A Rich Life

The Old Ideas on Saving & Investing Don't Work -- Here's What Does

Valuation-Informed Indexing #647: Stock Investors Have to Know That They Are Wrong All Along for Prices to Eventually Correct

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I’ve posted Entry #647 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stock Investors Have to Know That They Are Wrong All Along for Prices to Eventually Correct.

Juicy Excerpt: Investors must be at least somewhat rational. If they were not, the mispricing would continue forever. In fact, it would get worse over time. Investors misprice stocks for the same reason that bank robbers rob banks – that’s where the money is. When we push stock prices higher than they should be, it’s as if we are all voting ourselves raises. Why wouldn’t we do that?

But we don’t do it forever. We push stock prices up and up and up and then – down? We eventually push stock prices back down. Irrational exuberance is a temporary phenomenon. Why do we do this crazy thing that seems to run so counter to our self-interest?