The last refuge of scoundrels is their blind insistence that all data points must be adjusted for inflation.
I was reminded of this earlier in the week when Nasdaq, after 15 long years, closed above the 5,000 mark. The immediate response from parts of the bearish contingency was to demand that the numbers take into account the rise in prices.
There are many, many reasons why this is irrelevant to investors. Let’s focus on just three:
The first is technicals. When practitioners of this form of analysis look at support and resistance lines in a graph of a stock or index, they are actually delving into the world of psychology. Traders recall that when they bought stocks at a specific price, they were rewarded. That muscle memory keeps them coming back for more at those prices. This is true for stocks, exchange-traded funds and even indexes.
Similarly, they remember being punished when they paid too much at specific prices. Who among hasn’t thought to ourselves, “Dear Lord, let me just get back to break-even”? That is why share supply often appears at specific prices. It is a sign of investors recalling an earlier purchase that has been painful.
Thanks for the ‘mathsemantic’ lesson – the term is Edward MacNeal’s – in how to think clearly about stock valuations and inflation.
This error is a nice example of (Piaget’s} ‘centration’ – the inability to deal with several aspects of a situation simultaneously “due to the egocentric nature of the child’s thought or the incapacity to shift attention…” and the neuroscience assertion (Linda Feldman Barrett) that the brain is an “inference generating organ” in which attention can “be thougth of as what you allow your eyes to see.”
More actual insight for those willing to do the work.
How easy is this blog to write!? BR has got the cushiest job in the world. Simply watch CNBC for a segment and assume the opposite to be true.
Unless of course, if it’s the always-fact-based Joe Kernan…
Today Joe held up a newspaper photo of a Google car to the camera and screamed how he didn’t want to be forced to drive one. ‘Disneylandish,’ he called it. It’s terrible for any man to suffer the indignation of being forced to sublimate his nature. Especially if it’s by a so-called president that has plainly stated he’d s against business. What an excellent marketing executive Joe’d be, rolling out the same thing year after year. And excellent researcher. A veritable idea machine. Any network looking for nail down the Millennial demographic would be wise to get him up there front and center. A truly thoughtful fellow, trustworthy, and boy how about his flair for market timing…
… a few minutes earlier Joe really tripped up his guest from BMO, and the analyst’s bullish calls “almost” didn’t look so good in January. Every day back then Joe told us things were getting bad. How almost right he was.
Well, still BR is making a substantial effort but your point is well taken: just take the other side of CNBC.
I’m still trying to get my image of a craven, pasty, paunchy, ethically and intellectually-challenged Joe Kernan sublimating his ‘needs’. Has to be twisted… shudder.
I don’t understand this argument. It seems like your point is, hitting 5k is meaningless. Which, I agree with. It’s meaningless exactly because of inflation.
We discount everything due to TVM. Comparing the value of an index in 2000 vs. 2015 is comparing apples and oranges.
It’s like comparing the biggest grossing films of all time. How can you possibly compare them without taking inflation into account?
Not sure why that makes me a scoundrel.
It looks like this column was directed to the contingent of perma-bears who never admit they have been wrong, that they missed a 200% + rally.
Any occasion is an opportunity to spew some negative nonsense.
Of course inflation matters — BR said as much.
But to the folks who insist we are still in a recession, that the equity gains are artificial, that its all QE driven — I say balderdash
While I totally agree with Barry’s numbers about valuations and such . . . the argument he make misses the point imo. If I bought the S&P 500 Index via SPY and I paid $ 10,000 “thinking” “I’ll have $ 25,000 by 2015 for a down payment on a $ 100,000 home.”
OOPS — that home now costs $ 145,000 at 2.50% inflation per year. . . . so I don’t have enough for a down payment. Sure, I have my money back but what I have won;t buy what it did 15 years ago.