I read an article yesterday that attempted to prove that the U.S stock market is overvalued. http://www.theglobeandmail.com/glob...s-stock-market-is-overvalued/article27631107/ Looked at a number of sites and learned that most investors believe that the US stock market is overvalued but there are a few who think it's undervalued. Your thoughts?
Most seem to agree that it is pretty fairly valued overall by most traditional measures. But that does not necessarily mean that it can't go higher. There are some companies that are cheap, and some that are quite expensive. Sometimes the cheap companies get even cheaper - particularly in a correction or bear market... And sometimes the ridiculously expensive companies get even more so, particularly if the broad markets hold their own or continue upward. Personally, I always look for individual companies that appear to be growing rapidly and/or relatively cheap to invest in, and also for other companies that appear to be declining fundamentally and/or ridiculously overpriced to perhaps carefully bet against. Some more volatile long positions often have a put option for downside protection, and some highly speculative companies such as small cap biotechs are lightly bet on/against for brief periods of time - often with both puts AND calls to try to take advantage of volatility on either side.
I do think that in general the markets are pretty highly valued. That doesn't mean that they can't go a bit higher though... so I still keep buying little by little. As JR said, there are some companies that are cheap... so might as well try to find those and put your money in them, just because the market overall is a bit overvalued it doesn't mean that you won't find nice deals somewhere in there.
From what I know, all stock markets are over valued sometimes but not all the time. The valuation is based on estimated value of the stocks and some are even basing the estimate on the projected value so the accuracy of the figures can be in question. However, if that is the practice then nothing's wrong. Besides, the over valuation is not intentional in nature otherwise it can be considered an anomaly to take advantage of a sector which is often the public.
I think it is on the high side of being fairly valued. We are quickly approaching 7 straight years of decent gains but they have been spread out into different sectors. I do think it is going to get harder to pick undervalued stuff outside of corrections.
The low interest rates allowed companies to get bigger than ever and made the stock market one of the only places to get a nice return on investment. I see little changing in the value of the market (maybe 1000 points lower) given that the money is there.
The academics will tell you that the market can never be "undervalued" or "overvalued". I think it's a theory called something like "perfect market efficiency", meaning that there are all of these unseen inputs into the market that we, as humans, are never able to completely compute, and from those inputs a particular stock will find its precise value at any time. This idea doesn't preclude the existence of stock market crashes or ridiculous bubbles either. It just means that those events come about naturally form the ebb and flow of the markets themselves. Personally, I view the markets by looking at how long my forecast is. Short-term and long-term are the hardest to predict because of the volatility of short-term events, and the myriad factors that determine long-term guesses. Medium-term is where it's at for me. I think you get the most accurate predictions on a 1 to 2 year cycle. YMMV.
There are a few comments doing the rounds talking about the market being overvalued. Essentially, the inference is we shouldn't expect too much out of the market in 2016. Naturally, it will only take a few variables to change (e.g. higher oil price, faster rate rises etc) to impact earnings assumptions, market sentiment and shift the story again. But it's probably worth keeping an eye on it.
The "efficient market theory" is a perfect example of why most academics aren't rich, and why much of what they say needs to be taken with a grain of salt. "Theory" sums it up. Several of the very best examples off the top of my head of why the efficient market theory is largely incorrect include Buffett, Icahn, Jim Simons, DE Shaw, David Tepper, and Ray Dalio. Of course the academics will call them "outliers" who are simply "lucky", as they will call anyone else who has outperformed the broad markets by more modest margins. I do believe that the GENERAL tendency overall is for the markets to be PRETTY efficient over the LONG term. But one major flaw the theory ignores is "behavioral finance". When a multi million dollar biotech company with several promising drugs in its pipeline has a minor issue with one of those drugs, and the company suddenly drops 75% in one day, this is almost always a gross overreaction, and is usually an excellent opportunity to buy a little stock. When a multi billion dollar company in the S&P 500 drops 5-10% or more in a single day on earnings news and forecasts that weren't actually bad, this is often a great opportunity to buy in.
