Valuation-Informed Indexing #437: The Stock Market Requires Valuation-Informed Investors to Function Properly

I’ve posted Entry #437 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Stock Market Requires Valuation-Informed Investors to Function Properly.

Juicy Excerpt: By following different sweater-buying practices, that sweater buyer is helping the sweater market to function properly. The companies that make sweaters and the stores that offer them for sale can afford to make more sweaters available at times of high demand if they know that, should they miscalculate in their assessments of the strength of the market, they will be able to sell those left-over sweaters to the customers who put getting a good price above all else, the contrarians. Contrarians grease the wheels of commerce. They are essential to efforts to make those wheels turn around smoothly.

So it is in the stock market. The conventional view is that stock price increases are always good and stock price drops are always bad. That is of course not so. The best stock prices are those that place stock prices at fair-value levels. Stock price increases that push the CAPE value above 16 are bad and stock price drops that push the CAPE value down closer to 16 are good. So stock price contrarians play an important role in keeping the market functioning well. When there are too few contrarians, prices spin out of control. A stock market without contrarians is a fast-moving car without brakes — plenty exciting but also plenty dangerous.