Sense on Cents

What is something worth? Very simply whatever somebody is willing to pay for it, correct? While regulations or the lack thereof have a big impact on overall levels of returns and compensation, all other things being equal, I do not begrudge those who take risk, work hard, and reap rewards. I applaud them. I view that process as the essence of capitalism.

Does this line of thinking still work in our Uncle Sam economy circa 2010? One of the overriding themes highlighted in Observations on My Afternoon in New York City addressed the topic of market valuations. I wrote:

4. Investors do not want to sell what they currently own because they do not know what they might purchase to replace it. Investors do not want to allocate more capital because they are concerned about market valuations in general.

I should have been even more pointedly specific in writing this statement. While I do believe many people in the market today are concerned about the overall level of the market, the point I was trying to get across is that people do not trust or believe the individual values of investments at current prices. Why is this the case and how does this happen? (more…)