I remember how expensive housing seemed when I was first shopping around. I knew where it had been, and there was no question that it was up. It took a while to accept what the prices were and I watched in disbelief prices go up an additional 20-25% before I jumped in. Prices did come down some, but I found that after I was in the market and had paid the outrageous price, I had a greater degree of "price acceptance," that home was worth $x and that one $y dollars and so on. But there was a period of price rejection in beliefs and before actually committing to buying.
I often think my look at the market is similar. Housing about tripled in a 7 year period. I didn't invest in the market when I was younger, but I did get guidelines about and I did form beliefs around it. The first was that because you capital was not safe, you should receive a premium for the risk. I expected that you should make about 10%.
Reading Mogambo Guru I am pointed to what the value of the market would be at different P/Es.
"For the S&P500 (currently about 1360) to fall to the range of historical fair value of a P/E of 15, this means the S&P500 index should fall to, according to the chart, 993!" At a market bottom, at a P/E of 10, the index would have to fall to 662.
I started looking at the market with 1980s beliefs around pricing the market. I figure people who in the market had to have gone through a gradual change in price acceptance. I tend to think that if you did a Rip Van Wrinkle and looked at the markets after your nap, price acceptance would be non-existent. Equity valuation has gradually been changing so that investors have been paying more and more. I was Rip Van Wrinkle and in shock at the valuation levels I saw all over the market. I just didn't bother with the market past learning some valuation standards of a generation ago. My price acceptance has been at odds with much of the market.
Mogambo says the S&P is trading at a P/E of 21 and the Dow at a P/E of 53. If that is indeed the case, for the Dow to be at the historical fair value of a P/E of 15 it would have to decline to 3500, and at 2330 for a P/E of 10. Now I'm going to take a closer look at those 30 stocks because a P/E of 53 is in the "I can't comprehend how you thought buying here would work out for you" category.
I never got to price acceptance in the market.
On another point, Las Vegas is having a rough time. I was through last June and I felt like I was being price gouged. I was there for 3 days. It says that peole are going for 3 days instead of 4, staying in cheaper hotels, and just seeing one show. Hmmm, my visit -- 3 days, cheaper hotel, saw one show... What'll induce me back? 4 nights for the price of 3, half price shows, free internet in my hotel...