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When Valuations Don't Seem to "Work"

John P. Hussman, Ph.D.

It’s precisely the failure of valuations to matter over shorter segments of the market cycle that regularly convinces investors that valuations don’t matter at all. 

This delusion is strikingly ingrained into investor behavior, and is almost inescapably revived during every speculative episode.

As Graham and Dodd wrote in Security Analysis (1934), referring to the final advance that led to the 1929 market peak, the reason investors shifted their attention away from historically-reliable measures of valuation was “first, that the records of the past were proving an undependable guide to investment; and, second, that the rewards offered by the future had become irresistibly alluring.” 

The consequence of the delusion that “old valuation measures no longer apply” was predictably wicked, as it was after the 1969, 1972, 2000 and 2007 extremes.  

What’s distressing is that this delusion is actively encouraged by investment professionals who ought to know better.

 DYI