Again With the Bubbles?

A few years back ? it seems like an eternity today ? the U.S. stock market experienced a severe bubble burst. Legitimate stocks rose beyond reasonable valuations and ideas merely in the germination stage sold for prices far beyond those of real proven companies. When the bubble burst, billions of dollars of shareholder value evaporated. One would have thought we'd learned our lesson.

Today, Yahoo and EBay, the two leading internet companies, again sell for prices beyond reasonable value. Again, people seem content to listen to a good story and place unrealistic valuations on companies that have no earnings or real prospects. Google's recent IPO is proof positive that the market is still bubble-icious. Even stocks like General Electric are selling at prices above what the market should bear. What's the story?

The story is, very simply, that we don't learn lessons very well. Also, if you think about it, a lot of people actually made money back in the late 90's during the bubble. So, there's a case to be made for gambling on another similar adventure. If we can survive the "greater fool" theory, and find someone willing to pay more than we are, it almost doesn't seem dangerous to buy a stock that has little or no intrinsic value, as long as there's a belief that someone else might eventually pay more. So much for value investing!

No, the "experts" are now convinced that stocks and markets do not move in line with actual events, but instead move along with emotions and trends. Thus, the big money is chasing itself, going where it goes simply because it is going there. Does that make sense to you? I hope not.

We've held firmly to the seemingly outdated position that value does matter. We differ from some value investors, such as Warren Buffett, who avoids technology and new ideas: we do believe such stocks can have merit. We also hold firm to the idea that stocks will eventually return to their real value?or at least move toward that point in the end.

In these days when emotion seems to dominate reason, it is not unlikely for the whipsaw effect to be stronger than the reality effect. But we believe that, even in the midst of such insanity, having a focus on reality is worth something?even if no one else believes it.

For questions or comments, Scott Pearson can be reached directly at [email protected] or by visiting www.valueview.net

Scott Pearson is an investment advisor, writer, editor, instructor, and business leader. As President and Chief Investment Officer of Value View Financial Corp., he offers investment management services to a wide variety of clients. His own newsletter, Investor's Value View, is distributed worldwide and provides general money tips and investment advice to readers both internationally, and in the U.S.