Confused logic –> unjustified advice

14th February 2014

The following is an extract from a securities advisory letter. It is from one of the most respected advisors on Wall Street. It is also an example of how utterly confused even the departure point for the logic can be:

This week battle lines were drawn between those claiming nothing but blue skies ahead versus those emphatically stating the market is overvalued by most historical measures.

Ok… so the logic here is that stocks might be over or under valued. No argument except that the statement makes no sense until we ask “compared with what?”.

Compared with “historical measures”  for one group it seems. Fair enough – so that is the measure.

Yet even the valuation hawks had to admit that there is no other viable investment alternative right now for those who want a decent rate of return.

And in here it all comes unstuck. Somehow “viable investment alternative(s)“ have entered the equation. This is either an unrelated comparator or the question has changed from “are stocks overvalued” to “what is a viable investment alternative”.

There is also

“for those who want a decent return”.

So over / under valuation seems now (in addition to the two comparators we already have) a matter of returns.

We also seem to have returns which are “decent” and “poor” (assuming indecent returns is not the focus) – and no idea what “decent might mean”.

Combine that with a lack of a negative catalyst (recession or Risk Off scare) and they reluctantly agreed that stocks will likely move higher before lower.

Now add in “the absence of evidence” as yet another consideration – impending doom or the lack there of seems to be relevant as a measure of over valuation.

Ok – its no big deal that there are lots of variables we might talk about. It is a big deal to miss the point that the conflation of all of these ideas into a blurry mix where every variable measures some relative not absolute condition means that conclusions such as this:

you should have a little more eye towards stocks trading at reasonable valuations to increase your odds of success.

simply cannot be justified but do imply that the form of reasoning used is a viable means for making decisions. It isn’t. Don’t.

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