Comments on The Psy-Fi Blog: Bacteria, Boids and Market Instability

Another fantastic post Timarr. Economists who tho...

2009-08-15T10:18:32.088+01:00

Another fantastic post Timarr.

Economists who thought agents in the market were perfectly rational and independent entities had obviously never bought a share...

No excuse today, since you can get a laptop and wi-fi into any Ivory Tower...

I am mostly agree with everything but this part: &...

2009-08-14T08:23:18.440+01:00

I am mostly agree with everything but this part: "Fundamental value is, in fact, not the most important issue most of the time." What about the high correlation in the long run between positive cash flows and stock prices.

Hello Dear and Respected, I hope you are fine and...

2009-08-13T16:01:28.310+01:00

Hello Dear and Respected,

I hope you are fine and carrying on the great work you have been doing for the Internet surfers. I am Imran Haider from The Pakistani Spectator (TPS), We at TPS throw a candid look on everything happening in and for Pakistan in the world. We are trying to contribute our humble share in the web sphere. Our aim is to foster peace, progress and harmony with passion.

We at TPS are carrying out a new series of interviews with the notable passionate bloggers, writers, and webmasters. In that regard, we would like to interview you, if you don't mind. Please send us your approval for your interview at email address "imran.oracle at Gmail dot com", so that I could send you the Interview questions. We would be extremely grateful.

Regards,

Imran Haider,
The Pakistani Spectator
pakspectator dot com

Today not even economists really believe that t...

2009-08-13T12:46:29.260+01:00
Today not even economists really believe that this is how people actually operate, but figuring out something better is a not insignificant task

In the investing area, we have the perfect tool to tell us how much irrationality there is in the market at any specified time -- the P/E10 value.

Imagine that humans were 100 percent rational. What would the valuation level be? Fair value! The logical thing to do is to respond to overvaluation by selling stocks since the long-term value proposition has worsened (bringing prices back down to fair value) and to respond to undervaluation by buying stocks since the long-term value proposition has improved (bringing prices back up to fair value).

Markets are self-regulating so long as investors are encouraged to take valuations into consideration when setting their stock allocations. All overvaluation and undervaluation is caused by promotion of the Passive Investing concept, the idea that it is not necessary to change one's stock allocation in response to price changes.

The P/E10 level (the price of an index over the average of the last 10 years of earnings) tells you how emotional investors are at any given time. In January 2000, the P/E10 was 44, three times the fair value P/E10 of 14. That told us that that was the most emotional market we have ever seen in U.S. history and the most dangerous market for those looking for a place to invest their retirement money.

Rob