How do we know when irrational exuberance has unduly escalated asset values?
Stock market corrections, although painful at the time, are actually a very healthy part of the whole mechanism, because there are always speculative excesses that develop, particularly during the long bull market.
Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.
Normally, the market peaks before bad news emerges. That's what happened in 1929, and that's what happened in 2000.
When the market is just going up, up, and up, we all tend to be blind to the holes in the market. They're all papered over by the rise.
There's a certain degree of speculation that goes into valuations. In so far as the market supports a valuation, everyone who gets a great one deserves it, but they should also be cautious because that speculation is temporary. I saw Yahoo go from $100 billion to $10 billion. It's not a long-term measure.
That strategy of buy and hold, which is the sound and sensible one for the individual, can have very dangerous and perverse effects for the market as a whole.
A great company is not a great investment if you pay too much for the stock.
That's not to say there's no such thing as an overvalued market, but there's no point worrying about it.
