THE REALITY CLUB

THE ECONOMICS OF DREAMS
By Yossi Vardi



NEWFrom: Chris Westbury
Date: March 14, 2001

With respect to Joseph Vardi's question: Asking "How long will it be until the stock market begins to go up?" makes about as much sense as asking "How long will it be until people are happy?".

Some of us are happy right now, and some of us will never be happy. There is no "stock market' that can move as a whole; there are just individual stocks and a variety of different yardsticks for trying to understand them in different ways. Solemnly-proclaimed rhetoric to the contrary notwithstanding, the DJI and the Nasdaq averages are no more representative of "the stock market" than the serotonin levels of Newfoundlanders are representative of how happy the human race is. The notion that "the stock market" has crashed in recent months is a myth based on the category error that confuses one operational measure of a thing with the thing itself.

What has in actual fact happened is that some stocks are selling for much less than they were selling for a few months ago. Other stocks are selling for much more. Anyone who bought a Yahoo or an Amazon at 250 times earnings (or a VA Linux with no earnings at all!) expecting the stock prices to rise was a little over-optimistic, to put it gently. Many investors were not at all surprised to see those stock prices come down. Insofar as most of them are still clearly over-priced by good old-fashioned value-based measures, I feel safe in predicting for Mr. Vardi that "the stock market" will not begin to go up, but will come down still further.

However, while Yahoo and Amazon were selling at such absurd multiples, I picked up an oil stock (CYZa.TO) sitting at about 4 times earnings in a time of huge oil price hikes, and a liquidator (LQW.TO) with an unbroken 8-year earnings growth record selling for less than the company's book value! These kinds of under-priced stocks have behaved just as rationally as over-priced stocks like Amazon and Yahoo: they've gone up. Using the yardstick of value based investors, the stock market never came down: it just became more comprehensible.



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