Towards the end of financial bubbles, asset prices behave in ways that can’t be explained with rational/historical metrics. So new ones are invented to make sense of things. In the 1990s tech stock bubble, earnings were ‘optional’ and ‘eyeballs’ – that is, the number of visitors to a dot-com’s website – were what determined value. In the 2000s housing bubble, home prices would always rise, which justified pretty much any selling price and asset backed security structure.
Now David Einhorn, a high-profile (and highly frustrated) hedge fund manager, has offered an explanation for today’s bubble:
David Einhorn: ‘We wonder if the market has adopted an alternative paradigm’
(Yahoo! Finance) – Hedge fund billionaire David Einhorn is struggling to make sense of the stock market. In his latest investor letter, the founder of Greenlight Capital raised an interesting question about valuation.
‘Given the performance of certain stocks, we wonder if the market has adopted an alternative paradigm for calculating equity value,’ Einhorn wrote in a letter to investors dated October 24. ‘What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss?’
Einhorn, who identifies as a value investor, said the market ‘remains very challenging’ for folks like himself as growth stocks with speculative earnings prospects outperform value stocks.
This post was published at DollarCollapse on OCTOBER 24, 2017.