Bubble Or Mirage?

What kind of analysis is that? No one expects perfection in analytical work and there are always extenuating circumstances that cant be anticipated, but this is outrageous and no doubt accounts for much of the reticence among investors to take risks today.

A friend of mine, who was the CEO of a life insurance company, once said to me when we were discussing analysts, “they dont know.” He said he had had several on his board at various times and that their views were no better than anyone elses and were more often wrong than right. A sad commentary on a profession usually held in high regard and one that many rely upon for advice.

The focus in the high profile cases where analysts have erred has been because of pressure from conflicts of interest. However, it seems to me that the problem is far greater and the profession could use a heavy dose of self-analysis.

Mirages in nature are caused by the refraction of the suns rays. In my view, mirages in the market are caused in large measure when an analyst does not factor in the effect of inflation. One definition of inflation is too many dollars chasing too few goods. And that is precisely what occurred in the 1990s when huge sums of money poured into the stock market from 401(k)s, pension plans, the proliferation of mutual funds, variable insurance products, IRAs and private savings–some of which came from lump sum payments from pension plans.

Much has been made in the media about the losses sustained by employees in their 401(k) plans. If my belief is true regarding market values being a mirage, then those values were never really there; they were merely illusion. In a sense, you cant really lose what you never had in the first place, but it is still a cruel hoax that employees should never been exposed to.

I freely admit to being a bit old-fashioned, but when you have lived through the Depression and several recessions you become more mindful of the fickle nature of economic factors. When you have watched your parents struggle just to make ends meet, you become reluctant to stray too far from guarantees.

I guess that is also one of the reasons that I am adamantly opposed to privatizing Social Security. We dont need Social Security dollars bidding up the prices of stocks, thereby intensifying the mirage.

No doubt, in time, the stock market will regain some of its lost ground and may even push forward again. However, the important point is, will it be real or just another mirage that will be fleeting at best?

Mirages in nature are fun to watch, but watching your nest egg disappear can be a gut-wrenching experience.

Reproduced from National Underwriter Life & Health/Financial Services Edition, October 14, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.