More on the gold standard and today's unprecedented stock valuations (which I first wrote about in Message 12226102 ):
A piece in today's (1/1) New York Times notes:
"As the 20th century began, high-yielding railroad shares were virtually the only blue-chip American stocks that a conservative investor would consider. As it ended, the most popular stocks were being issued by young companies that had never earned a dollar, let alone paid a dividend."
Investors have shifted from seeking high dividends, to seeking strong earnings, to seeking strong earnings growth, to seeking companies with good prospects to make money someday (Sun of course makes money, but its valuation is based on a glowing appraisal of its future prospects).
In other words, over time we've gone from a focus on cash-in-hand to a focus on possible cash farther and farther into the future. This process, it seems to me, bears a striking resemblance to what has happened with money and currency over the centuries, where we've gone from a barter system (which is actually pre-money) to coins, to paper money pegged to gold, to "just" paper money, to even more abstract devices such as credit cards (which of course are not money strictly speaking). Again, the prospect of realizing a benefit has been pushed farther and farther into the future.
These two phenomena, I think, bear more than a superficial resemblance. I believe they are both manifestations of increasing confidence in their respective underpinning institutions, many of which they share in common. For example, I am pretty sure the United States will still be around in 2100. I don't think I would have had the same confidence about the 100-year outlook in 1900, 1916, 1943, or 1963. Similarly, I am more confident in today's accounting standards (imperfect though they are) than I would have been in the accounting "standards" during the days of the robber barons. Further examples abound.
So, assuming that human nature has not changed and that people now have the same risk tolerance as people 100 years ago, increased confidence in the future would naturally lead to planning and wagering that is more future-based. A prudent person will worry about the short term if the short term is not guaranteed. The same person will shift his attention to longer and longer terms to the extent that the short term becomes more assured.
Therefore, I propose that today's lofty stock valuations may be part of a secular trend toward increased confidence in the future, and may -- may -- be entirely legitimate.
-Alex
P.S. Thanks to all the Sun bulls and bears who liked my previous post on this subject and said so. |
