This isn't new territory
Submitted by DaveinHackensack (not verified) on Wed, 2009-12-02 12:27.
I imagine people were thoroughly disgusted and convinced that the stock market is a money pit. Those would've been the best times to invest.
Well, to be accurate, the ends of those periods would have been the best times to invest. This isn't new territory though. See, for example, Vitaliy Katsenelson's thesis on secular markets.
Because I believe in the efficient market hypothesis
The efficient market hypothesis is sort of in tatters today, at least the strong version of it. It's mostly true over the long term, but not in the near term. This is an observation that precedes the term "Efficient Market" itself, since it was encapsulated in Benjamin Graham's old aphorism that the market is a "voting machine" in the short term but a "weighing machine" in the long term.
For some examples of why the market isn't fully efficient in the short term, you could look up a number of stocks that were trading for less than their net cash earlier this year (e.g., USEG, KSW). Reasonable people can disagree on what a particular going concern is worth, but who would argue that the underlying, unencumbered, business of a company plus its potential future cash flows, its fixed assets, etc., should be worth a negative number? And yet that's exactly what the market was saying by valuing some companies at less than the net cash they had on their books. If the market were fully efficient, these companies would not have traded for less than their net cash.
If the market were fully
Submitted by Constant_ (not verified) on Wed, 2009-12-02 17:28.
If the market were fully efficient, these companies would not have traded for less than their net cash.
I can conceive of reasons one might value a company at less than its net cash, for example a nonzero probability that the cash will be wasted. I don't mean the CEO is expected to gamble it away in Las Vegas. I mean it might be wasted in perfectly ordinary ways, such as continuing to pay the salaries of the employees without enough revenue to replenish the cash.
In principle, of course, the stockholders could vote to immediately liquidate and sell the company's assets, but there practical problems with this. Nor do I think that would be a violation of the EMF, as I understand the EMF to concern trading assets, not controlling them.
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