dwot (99.56)

Price Acceptance

April 16, 2008 – Comments (4)

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...