We are pushing the envelope in terms of value growht on almost all major asset classes. What people forget is that “good times don’t last forever and bad times don’t last forever.”
One cannot assume that the good earnings and the good returns in the stock market are not based on historical averages, yet people assume it does. Why do people ignore history? Why is it that, for the last 143 years of stock market history, when people are most pessimistic, stocks go up soon after. When people are most optimistic, stocks typically fall. Is that coincidence? Really? Think about it…we’d all love to think it would be just coincidence, but it’s not. When PE 10 is highest, the following 10 year returns are well below historical averages and vice versa when the PE 10 is lowest. Yet, people love stocks when PE 10 is highest and hate them when PE 10 is lowest. THINK ABOUT IT!
The one thing I found interesting is that people do extrapolate short term results almost to perpetuity. Look at what is happening now. Long term interest rates are at all time HISTORICAL lows that have never been seen and everyone says that PEs on stocks should go up because of this. Well what about when interest rates were at all-time highs back in the early 80s? Did those rates stay up there forever? No! So were those values on stocks reflective of the future? Absolutely not. You CANNOT extrapolate short term results indefinitely into the future. This is why HISTORY MATTERS SO MUCH! It is all relative. How do fundamentals look now versus history? Have the things that have caused short term increases or falls look like they can last a longer period of time?
Think about these things before buying an investment. Look at history and see what it can teach you. As they say, it may not repeat itself, but it will rhyme.