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The market is overvalued when the price-to-earnings ratio is too high (ie, valuations outweigh the actual money that a company makes). When it gets really high,
by _rohan 6y ago
The market is overvalued when the price-to-earnings ratio is too high (ie, valuations outweigh the actual money that a company makes). When it gets really high, investors can panic, and sell stocks, driving prices down and hence reducing the PE ratio.
The alternative I’m describing is one where panic selling doesn’t occur. Earnings can continue to rise (because earnings reflect consumer spending and other similar trends), whereas prices don’t go up as much because market speculation reduces and people are less bullish. It doesn’t have to devolve to panic selling.
- lottin 6y agoBitcoin has no earnings so I don't know how that could possibly work in the case of the bitcoin bubble.
- frankbreetz 6y agoI think growth in value could be substituted for earnings in the case of something like Bitcoin or a stock without dividends
- lottin 6y agoI don't think so, because we're using earnings precisely to assess if the observed increase in value is justified. Stocks without dividends are not a problem, because businesses always have earnings regardless of whether they distribute dividends or not.
- hiq 6y agoI think OP was talking about a possible market bubble, not Bitcoin.
- shrimpx 6y agoIt seems like the unlikely alternative. What would motivate everyone to keep money in assets that aren’t moving, or barely moving? Perhaps if there are zero alternatives — nothing is growing faster — then yeah... That’s hard to imagine.