rydad,
But what is the probability that a stock will go to zero?
Very small, but finite. If a company goes bankrupt, the chances of you ever selling your shares is remote. I still own some shares of ARCH, a stock that is up 360% from it's all time lows, at 3.6 cents a share. That also happens to be 99.96% off it's all time high of 92.25. Toward the end of July, you could have bought it at a price you would think could not possibly go lower, a dime. It is down 64% from that level, and was down 90% at the low. It was not too long ago this was a multi-billion dollar company in an industry with a bright future. At this point it will be a miracle if it survives
Anyways, wouldn't you think that we are closer to the bottom of the market than the top and if we did get a substantial further dip, eventually we will head upwards again.
Yes, of course it is true that the Nasdaq is closer to the bottom than the top. Once the index fell more than 50% from 5132.52 high it was by definition closer to the bottom than the top. But that was the prior top, and that is history. The question is not where we are in relation to historical highs, but where we are in relation to the levels that can be achieved in the future. There is no guarantee the Nasdaq will ever get back to 4000. If it does, it will probably be as a result of dropping all the dog stocks out of the index. Nasdaq delists stocks that fall below $1 in value, and don't forget that the Nasdaq index is weighted roughly by market capitalization. That means when a stock dies it can no longer affect the index Were that not the case, the index would never have gotten so high, and if it had to take all the stocks with it that were included at the high, it might never get there again. The index will someday be driven higher by companies that survive and grow strong, but there's going to be a lot that never make it.
For the Dow Jones Industrials, and the S&P indices, you cannot argue that the bottom is farther away than the top. Most of us hope it is, but strong arguments can be made that much more than another 20% is possible based on historical valuations, disenchantment with the market, and global economic issues. If you look for them, you can find prophets of doom very easily. These indices too drop stocks that fall out of favor, and replace them with stronger ones, so you cannot assume that the historical performance of the indices is indicative of the strength of the market as a whole.
Dan |
