Monday, February 25, 2008

Investments I

In the age of modern Wall Street, stocks are overpriced, but they’re worth less than many think. Stocks are indexed to the dollar. Prices of commodities indicate that the dollar is worth about a third of what it was five years ago (wheat, corn, and gold ‘prices’ have tripled). By this analysis, the DJIA has fallen from ~11,000 to ~4,000. The true value is probably somewhere in between the two numbers.

The reason that I still consider the market to be overpriced is that the price-earnings ratio of a decent company like IBM, is fifteen. Compare this with a family plumbing business that, after paying all expenses and salaries, clears $100,000 in a year. I can state with a large degree of certainty that about 95% of owners in this situation would sell their business for $1.5 million. Probably 90% would cash out for a million. Stocks are demanding a premium because of their history and liquidity, but the fundamentals just aren’t there.

Bonds are riskier still with the impending bankruptcies of MBIA and Ambac.

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