https://www.investopedia.com/terms/i/irrationalexuberance.asp
KEY TAKEAWAYS
Irrational exuberance is unfounded market optimism that lacks a real foundation of fundamental valuation, but instead rests on psychological factors.
The term was popularized by former Fed chairman Alan Greenspan in a 1996 speech addressing the burgeoning internet bubble in the stock market.
Irrational exuberance has become synonymous with the creation of inflated asset prices associated with bubbles, which ultimately pop and can lead to market panic.
Breaking down Irrational Exuberance
Irrational exuberance is widespread and undue economic optimism. When investors start believing that the rise in prices in the recent past predicts the future, they are acting as if there is no uncertainty in the market, causing a positive feedback loop of ever-higher prices.
We can tell ourselves anything...
There's more liquidity in the market, COVID will be gone soon, the market is forward looking, things aren't as bad as they seem... the list can go on...
But really? Is that really the truth?
BUT...
That doesn't mean that one shouldn't invest in a bubble.
It also doesn't mean one SHOULD invest in a bubble.
That's the difficulty.
If you wait for the bubble to pop, even after the pop, asset prices for good assets COULD be higher than what they are now.
BUT, if you buy the wrong stock, the pop could result in a worthless stock much like what happened in the Dotcom era.
Do I think markets are highly irrational now?
Yes I do, especially for US markets.
Singapore is still around 20% down from the peak.
Whereas S&P has recovered all if not most of it's losses.
Jobless rates are high, consumer spending is low. People are hesitant to spend due to concern of their jobs.
People aren't travelling. Discretionary spending is down.
Stock prices have to eventually reflect earnings.
Else investors aren't being adequately being compensated for the risks they take.
Imagine investing in a stock for $100 and getting $1 earnings after a year.
That's a 100 P/E ratio.
In such a case, either the company is a super high growth company, OR investors aren't getting enough returns for the purchase price of the stock.
It's like buying a bond with a 5% chance of default but getting a 1% return on it. The price and return must eventually reflect the risk.
Well... If the Central Bank/FED is the greatest fool, if they are willing to keep buying assets, then the party could go on for very very long.
You see, the FED doesn't have the same objective as us investors.
Investors try to make money, and want to have reasonable return for the risk we take.
The FED doesn't need to "make" money. They can just print it.
Their objective is to stabilize the economy. Or they hope to. So they can just keep propping up asset prices for whatever objective they deem fit.
BUT, this in-turn would crush returns and yields for normal investors.
If there's ever a time for value investing, investing in companies that have a good moat, good cashflow, good management, now's probably the time for it.
And we all know who's the best at value investing... *wink wink*
Once again...
These thoughts are my own analysis and thoughts, please do not use it as an indication to buy or sell. Please do your own research before making any decisions.
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