“During a Bull Market, Everything Is Running on Pretend Money. Money Is Fungible. It Flows Everywhere. Bull Markets Mess Up Our Entire Economic System.”

Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:

What a pathetic and uniformed response. The growth is ACTUAL revenue, not the stock price. The capital is what helps you find programs that cause the revenue growth.

When a company has a double digit growth rate, the value is higher than a business that has flat growth.

So, tie it all together……tight capital leads to slower or no growth, which then impacts valuation.

What do you think the word “overpriced” means, Sammy?

Stocks were priced at three times fair value in 2000. That means that, to know the true value of your portfolio, you had to divide by three. Does that not follow?

The dollar value of the overvaluation was $12 trillion. Where do you think that all that money went? It went into the pockets of consumers, who used it to buy things, and those purchases caused the profits of the sorts of companies you are talking about to increase.

During a bull market, everything is running on Pretend Money. Money is fungible. It flows everywhere. Bull markets mess up our entire economic system.

Either you believe that the nominal price of stocks is real (the Buy-and-Hold position, rooted in the research of Eugene Fama) or you believe that valuations affect long-term returns (the Valuation-Informed Indexing position, rooted in the research of Robert Shiller). Both cannot be right. They are saying opposite things.

Is Shiller “pathetic and uninformed”? Why was he awarded a Nobel prize? Has the committee that awards the prize gotten in the habit of handing it out to people who are “pathetic and uninformed”?

The words “pathetic and uninformed” mean something very different to Buy-and-Holders than they mean to anyone else who uses them. To a Buy-and-Holder, anyone who thinks that Eugene Fama is wrong and Robert Shiller is right is “pathetic and uninformed.”

I don’t buy it. If Buy-and-Hold were a legitimate strategy, it would be possible to make the case for it without resorting to the use of words like “pathetic” and “uninformed.” Discussions with Buy-and-Holders always end with them resorting to that sort of language because since 1981 there has been no rational case that can be made for it. Once Shiller showed that valuations affect long-term returns, the intellectual case was settled.

What has been keeping Buy-and-Hold alive for the past 35 years is that it is a huge money maker for the people advocating it and they don’t want to give up their cash cow. There is nothing else. Either the market is efficient or valuations affect long-term returns and there is now 35 years of peer-reviewed research showing that valuations affect long-term returns.

That’s my sincere take re these terribly important matters, in any event.

Rob