My argument is a bit different. Without a great deal of evidence to back me up, I see the earnings of publicly traded companies being determined by the ability of human beings to create value for each other in a competitive marketplace. In the long run, this depends only on the value-producing capability of the (collective) human mind, which changes only at the rate of human evolution, and so we should not expect it to be any different in any particular century so long as the marketplace remains competitive.

Every other effect is either temporary or localized. For the temporary ones, stock values suffer only until these other effects are fairly reflected in share prices. The localized ones can be addressed by geographical diversification.

I am always suspect of the “it’s a new economy” and “this time it’s different” arguments. This same conclusion could have been used to avoid buying stocks during the Great Depression. That would have been a mistake.

I’m betting on mankind’s ability to increase productivity over time. Since I am in index funds I can use the time that would otherwise be spent analyzing the market to make more money.

@PFO – I think you missed the point. It is possible to predict the business cycle as business cycles describe self-similar behavior. Pick up any text book on finance and it will be in one of the first chapters. This is not a novel idea by any stretch and therefore you can not use it to make money in the stock market. In fact it is so well known that the stock market is known to pick up steam about 6 months before the business cycle does. Don’t confuse alpha with beta.

I always appreciate a good Bushism any which way. 😉

Predicting the future of complex systems–whether economic performance of a civilization in coming decades or the weather for a particular week 5 months out–is more speculation than precise analysis, no matter how many numbered lists or multi-syllabic words or obscure elements the analyst conjures.

This doesn’t mean we shouldn’t try to predict. We do our best to guess at what we’re likely to face in the future. But a too-confident dismissal of conventional predictions, in favor of one’s own alternative predictions, should imbibe some of the nectar of intellectual honesty and frank humility in the face of what we really cannot legitimately know with any degree of confidence.

Looking at the past is, as a means of prediction, far inferior to looking at the future; but the past has the charming advantage of being visible.

One’s analysis is only as good as one’s premises and interpretations–the accuracy of what one is assuming, the comprehensiveness of what one is looking at, and the legitimacy of one’s interpretations…including the small predictions that are used to construct the major predictions.

But all of these elements, when brought to bear on a complex system, are questionable. For one example of many, if, at approximately the turn of the previous century, before there was widespread use of motor vehicles, someone would have argued that we were reaching “peak horse,” because the world could not sustain a billion human beings each having their own horse to transport them, and therefore that economic activity would clearly have to slow down…that might have sounded like an intelligent argument, especially if it were dressed up in specialized nomenclatures and put forth by people with advanced degrees and an abundance of sneers for the “little” people who weren’t brilliant enough to see what was so obviously coming.

We peer into the opaque future, and none of us can see it clearly. Yes, let us keep trying to predict, but let us not fool ourselves that our analysis is anything close to a lock. The best analysts are frequently wrong, and even when their predictions “come true,” it’s often for reasons different from what they envisioned.

Iconoclasm is good and helpful in many cases; this doesn’t mean that the iconoclast’s predictions are any more accurate than those favored by convention. The present can be tested, and one’s case shown to be valid or invalid; the future cannot be subjected to tests that would give us legitimate confidence about whether we right or wrong. Honesty, then, when it comes to long term predictions on complex systems, demands humility.

What am I buying when I buy a stock? Home Depot debt to equity-51, Verizon-61, Altria-233, meaning these companies have 51/61/233 dollars of debt to every dollar of equity respectively. Verizon has a payout ratio of over 200%, meaning they payout a dividend twice as high as what they earn. Verizon must be cannabalizing to pay it.

Check out some of the others we love. This whole stock thing seems as though it’s built on a mountain of debt and unsustainability.

There’s really no other game in town, so I’m in…at least for a portion…but I always wonder WTF.

Actually, Caine, the stock market is *not* the only game in town. There is another game available, and it’s the one where more of the big money goes. Are you only shopping for returns in one place? Check the link below and see what you think.

http://www.aametrics.com/pdfs/world_stock_and_bond_markets_dec2010.pdf