I'm becoming a convert to new-paradigm thinking. For years now I've been focused on value and fundamentals, which is how I originally got into SUNW back in early 1995.
Recently, as this thread has witnessed, I've been struggling as SUNW has morphed from a value stock to a growth stock to one of the highest of the high fliers.
In particular, I've been chewing over Warren Buffet's assertion that "Investors as a whole cannot get anything out of their businesses except what the businesses earn" (Fortune, Nov. 22, 1999 p. 216). I believe this wholeheartedly. How, then, to justify holding SUNW, when the stock price is clearly far, far ahead of earnings?
In my thinking, I'm beginning to compare today's stock market new-paradigm debate with the debate over the abandonment of the gold standard many years ago. Obviously, today's currency isn't "really" worth anything, since its value isn't anchored to anything tangible, yet the currency system we have endures, enjoying a high degree of public confidence. Few people today think of the dollar as a house of cards, a bubble, or a secret Ponzi scheme.
I wonder if stocks aren't taking this idea to the next level, becoming, in effect, a kind of meta-currency whose value is not linked in a fixed way either to gold or to corporate earnings.
Of course this immediately begs the question, "So how does one value a stock?" I don't know. But I think it has to do with the idea that fundamentals can still anchor a stock -- just not with a chain; rather, with an elastic tether. Thus, gold still has a price, even though we've abandoned the gold standard, and a future earnings stream has a price too (the stock price), even though a PEG of 1.0 is no longer the benchmark for fair valuation.
A dollar is worth what people collectively believe it to be worth. So too with a share of stock?
-Alex |
