26 January 2011

Market Valuations

The Mad Hedge Fund Trader explains a market philosophy:

Karl is convinced that the current move up in equity markets is a load of baloney and is nothing more than a replay of the dotcom bubble of the 1990’s. One of many measures he tracks is the ratio of stock prices to underlying tangible asset value. A low number is good and a high number is bad. It hit two during the nineties, rose to 4 during the crash, and has since soared to 12 today, six times the bubble peak.
Rising values today are being driven by multiple expansion and this will only end in tears. Flavor of the day “cloud computing” companies are trading at multiples of over 100. Sound familiar? Traditional cost/push inflation, which historically takes eight months to hit stock prices, started in earnest six months ago.

Always look at fundamentals.  If you’re going to play the market, don’t get caught up in hype.  Instead, stay grounded in reality.

Always ask yourself, what products or services does this company provide?  What’s the long-term tenability of their product?   How much hype surrounds this company?  What’s its P/E ratio?  What’s its track record?  How much debt is it holding?  What is the value of its assets?

Trying to play the market by guessing tomorrow’s valuations is risky and dangerous.  This method is very susceptible to bubbles.  Stick to the basics, and play it safe if you want to win in the long run.  Of course, if you really want to win in the long run, you should buy silver.

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