I hear this subject frequently debated. The DJIA/S&P/NASDAQ should be at 5000, 10000, 20000 or whatever.
It is misleading to talk about the actual valuation. Why?
Stocks underperform true inflation. Over the past 10 years, stocks have underperformed true inflation (gold) by nearly 1% per month.
Now, a pro-State troll says “A clever person can pick stocks profitably.” That makes as much sense as “If you make the right picks, you can win at Roulette.” Nobody is a clever enough stock picker to overcome a 1% deficit *PER MONTH*.
Now, a pro-State troll says “Stocks are cheap! You can buy cheap, wait for a spike, and cash out for a profit.”
Here is an analogy. To keep things simple, suppose that inflation were 0%. I tell you “You can deposit money with me. I’ll take 1% per month, but I’ll give you a random bonus or deduction whenever you make a deposit.” Does that sound like a good deal? Would you take it? I’ll even say “I’ll give you a bunch of envelopes, some with deductions and some with bonuses. You get to pick which one, when you make a deposit. If you’re clever, it’ll be a good deal!” Would you do it now?
Even if stocks are cheap, they can stay cheap for months or years. In the meantime, you’re paying that 1%/month cost to the financial casino.
Stocks underperform intlation by 1% *PER MONTH*. That’s a huge handicap to overcome, no matter how clever a stock picker you are.
The number on your statment may increase, but you’re getting ripped off by inflation and all the fraud/waste/theft of a large corporate bureaucracy.
Most people think that their investments grow exponentially. That’s only true if returns exceed inflation. If your return is less than inflation, then you have asymptotic growth and not exponential growth. If your real return on savings is -10% per year, then the most you can ever save is 10x your annual savings rate.
It was very shocking to realize that the stock market is one big scam. It’s like discovering that Santa Claus doesn’t exist.
Given that stocks consistently underperform inflation, the “fair value” of the stock market is zero. Anybody who claims they can pick stocks well enough to overcome the true cost of inflation/fraud/theft is lying or delusional. If you invest in the stock market, you’re guaranteed to be robbed.
You touched a very valid point. I believe only very few traders/investors can make more than about 15% profit/year averaged over bull and bear markets.
On this page:
you can find some charts (and more) that underline your statement that inflation eats up a lot more than many of us think – see the Dow Jones Index, for example. It went down, practically in a straight line, for the past decade by more than 80%, when measured in real commodities/gold.
Also the trading volume in the US market and probably world wide has been going down fast and continuously since 2007 as seen in the DJIA chart with “on balance volume”.
Although I used to trade shares myself I now hope the stock market will disappear or at least lose its current (over)driving role for “growth” in a future “economy”. We are past scarcity with plenty of technology held back by the artificial need to employ people full time.
Fair distribution – not economic growth and planned obsolescence – is the challenge of this century.
Inflation helps provide the illusion that the stock market is a good deal. The number on your statement goes up, but you aren’t keeping pace with true inflation.