What does "the market is overvalued" actually mean?

[mtsen]

you are right about gambling, or in better words, normally I keep my 5% play money in FD ignoring it. But recently I have been actively speculating them in local stock market. After all the Prime Minister effect isn't exactly over yet .....

sorry this may not sound like a good example, but I have had my money management done well all these years, and now is desperate time called for desperate measure. Only future result will prove me an idiot or managed risk taker.

As for the passive vs active index fund, I guess I am still new here. My term of 'active' vs 'passive' mutual fund may not work well in this forum yet, so lets just leave it and just says I support Steve's concept for now ...

[mtsen]

oh, wait a minute, I have found an article that can explain my previous comment

"buying a blue chip that is better than passive index fund is quite easy"

Index Fund or Malaysia Stock Indics ? | Malaysia Personal Finance

[Broken Arrow]

Ah ok. I'm not against gambling, and even Steve will tell you he does it from time to time. Although if I may be so bold as to speak on his behalf, I think he does it for fun, not because he's desperate to make money.

I think the feeling of desperation is an emotional sentiment, not a trading strategy, and I don't think it's a good idea to resort to gambling when you are feeling desperate. Perhaps you can separate your emotions when you start gambling, but just the fact that you are there because you are desperate, you may have already lost before you even begin....

Either way, it's no big deal to me. I'm just saying....

[disneysteve]

Ah ok. I'm not against gambling, and even Steve will tell you he does it from time to time. Although if I may be so bold as to speak on his behalf, I think he does it for fun, not because he's desperate to make money.

I am realizing a funny irony as time goes by. The less money we have, the more we need money, but can not afford to take big risks. Conversely, the more money we have, the less we need it, but the more we can afford to take big risks.

This is all true. Statistics support the fact that the vast majority of lottery tickets, for example, are sold to the poor. The people who can least afford to throw away money are the ones most likely to do so.

I enjoy gambling. My wife and I go to casinos on a pretty regular basis, but we do it as entertainment, not financial planning, and we stick to a pretty strict budget of how much we are willing to lose each trip.

I also gamble occasionally in the stock market. I don't trade often but I go through phases where I get the urge to do so. It has been several months since I traded a stock. I think the last one was my BoA trade. Again, though, I do that with "play" money. It is an insignificant portion of my portfolio.

[kv968]

Thanks for getting back to the original question. Still, though, how can you (or anyone) say that the "market" is overvalued? The "market" is made up of hundreds or thousands of stocks in many different sectors and industries. Some of those individual companies might be overvalued. Others might be undervalued. Still others might be priced pretty fairly based on their performance prospects. It just seems like a tremendous and inaccurate oversimplification to say "the market" is overvalued.

I believe too that it's an oversimplification to say "the market" is overvalued when certain sectors or classes may not be but you have to remember they are talking about the MARKET as a whole. They aren't breaking it down into sectors and if people are investing in the MARKET (i.e. S&P 500) without paying attention to the individual sectors they may certainly be losing out.

What I'm trying to say is that out of the 9 major sectors which make up the S&P 500, as long as 5 of them are "overvalued" as compared to their own sector, the general consensus would be that the MARKET as a whole would be considered overvalued just to word it quickly. Is it completely accurate? Not by a long shot but that's what I think most people want to hear...a one work "wrap-up" of how things are.

That's why how much the Dow Jones numbers are thrown amazes me. I know it's a bellwether of the "market" as a whole but instead of just quoting that sampling of the market, why not just use the numbers of the S&P, or the Willshire 5000 for that matter? That would give a much better perspective of what the "market" is really doing because it's the ACTUAL "market" you're sampling! Personally, I think it's because, again people want that one number. When you say, "the DOW went up 120 points" instead of "the S&P went up 11" (although percentage-wise it's basically the same thing) people seem to get more satisfaction out of hearing the bigger number rather that the smaller (although a 120 point jump is something to get pay attention to regardless).

I'm not sure if any of that made sense, but I think most people just want that little sound bite of information of how everything's going and damn the details.

[disneysteve]

kv968, I think your answer is a great one. People want something that doesn't really exist. They want a single marker for what to do. They want one number they can track to know how the entire economy is doing.

[LuxLiving]

kv968 said:
"I'm not sure if any of that made sense, but I think most people just want that little sound bite of information of how everything's going and damn the details."

Right, I think it is much like saying "Americans are overweight", or "Houses are over-priced." They, like, "the market is overvalued", are soundbites. We all know that not EVERY American is overweight, or that not all houses are over-priced. There are still good housing values to be had for the selective buyer and many skinny-minnies still roaming about in Southern Cal.

I've always heard that it's a willing seller plus a willing buyer agreeing on price = true market value. You might come along and disagree on their pricing structure, but meanwhile they've made the deal and supposedly each gone down the road happy. It's only later that buyer/seller remorse might set in!

And yes, I do think that statement about the market scares many people away. But why do 'they' say it? Ummm, possibly so there are more scraps of goodness left out there for them to snap up? I don't know the exact reason other than 'we are a nation of generalizers', which is another example of painting with a broad brush!

Do the research on whatever you're buying. I try to buy based on VALUE which to me is based on assets, earnings potential, human capital, dividends, P/E ratios, past history, market trends and such - not speculating upon soundbites.

[disneysteve]

Right, I think it is much like saying "Americans are overweight", or "Houses are over-priced." They, like, "the market is overvalued", are soundbites. We all know that not EVERY American is overweight, or that all houses are over-priced.

That's a good analogy. Not long ago, the media started reporting the "fact" that 1 in 5 homes in America is in foreclosure. Most news outlets just said that. One report I heard, though, explained that the average is tremendously skewed by Las Vegas, Arizona, Detroit and a couple of other places and if you removed those few markets from the calculations, the situation is far less bleak.