In his latest piece titled – A Viral Market Update IX: A Do-it-Yourself S&P 500 Valuation, Aswath Damodaran discusses the disconnect between US Equities, which are climbing back towards pre-crisis levels, and an economy where consumer confidence and spending are plummeting, the ranks of the unemployed rising, and professional economists are painting a picture of impending doom. He provides the following warning to investors who believe they are the only ‘sane’ ones left during this period of irrationality saying:
Every investor has a narrative, sometimes explicit and sometimes implicit, about how the economy and markets will evolve over time. Markets reflect a collective narrative across investors, and there are times when your narrative will be at odds with that of the market. It is during those times that you will feel the urge to label markets as crazy or irrational, and to view yourself as the last sane investor left on the planet.
While I understand that urge, it is my experience that projecting your personal fears and hopes on to the market, and then getting angry when the market responds differently is a recipe for frustration and dysfunctional investing. That is not to say that markets cannot be wrong, but even if they are, a dose of humility is always in order, and there is always something that can be learned from market movements. Right now, it is true that markets are collectively more upbeat about the future than most economists/market experts, but given their relative track records over time, are you really more willing to trust the latter? I most certainly am not!
You can read the entire article here: Aswath Damodaran – A Viral Market Update IX: A Do-it-Yourself S&P 500 Valuation.
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