Set forth below is the text of a comment recently posted to the discussion thread for another blog entry at this site:
“It is true that we cannot know the fair-value price for stocks with absolute precision. If our economy becomes more productive for an extended period of time, the fair-value CAPE level will go higher If it becomes less productive, the fair-value CAPE will go lower. There is no way to know at any moment in time whether the fair-value CAPE is in the process of rising or falling. It is possible that the fair-value CAPE today is 15 or 17 rather than 16.”
My argument is not that we can’t know the exact “fair-value” but rather that such a thing does not exist.
The value of a financial asset or group of assets is determined by what the market is willing to pay.
If you are trying to buy a used car you might look up the Kelley Blue Book value. This is not some arbitrary number that a self appointed expert says is the fair-value price of the car but rather a value determined by a survey of actual sales and the prices paid for those cars. if no-one is willing to pay $10,000 for a car then the car is not worth $10,000 no matter how much wishful thinking is involved.
The difference between the car market and the stock market is that honest posting is permitted in the car market. If the engine of one car model always breaks down, people would write about that and car buyers would assign a lower value to that model. That’s how markets work.
This is why I am always saying that we need to open every discussion board and blog on the internet to honest posting re the last 39 years of peer-reviewed research in this field. If investors had access to honest and informed takes, they would see to it that stocks were priced properly by buying more stocks when the value proposition was strong and fewer stocks when the value proposition was poor.
That’s the entire debate. For so long as honest posting re the peer-reviewed research is prohibited, the thing that we call the stock market is not truly a market at all. It is a scam. I want to see a real stock market. I want to see a stock market that functions properly. A market that produces a CAPE value of 29 is not a market that is functioning properly.
Make sense?
Functioning Stock Market Advocate Rob
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