The problem is how can buyers suspend their disbelief

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Unformatted text preview: rate of return on their investments. Yet, in 1929 the P/E ratio hit 33 and approached 45 in 2000! The problem is, how can buyers suspend their disbelief? Is this the result of a mass hallucination? 1/45=2% rate of return. Let’s look at the class results for an experiment structured almost exactly like Smith’s early experiment, EV = $3.60 on round one decaying to EV = $.24 on round 15. Professor Schulze AEM 414 AEM Lecture 10 Most Important Thing Given that the most important thing to figure out is when to bail, what explains the biggest bubble of all time that started in 1982 and crashed in 2000. It is impossible to pick the exact high and low. Use P-E ratios. If stocks are cheap, buy. If stocks are expensive, sell. Many investors do exactly the opposite. AEM 414 AEM Professor Schulze Lecture 10 Schiller lists 12 precipitating factors that contributed but are not causal of the 2000 crash: 1) The internet arrived on top of solid real growth earnings growth. 2) Foreign economic rivals like Japan tanked. 3) Culture changed to favor business including stock participation by managers and unions tanked. 4) Republican Congress and Capital Gains Tax cuts. 5) Baby Boomers. First Consume like crazy and get away with it by retiring on fantastic stock market gains. (DREAM ON.) 6) Media reports and the development of stupid talking heads hyping the boom. 7) Optimistic forecasts by analysts with the brain power of pumpkins. AEM 414 AEM Professor Schulze Lecture 10 Schiller lists 12 precipitating factors that contributed but are not causal: 8) 401k pension plans and move to stocks for retirement plans. 9) Advertising and mutual funds focused people on overall market rather than individual stocks. 10) People reacted to decreasing interest rates (due to decreasing inflation) by putting more money into stocks, not realizing that only the real rate of return is rele...
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This note was uploaded on 04/04/2009 for the course ECON 1120 taught by Professor Wissink during the Spring '05 term at Cornell University (Engineering School).

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