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This is simply not true. The stock market is notoriously short sighted. Many investors are playing a game of musical chairs/the bigger fool because they know th

This is simply not true. The stock market is notoriously short sighted. Many investors are playing a game of musical chairs/the bigger fool because they know the economy works in a cyclical fashion with alternating booms and busts. So during boom times (now) investors will continue to push money into the market, pumping up PE ratios, with each investor thinking he/she is smart enough to exit before the next bust. If anything, the markets are even more short-sighted today due to the increase in popularity of arbitrage-seeking algorithmic and high-frequency trading, which is the anthesis of value investing. I'd argue we are seeing the same mechanisms at work in the private tech investing space, and that once companies start to go under, those who have not exited from their investments are likely to get burned big time.

paulpauper 11y ago
But PE ratios today, unlike in the late 90's, are not that high. Stocks, especially large cap technology and large-cap consumer like Nike and Disney, may still be a good value
- AngrySkillzz 11y ago
  I'm not sure if I would call them "not that high", the CAPE is still fairly high by historical comparison. [1] Just not absolute lunacy like around 2000. [1] http://www.multpl.com/shiller-pe/ http://www.multpl.com/shiller-pe/
- roymurdock 11y ago
  It's a safe bet that most blue-chip companies with stable revenues and time-tested business models will be just as big, if not bigger in 10-20 years. They'll take a hit when the economy inevitably enters the bust phase of the business cycle, but people will still be buying shoes and coke. It's the PE of companies like Facebook and Twitter, who derive their earnings from questionable business models (notoriously hard to measure ROI on advertising, millions of fake/spam accounts, possibility of disruption ala Myspace) that I would be concerned about.
WalterBright 11y ago
Which companies do you believe are eating their seed corn, and are you shorting their stock?
- Frqy3 11y ago
  “The market can stay irrational longer than you can stay solvent.” Often attributed to Keynes, though may have originated with Shilling (or been in common use).
  - JesperRavn 11y ago
    It's just not right. Given the existence of options, shorting is no more bound by liquidity than being long on a stock. Imagine saying "Stock X is great, but the market can undervalue X longer than I can stay solvent"?
    - tbrownaw 11y ago
      The control against companies staying undervalued for too long is acquisitions. Plus of course, it's possible to buy stocks and hold them long-term without worrying about margin calls forcing you out.
- roymurdock 11y ago
  I just finished my undergrad studies, so I don't have any spare money to gamble on the market. If I did have extra capital, I would keep 95% of it out of the market, use 5% to buy 1-month Facebook put options at a $92.5 strike, wait for a correction in real-estate prices, and use the untouched 95% to purchase some property in Inglewood and Compton, CA.
  - WalterBright 11y ago
    If you're sure a stock is overvalued, then it isn't gambling :-)
WalterBright 11y ago
> they know the economy works in a cyclical fashion with alternating booms and busts. It's a chaotic system with an upward bias. Cyclical implies temporal predictability, and good luck with that :-)
- roymurdock 11y ago
  > Cyclical implies temporal predictability Sure, I can say with 99.9% certainty that the economy will contract within the next 100 years. Shorten the time frame and my confidence level will drop accordingly. I'd probably have a 0.1% probability of guessing within 30 days of when the business cycle will reverse.
  - WalterBright 11y ago
    You're describing a characteristic of a chaotic system. People who have tried to make money using cyclical predictions of the stock market have terrible returns. The only things stock market cycle theories predict is the past.
  - JackFr 11y ago
    I think your mental model is not quite there. The stock market is a leading indicator of the business cycle.

paulpauper 11y ago

But PE ratios today, unlike in the late 90's, are not that high. Stocks, especially large cap technology and large-cap consumer like Nike and Disney, may still be a good value

AngrySkillzz 11y ago
I'm not sure if I would call them "not that high", the CAPE is still fairly high by historical comparison. [1] Just not absolute lunacy like around 2000. [1] http://www.multpl.com/shiller-pe/ http://www.multpl.com/shiller-pe/
roymurdock 11y ago
It's a safe bet that most blue-chip companies with stable revenues and time-tested business models will be just as big, if not bigger in 10-20 years. They'll take a hit when the economy inevitably enters the bust phase of the business cycle, but people will still be buying shoes and coke. It's the PE of companies like Facebook and Twitter, who derive their earnings from questionable business models (notoriously hard to measure ROI on advertising, millions of fake/spam accounts, possibility of disruption ala Myspace) that I would be concerned about.

WalterBright 11y ago

Which companies do you believe are eating their seed corn, and are you shorting their stock?

Frqy3 11y ago
“The market can stay irrational longer than you can stay solvent.” Often attributed to Keynes, though may have originated with Shilling (or been in common use).
- JesperRavn 11y ago
  It's just not right. Given the existence of options, shorting is no more bound by liquidity than being long on a stock. Imagine saying "Stock X is great, but the market can undervalue X longer than I can stay solvent"?
  - tbrownaw 11y ago
    The control against companies staying undervalued for too long is acquisitions. Plus of course, it's possible to buy stocks and hold them long-term without worrying about margin calls forcing you out.
roymurdock 11y ago
I just finished my undergrad studies, so I don't have any spare money to gamble on the market. If I did have extra capital, I would keep 95% of it out of the market, use 5% to buy 1-month Facebook put options at a $92.5 strike, wait for a correction in real-estate prices, and use the untouched 95% to purchase some property in Inglewood and Compton, CA.
- WalterBright 11y ago
  If you're sure a stock is overvalued, then it isn't gambling :-)

WalterBright 11y ago

> they know the economy works in a cyclical fashion with alternating booms and busts. It's a chaotic system with an upward bias. Cyclical implies temporal predictability, and good luck with that :-)

roymurdock 11y ago
> Cyclical implies temporal predictability Sure, I can say with 99.9% certainty that the economy will contract within the next 100 years. Shorten the time frame and my confidence level will drop accordingly. I'd probably have a 0.1% probability of guessing within 30 days of when the business cycle will reverse.
- WalterBright 11y ago
  You're describing a characteristic of a chaotic system. People who have tried to make money using cyclical predictions of the stock market have terrible returns. The only things stock market cycle theories predict is the past.
- JackFr 11y ago
  I think your mental model is not quite there. The stock market is a leading indicator of the business cycle.