Heinz:
1. What's happening with the internet sector does not disprove my thesis, that the stockmarket is rational in the long-term and irrational in the short-term. The internet sector is so new, it doesn't yet have a longterm record on which to base valuations. I can't draw my trend lines yet for Ebay and DrKoop.fraud because there isn't yet enough data. By the time this industry has been around long enough for most of the players to have 5-year track records, I'm sure it will have gone through a vicious Darwinian process. Sort of like what happened to railroads in the late 1800s in the U.S. (a few were decent investments, 90+% went bust). That process already looks like it's beginning.
2. you said, "how do you explain a 200 p/e on the NAZ?" Every set of data points has a few outliers. Every bell-shaped curve has ends on either side that extend far outside two standard deviations from the mean. Statisticians throw out those "outlying data points" when they look for patterns. For the stock market, those "outside of the rules" events happened in 1929 and 1932, and now.
3. The longterm average of the market's PE (using trailing earnings) is 10-20. It recently hit 33. During the last real recession (early 1970s), the PE went to 6. That must be what you're expecting, a compression of PEs from 33 to 6. It won't happen. What you're missing is that there is a kernal of truth in the "New Era" euphoria. There is a general upsurge in productivity. The internet will improve business efficiencies, and tamp down the cyclic oversupply/undersupply events. And, for the best companies in the best industries, EPS growth of 30%/year long-term is not unreasonable. So, I'm far more optimistic than you. I think the market's PE will bottom out around 20, sometime in the next 2 years. And, until it does, I'm prepared to sit in a very defensive position.
The world is rational, Heinz. We just happen to be living at the edge of the bell-shaped curve right now. |
