I have posted Entry #410 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called If You Are Truly Bullish on America, You Want Stocks to Be Priced Properly.
Juicy Except: Let’s say that the proper price increase for the last four years of the 1990s was 26 percent, the price increase you would see if the average annual gain of 6.5 percent applied. That would mean that the phony 126 percent price gain created by the bull market would be off by 100 percentage points. Having the stock market deliver a signal off by that much hurts us all in very serious ways.
One of the purposes of the signals sent by changes in stock market prices is to let entrepreneurs know what sorts of businesses need to be formed at a particular point in time. When the prices of the sorts of companies that do well in economic boom times rise rapidly, a signal is being delivered that we need more of those sorts of companies to be formed for our economic system to operate at maximum efficiency. If a false signal is sent — if the stock market tells us that we need more of the types of companies that do well in boom times at a time when we really need fewer of those types of companies and more of the types of companies that do well in economic down times — lots of companies that should not have been formed are formed and then lots of those companies fail when the economic realities reveal themselves and dispel the bull market illusions.
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