Very interesting thoughts here from Bill Fleckenstein. Fleckenstein argues that the market has lost its discounting mechanism. I am not so sure I agree that it ever really had a discounting mechanism.
To me the market is a non-linear dynamical system which is susceptible to substantial chaos. The market is very inefficient in the short-term due to the inefficiency of its participants. The idea of the efficient market and the market as an efficient discounting mechanism has been sold hook line and sinker to the public. We are taught that equities can’t go down over the long-term, that a PE ratio of 10 is “historically cheap”, that you can’t outperform the market, yet none of this is founded in solid proof, but rather a very short history of data that is currently available and adds up to nothing more than theory (a weak one at that). Fleckenstein’s comments are well worth a listen:
Source: Bloomberg TV
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.