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Pastimes : The Justa & Lars Honors Bob Brinker Investment Club
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To: Hank Stamper who wrote (11847)2/10/2000 8:43:00 PM
From: Chris J. Horne  Read Replies (1) of 15132
 
"I just have a hard time wrapping my mind around this."

The best way I can express the reasons why I do not believe PEs have the significance they used to...is the way I already have.

To reiterate:

There is a tidal wave of money from baby boomers chasing the tech stocks. Most of these people don't know PE from ABC. More money chasing a finite amount of stock results in higher prices.

In the past, there was never an inflow of money like there is now on a constant basis. Month after month, 401k / 403b contributions flow into the market. Year after year, IRA contributions flow into the market. Small investors have created a whole new industry of online brokers. This massive inflow is distorting the traditional measures.

Valuing stock using traditional PEs work on the principle that stocks have an inherent value...calculated by discounting future earnings. You could look at a home...and say it has an inherent value...say the price of the materials. However, if there is a lot of money chasing that home, it can sell for many many times its "inherent" value. That is what is happening to stocks now.

There is so much money flowing into the market, stocks are being "bid up" way beyond what people would pay for them in the past. And many of the buyers do not care what the projected earnings are.

Does this mean we will not have a bear market before the demographics shifts? I have no idea, but one might theorize that massive amounts of money flowing into the market could limit downside risk. Bob's model does not seem to consider money flowing into the market.

Hey, I am basically traditional too...and conservative. I took Bob's advice and sold out over half of my position.

If you do not believe something has changed, how do you explain the record PEs? statistical aberation?

Please do not get worked up over this. I think we all need to kick around ideas...and try to make some sense out of what is going on.

I have not studied events that lead to the rise and fall of the Japanese stock market, so I cannot comment on it.
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