Foreword
This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.
I keep hearing people say that stocks are cheap, because they are 10, 20 (or in some cases 90)% below their peaks. Are they though?
As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.
If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.
Bovine Stool
For the sake of decorum, let’s say I have a pile of, ahem, bovine stool. Let’s just call it BS for short.
OK, I have a pile of BS. It’s a pretty big pile. Are you willing to pay me $1m for it?
No?
What about $500k! It’s 50% off from peak!
Would you buy my BS for $500k?
Last offer, $100k, 90% off! Yes?
EMH
One criticism I hear of the example above, is some form of EMH style argument — Markets are efficient/smart/sortof-efficient/whatever, so if you buy at this temporary dip, you’ll make a lot of money.
Cool, if markets are efficient/whatever, what makes you think it was efficient then, and not efficient now?
Or, maybe, it will be efficient after your favorite stock drops another 50%?
Summary
Just because something is selling for X% less than it used to, doesn’t mean it’s on discount for X%.
It could very well mean that it’s still overvalued by Y% (Y > 0), and waiting a bit will get you a better price. If your entire thesis is that “Stock Z has dropped X%”, so it must be cheap, then I suspect over the long run, you’ll be very disappointed in your portfolio performance.
To be clear, I’m not saying stocks are overvalued (or undervalued) right now. I’m just pointing out that comparing a stock’s current price vs its prior price at some point in time, and ignoring everything else, makes no logical sense.
Janky Thoughts 