. A firm's value, of
course, depends on its future discounted cash flow. By that
measure, DJIA may or may not be overvalued, but any
analysis is incomplete w/o that measure.

2. It then presupposes that Oct '99 will be a major stock
market top based on the incomplete analysis. (Even if the
analysis was complete, it is hard to forecast market tops
as similar arguments have been true for about the last 2
years or so, and the market has continued to go up.)

3. It then does an arithmetic average of future returns for
previous market tops to estimate future returns from '99
going forward. Arithmetic averages are most skewed by
extreme values than other averages and no wonder that
the '29 figures contribute heavily in this regard. W/o '29,
the 1 year figure would be a -17.7% return. Now given that
the DJIA dipped some 11% from its peak in the last few
months and then recovered, I think only traders are going
to get excited over the slightly larger forecasted one year
dip.

In summary, investing on the basis of such simplistic
spreadsheets is something I would personally strongly
recommend against. This is no different that chart
overlaying, which seldom works. But the human propensity
to mine data nevertheless continues to be a driving force.

-BGR.

PS: I think it is quite clear that '29 was a special case.
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