Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: Rick McDougall who wrote (95992)	9/28/2003 1:09:34 AM
From: maceng2	Read Replies (1) \| Respond to of 116781

OK one last one (and most interesting... have we got a reversal?) moneytalks.net Friday, September 26, 2003 Are We Nuts When It Comes To Stocks? By John Mauldin September 26, 2003 <"Where," he asked, "is the stock market going? Will it go higher before the end of the year?" It was of more than academic interest to Butch, as he had December '03 LEAPS put options (a bet the market was headed down), which are losing value every day as the market goes up.> Yet, some academic economists are beginning to assert that the Theory is fundamentally at odds with reality. Some of us less scholarly types simply note that it is a silly way to look at the world, the economic equivalent of asserting it is mathematically impossible for bumblebees to fly. It demonstrates that just because an academic, even a Nobel Laureate, presents mathematic "proof" of a proposition, we would be wise to examine the assumptions made in developing his theory. As we will see, the Theory does not hold up well under examination.> <(Why is this important to you as an investor? Because marketing types will use it to demonstrate that you should invest in certain ways, like buy and hold stocks and mutual funds. How can you disagree with an idea that won a Nobel Prize? "Trust me," are at least trust the Nobel genius, "you are told." I should note that the vast majority of Nobel economic laureates deserve your trust for their ideas, but there are a few that either get very abused by those who want to sell you investments, or they make nice theories, but bad investments.)> <"I know this card. I have studied it. I have a personal involvement with the card, therefore it is worth more," thinks the investor. Of course, it is worth no more than in the first case, but the psychology of "owning" the card makes investors value it more. Hold this thought as we explore the next idea.> <"...there is no reversal in fundamentals to match the reversal in returns. That is, as favored stocks go from outperforming the market, their fundamentals do not deteriorate significantly, in some case they actually improve.... The fundamentals of the 'worst' stocks are weaker than both those of the market and of the 'best' stocks in both periods."> <"Thus, while there is a marked transition in the return profiles [share price], with value stocks underperforming growth in the prior period and outperforming growth stocks in the measurement period, this is not true for fundamentals. In nearly every panel [areas in which they made measurements], fundamentals for growth stocks are better than those for value stocks both before and after portfolio formation."> <"Although there is a major reversal in the returns [prices] to the best and worst stocks, there is no corresponding reversal in the fundamentals." In fact, in many cases the fundamentals continue to improve for the growth stocks and deteriorate for the value stocks. The data and the graphs clearly show the fundamentals for the growth stocks clearly beat those of the value stocks even for the five years after portfolio formation.> <"We conclude," they write "that the cause of the major price reversals is psychological, or more specifically, investor overreaction.">