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URL:  http://boards.fool.com/of-course-like-all-these-folks-including-market-20683798.aspx

Subject:  Re: TMF Reviews Mauldin Date:  4/25/2004  8:49 AM
Author:  Lokicious Number:  10020 of 35392

Of course, like all these folks (including market bulls) who use historical market statistics as their basic reasoning, and who know nothing about real history and about all the complex factors that cause historical statistics, this is garbage.

Don't get me wrong, I don't have high expectations for the stock market, but I won't listen to these people until they show some understanding of history and of the actual numbers that underly P/E ratios. They are comparing apples and oranges by using old P/E statistics without controlling for changes in depreciation accounting and by how much of earnings used to be paid out in dividends. That alone makes Maudlin's numbers silly. He is also treating a statistic, the P/E ratio at which bull markets start, as some God's truth, when it is just a statistic that has no necessity. But most importantly, he fails to take into account all the changes in tax laws, that pump money into stocks, plus all the institutions—mutual funds, 401 (k) plans, etc.—that have led to a broad participation in the stock market.

I fully expect to see some substantail pull-back from the strong showing of the stock market after it's huge losses, although the recovery is still only about 1/3 from the high on the Total Market. And there are lots of underlyng economic and demographic concerns that could have a major impact on the stock market (like lots of foreign capital fleeing, retirees fleeing stocks, the debt economy losing steam), but none of this is magic, just like none of the times the stock market in the past started on sustained up-runs from single digits was because stocks were trading at single-digit P/Es. Symptoms are not causes, and I'm tired of people in "finance," who clearly know nothing about anything else, basically using magical thinking.

Historical statistics are effects not causes, and at most they become a starting point for exploring whether the the statistical pattern being seen has root causes which might repeat themselves. I've given up arguing with folks on the index fund board who are convinved small cap value stocks will outperform the total stock market over time because that has happened over a long period, though not, in fact, over the period since tax advantages (long term capital gains rates) in investing favored holding shares in companies for longer periods, which is easier with blue chips, and easing enforcement of anti-trust laws has made it harder for small companies to find a niche. Even if we do see a return to small cap value stocks doing better (not counting recent pump and dump run), it won't be because past statistics predicted that would happen, it will because of a return to the factors that favored such companies in the past or because of new factors that might favor such companies in the future. There may very well be reasons why we are going to be in a sustained bear market, with some up swings, but the reasons won't have the slightest to do with historical P/E ratios. It will have to do with macro economic factors and demographics.
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