Fifteen years of hurt

STOCKS are the best investment for the long run. That is the common mantra among investment pundits. But the recent record high for the NASDAQ, America’s tech-heavy equity index, ought to give investors pause. Like the FTSE 100 in London, it has taken 15 years for the NASDAQ to surpass its previous high (see chart). Even so, that counts as a sprightly performance compared with Japan’s Nikkei 225, which still trades at only half its 1989 peak.

Such statistics make it hard to argue that “there are no such things as bubbles”, as the occasional economist still contends. A very high stockmarket valuation implies the expectation of rapid growth in future profits. The average price-earnings ratio of the NASDAQ back in 2000 was more than 150. In other words, if profits did not rise, a shareholder would have had to wait for well over a century to recoup his original investment.

Perhaps investors were thinking of their great-great-great-grandchildren, but that was not how it seemed at the time. Technology companies were expected to take over the world and drive “old economy” firms out of business; their profits would soar as a...



via The Economist: Finance and economics Business Feeds

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