Ask Mohan about the Market Message Board

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Pastimes : Ask Mohan about the Market

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To: Jay who wrote (10636)	12/9/1997 9:04:00 PM
From: Rational	Read Replies (1) of 18056

Jay: I found your following statement thought provoking! Things look pretty grim now - should we be bearish or bullish? Logically, bears (I have none in mind) should be thinking that the bulls are dumb to imagine that everything looks rosy, while the bulls (again I have no one in mind) must be thinking that bears are too stupid to believe that things can get worse. This is an ongoing tug-of-war between bears and bulls that engender an equilibrium market price. This market price is not necessarily a "fair" value of an asset as a professor of finance can comfortably claim in an MBA class. In fact, professors of finance (notably Grossman and Schiller) have shown, in well-cited empirical research, that stock prices are not the discounted expected future streams of dividends, which they should be. Of course, this outright condemnation of the stock market valuation is somewhat moderated by subsequent research that shows that we observe (at any given time) only a subset of all firms that once operated, i.e., we see only the surviving firms ... Thus, whether or not the situation is grimmer than that the current prices reflect is difficult for a bull or bear to judge, until they bet their money in the tug-of-war to change the price one way or the other! Best of luck to bulls and bears!! Sankar

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