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« ETF Update: When System and Reason Diverge | Main | Opportunity Knocks: Time to Buy Goldman Sachs »

January 20, 2010

Comments

Mike C

Jeff,

I appreciate your response, although I genuinely had hoped you might directly address the question, rather then be "surprised" I thought it was a right question to ask or go in the direction of who does or doesn't have formal training. I'm not really sure what me trying to have Barry address your work has anything to do with the price of tea in China.

Incidentally, not that it makes it unquestionable, but Buffett himself has cited this valuation metric which I assume you might find surprising (you have cited Buffett in many of your blog posts):

http://money.cnn.com/2009/02/04/magazines/fortune/buffett_metric.fortune/index.htm

I'm not a "true believer" in anything, and actually am very interested in why a metric Buffett espouses may not be totally valid. I posed this question in several forums looking for some specific answers, and received some answers. One reason was lower tax rates the past several years on capital gains and dividends which raises the after-tax cash flows investors receive, and the other reason was a more globalized economy where this metric isn't capturing foreign revenues that companies like KO and MCD have. Anyways, I can see why this metric Buffett likes is flawed.

Meanwhile, I really prefer to work from my own agenda of what I think is important.

Not really sure how to take this. I was simply asking what I thought was the "right question". I knew Buffett liked this metric, and Buffett is much smarter than me, yet I intuitively thought there must be some reason a new range had been established and was simply looking for direct answers from other smart people and you certainly qualify.

oldprof

Mike C -- I do not think that this chart provides any useful information, and I am surprised that you do.

There is a method for doing research. It starts with forming a hypothesis. You then look at changes in independent and dependent variables to test the hypothesis.

What you do not do is put up some chart and make a vague hypothesis about "ranges."

As a descriptive chart, it is OK, but there are many reasons why investment in public companies as opposed to other investments may have changed over time.

In particular, trying to look at this as some sort of valuation measure is lacking on many fronts (although it does capture that as one element).

To summarize, and not meaning to pick on Barry in particular, most of those doing charts and "research" have not had any formal training in research methods. They start with a conclusion and look for some evidence to "prove" the point.

Meanwhile, I really prefer to work from my own agenda of what I think is important. Articles like this can be thrown up in a minutes. They seem compelling to true believers. It takes hours to do a comprehensive refutation and even then, you will not convince anyone.

Why don't you try getting Barry to deal with some of my work?

Jeff

Mike C

Here are 2 questions I'd be interested in your take on. Take this chart:

http://www.ritholtz.com/blog/wp-content/uploads/2010/01/1-15-10-Market-Cap.gif

Question 1: What changed in 1996 to sever and disconnect the historical range on the relationship between GDP and aggregate market capitalization. There must be some logical explanation why an entirely new range has existed for the past 15 years?

Question 2: If we are looking out the next 20-30 years, which dataset is more likely to be predictive of the future, the 1996-2010 range or everything that preceded it. If it is the 1996-2010 range, why is everything before no longer valid?

I come at this question with a bias but I am very interested and open to both views here.

Adam

Imagine if the Dem. had won in Massachusetts and the market had sold off, the cause/effect would have achieved permanent narrative status.

Paul Nunes

This was great Jeff! Have a great weekend.

Paul

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