Half Truths, Lies and Equity Valuations

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“When one side of a story is heard and often repeated, the human mind becomes impressed with it insensibly” - George Washington

Daughter: Can I go out with friends?
Father: Have you asked your mother?
Daughter: Of course I have.
Father: Okay, have fun.

In the plot above, the daughter only tells her father half of the truth. She fails to disclose that her mother said “no.”

Like the daughter's craftiness, many markets are surging on narratives built on just one side of a story. For speculators and gamblers, that seems to suffice. For investors aiming to build and preserve long-term wealth, I suggest understanding every side of a story.

Of the many tales being told to justify record equity valuations, low interest rates are among the more popular. Low interest rates benefit stock prices. However, that is only half the story. I present the other half of the story that few tell.

Opportunity cost

There is a popular narrative that says stocks should do well because bond yields are pitifully low. The basis behind the argument is math comparing historical stock returns to current bond yields. But historical average returns and expected stock returns are often quite different.