When Perception Becomes Reality

I had a good debate last night about how irrational the market is currently acting during the financial turmoil. There is no doubt that the balance sheets of financial institutions are still in flux until the government decides the valuation of these distressed assets. However, other blue-chip and growth companies are also getting hammered to historically low P/E ratios. Sure, macroeconomic conditions will influence their short-term earnings, but most economists would agree that long-term growth projections have not changed much.

I was making the argument that the long-term investor has disappeared and that all investors have significantly reduced their time horizon for sufficient returns. The debate turned to the positives and negatives of day trading (liquidity versus volatility and potential to alter management's strategic planning). That is a discussion for an entire entry.

In the near-term, we see these investors are acting in a herd mentality and basically making a run on these firms. However, I can't really do true justice to this topic so I will simply direct you to one of the best pieces on this topic from The New Yorker.