Blowing Bubbles

So, was it all just a bad dream?

With the stock market ending at its high for the year and at levels not seen since the Lehman bankruptcy, it’s reasonable to ask: have we learned anything? Should we just go back to business-as-usual?

Clearly, there are some obvious lessons. For one thing, we know that markets are not perfectly efficient and that prices can be misstated for years. Ever since Gene Fama started looking at the behavior of stock market prices in the ’60s, people have wondered how accurately the market evaluates asset prices.

Well, the results are in. Markets can be fabulously, spectacularly wrong. Lehman, Bear, and Merrill were insolvent in 2008 even though the market thought they were worth billions. But that doesn’t mean that betting against the market is an easy thing. Markets can remain irrational longer than many investors can remain solvent.

But some of the derivative implications of the efficient-market hypothesis have taken a justified drubbing. For example, the belief that market-clearing prices are always and everywhere the best indication of an asset’s value is clearly wrong. In early 2009 FASB recognized this, albeit under some pressure. (It always seemed to me that the academics who lead that body have more faith on markets than most practitioners, but that’s another story.)

In any case, one lesson is clear: the market, like “Father,” doesn’t always know best.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-01-08T15:14:31+00:00 December 27th, 2010|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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