Archive for July 2024
Last week I published a newsletter article titled “Will The Stock Market Return to The Fundamental?” I have received a good number of responses, and as promised, today I will share my thoughts.
The traditional economic theory has always presumed that economic actors are calculating and rational. The application of this presumption in the investment field is the efficient market hypothesis, which basically says that investors rationally pay the prices for expected future earnings adjusted for risk. The biggest proponent of the efficient market hypothesis is Nobel Prize winner Eugene Fama.
The efficient market hypothesis has its biggest opponent in Robert Shiller, who years ago published his seminal work that illustrated how a 1% change in dividends can oftentimes result in a 15% change in the stock price. If investors are, in fact, calculating and rational, stock prices shouldn’t fluctuate so much relative to dividends.
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The title of this article comes from a recent discussion I had with a client of mine. First, we should define what “the fundamental” means. It is best defined in Intelligent Investor, a book by Warren Buffet’s teacher Benjamin Graham. In short, his idea of a good investment is a stock with good earnings selling at a cheap price.
Graham’s insights were lately confirmed by Eugene Fama’s Nobel Prize-winning research, where Fama found that throughout history (until maybe 2015,) small-cap value stocks performed the best.
At present, the stock market in the US is definitely not following Ben Graham’s fundamentals. 70% of all returns are concentrated in the seven biggest tech stocks, all of which are very expensive. Nvidia for example, has a $3T valuation, which is 4 times the GDP of Taiwan, where its AI chips are made.
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The Investment Scientist 