Hussman had another great one a few weeks ago. Highly recommended.
hussmanfunds.com
Can we rely on investor myopia?
Over the past decade, it has been an uncomfortable lesson to accept that investors can be relied on to behave in ways that are ultimately unsustainable and destructive to their wealth, as long as market internals are temporarily supportive. It's one thing to say, "From every historical precedent, we know that this is going to end badly, and investors will lose a great deal of their wealth, but for now, they are speculating anyway." It's another thing to add, "and since they are, we are actually going to rely on investors to continue behaving dangerously, and join them."
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In reflecting on why the past 15 years have been so riddled by irresponsible speculation, it is impossible to ignore the rise over that same period of widely-viewed financial programming that is equally riddled with cartoonish content that encourages short-term thinking and speculation (buy-buy-buy! sell-sell-sell! boo-yah!). When we observe a clear change in the quality of analysis on the financial news, and the departure of its more speculative elements, I suspect we'll also see greater emphasis on fundamentals and better allocation of capital, while speculation will be less effective in the face of overvaluation.
During the late-1990's bubble, it struck me that the discourse on CNBC was remarkably similar to the sort of discourse that I had read from news archives preceding the 1929 crash. As I wrote at the time, what was surprising was the extent to which investment professionals, who ought to have known better, were fully endorsing valuations that were clearly inconsistent (at the time, and certainly in hindsight) with prospective cash flows - even if one assumed that economic activity, earnings, and dividends would achieve and sustain the highest growth rates ever observed in history.
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To analyze a company or the market, you have to think carefully about the long-term stream of cash flows that investors actually stand to receive, and how they should be discounted to arrive at an appropriate price. Instead, the only question today is whether earnings and economic reports are delivering "surprises" versus what "the Street" estimated the day before the data was released. The quality of earnings, the cyclicality of profit margins, dilution from option and stock grants, the implied total return reflected in the stock price, the return on retained earnings, cost of entry, competitive structure, market saturation, the potential for organic growth from reinvested capital - all of those things matter over the long run. But to watch a half hour of CNBC today is like watching an old episode of Gomer Pyle ("Well, surprise, surprise, surprise!").
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