Subject: Re: o/t, Sloan, looney tunes market
It's a longer piece than I'm comfortable just copying onto this board. As a writer yourself, I'm sure you understand. But I'll share pieces as they trigger my need to comment. Here's one:


"The only modestly positive thing about the 1930s depression is that it reduced the cost of most things by about 80%. That's great if you have a stash of cash or own bonds. The Dow Jones Industrial Average, which was the major index of the day, hit its absolute bottom at 41 in July of 1932 and didn't recover its 1929 high of 381 until November 1954. Every investor should memorize those numbers to remind themselves that anything can happen."

People often comment on these high points like this. Not just for the US market in this time period, but also the Japanese market in '92. The issue is they do so disconnected from the "roaring '20s" that got us to such a high point to begin with, or the global influx of capital to the growing Japanese market in the late 1990's that got us to that high point. You can't have the big falls without the asset prices getting out of hand, just like you can't fall from a ladder that's lying on the ground. Lots of economists were worried about the prices in 1954 reaching the highs of the 1920s. But they didn't realize that this time, the foundation for those prices was solid industry growth. In essence they were worried the ladder had been stood back up as it was in the 1920s, when in reality the prices were reached by building up the ground.

You see this thinking as well in people who suggest your stock market returns should be modeled by Monte Carlo simulation based on past yearly returns. Suggesting there is some reason to assume a statistical likelihood exists for a expect a 1930 crash, followed by a dot com crash that was not proceeded by a runup in asset values. Those same people could not explain why yearly returns should be used on and not daily ones. Daily returns would periodically show up in a Monte Carlo analysis as completely decimating any reasonable investment strategy. But using yearly returns instead of daily ones adds a bit of the cause and effect performance smoothing I'm alluding to. The market seeks the true value of assets in a way that corrects for overvaluations.

"Anything can happen" yes, but it gets statistically more likely the higher your overvaluation level is.