Very sensible letter by Jeremy Grantham

Here's a good example of some scary data that promoted the above mentioned doubts. A graph called "Four bad bears" shows inflation adjusted stock market prices, plotted on the timelines starting from month zero of each of those bear markets.

As you can see, on its timeline, the 2008 crash is worse than even the Great Depression crash, as well as all other bear markets.

No predictive power, but looks scary.

Igor Chudov wrote: [all points noted but much snipping for conciseness of response]

Your point helps reinforce my stance not to sell.

I think we need to put Professor Jared Diamond on a study of why banks collapse.

Perhaps. After six months of no buys, this week I did buy some GD. Plus I have been watching three other companies for several weeks now.

I think this is so. However from reading about the history of markets, I think it is more likely than not that corrections and stumbles as we have seen this decade are a part of mass psychology and inevitable. Not that this is bad news. More that it reinforces that one should not buy purely stocks unless one's timeframe is on the order of 15 years.

Would be a bad time to sell, for sure.

Would be interesting. If I could hazard my own answer, it would be following institutional imperative (leverage more when yields fall).

The only source for stock appreciation is earnings. They are used in three ways: to pay dividends, to repurchase corporate stock, and to reinvest in business.

If stocks become expensive, the following happens:

1) dividend yield falls proportionally 2) Share repurchases become proportionally less effective since every dollar buys fewer shares 3) A possibility to create new firms and get many more times the invested capital becomes much more attractive, and therefore there is more competition for capital.

In other words, the more expensive the stocks are, the less are expected future returns. The converse is also true.

I have been reading a funny book that is called "Dow 36,000", and the book tries to prove that the value of the Dow is 36,000. They promised Dow 36,000 to occur about 2005 or so.

The book completely misses the effect of high stock prices on future returns, as far as I could tell about halfway into the book.

I heard about the book around 1999, but only bought it a month ago.

There's always the 1985 book "The Great Depression of 1990" by Ravi Batra. I don't know what tomorrow will bring, but the 90's were not the time to be scared out of the market by books like this.

You are right, it was published in 1999, so if you ignore Batra, you were in for the 90's, then ignore your author, and you'd have been out for the Tech Bubble's crash. You may have discovered the next great market predictor. (Of course I say that tongue in cheek) Joe

According to the intelligent investor book, a good indicator that the market is overheated, is a large number of IPOs of obviously bad quality.

Just a thought: Perhaps these books that get things wrong are historically instructive and so useful. They are the errors of our ways documented. One can learn from them.

Read the "Dow 36,000" book, it is highly instructive as an example of flawed thinking taken rather far.

i

who thinks that Dow 36,000 may not be very far, as will be "Big Mac $36".