Returning Some Sanity To Stock Values

One of the reasons I counseled against investing in the stock market during the late 1990s dot-com boom was that there was no sane investment reason for the prices people were paying for stocks of companies that were predicted to lose money forever.  It was pure out of control speculation that was a house of cards that couldn't do anything but collapse. 

I received a lot of very hostile criticism for refusing to jump on that bandwagon and endorse what many supposedly intelligent financial gurus were calling the "new economy" where none of the rules of the "old economy" applied any more.  We all now know that those people were completely full of crap.  As I learned in college, and I said throughout the dot-com stock fiasco, basic fundamentals of business and economics are the same as they have always been and always will be.  A company's true value is (or should be) based on the amount of real life income it can generate for its investors; not on how much you can get some bigger idiot than you to pay for it (the greater fool concept).  I therefor concur with Larry Kudlow's prediction that, if the double tax is removed from corporate dividends, it will encourage more corporate earning to be distributed to shareholders and will then provide a much more realistic method for determining a fair value for the stocks. 

Of course, this is based on capitalism, and will not do much good in the class warfare battle the disciples of Karl Marx, the DemonRats, are waging to fight the dividend tax cut because they refuse to give up the unrealistic notion that only evil filthy rich people own corporate stock. 

On a related topic, investors still need to keep their heads screwed on straight and beware of following the advice of pundits who can't distinguish the difference between percentage and dollar returns.  The misinformation on these points is just as bad with taxes.  I have long cautioned people to focus on the actual dollars they have to pay rather than the abstract and often meaningless tax rates.    

KMK

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/10/2003 11:35:00 PM Send this post: