Spiders's Bull's Rebuttal
by Jeff Fischer ([email protected])

Okay, so I came out looking like the monster in this fight, and TMF Parlay actually appears to be a reasonable, intelligent guy. We don't need a silver bullet and we don't need to turn him into dust and scatter him across a desert. Instead, it sounds like he'd be an interesting person to have lunch with. If I were to meet Parlay, though, I would bring one tool with which to make his life better: A jester cap.

No one can argue against the fact that the market has soared over the past four years, but in the same vein, no one can argue that the market is now overvalued in the near term -- at least, you can't argue that without being a little Wise. The Wise have argued this very point during the past several years to no avail, because the market moves on future events, events that none of us can foresee. To observe the present moment and claim that stocks are overvalued on current numbers (when it's the future that will matter) is to look at a newborn baby and say that he'll never amount to anything.

Market bears and valuation proponents in general will attack me, but historically no one has shown that they can consistently value the market accurately enough to call it overvalued or undervalued at any moment, in part because the future is always what will determine the outcome -- and no one knows the future. There are far too many variables and possibilities. You can much more accurately value individual stocks, of course, but valuing the U.S. stock market as a whole is akin to valuing the world economy, because most of the major indices (including the S&P 500) are made of giant international companies. If you can tell us what the world economy is going to do in the next five years well enough to tell us that the market is overvalued right now, you're not of this planet. Meanwhile, using history to theorize a currently overvalued situation would have made you flee this market at least a few years ago, missing most of the recent gains.

Even so, Parlay looks at past numbers to justify his position, but only numbers for the past twenty-five years. You can hardly call those historical. He claims that the S&P has historically traded at a P/E of 15 over the past twenty-five years, but he doesn't mention that nearly one entire decade of those years included spiraling inflation and represented a time that, if you wanted to drive five miles to buy groceries, you first had to sit in a six-mile line of cars in order to buy gasoline.

My argument was clearly made in Parlay's own words: "...historically the stock market's average appreciation has been around 12-13% annually. We all know here at the Fool that four out of every five years the market will end the year higher than it started. Furthermore, stocks generally outperform all other asset classes over the long term, bar none."

Thanks, Parlay. That is exactly what Fools need to remember: Stocks outperform all else over the long term. Yet, then Parlay addresses short-term concerns, which, in contrast, pale in meaning when compared to long-term truths. Yes, currently the market is trading at higher valuations than it has in the past. But history hasn't in any way proven it to be dangerous to invest at these levels, as Parlay stated it has. The market has always made bold news highs over its history, so investing at "high valuations" in 1987 harmed absolutely no one if they bought and held good companies. The same is true of investors who bought at incredibly high prices in the early 1970s -- valuations were unbelievably "high" then, but the S&P is worth an a lot more now. History has proven that the market rises over time. As of this very day, the largest lesson that history has shared is that you can never buy, and then hold, too soon.

I do agree that interest rates, inflation, or any number of things could change the market's direction and prove today's valuations too aggressive. And earnings growth for the S&P 500 has slowed considerably this year. (Yet, the market has risen in value, so what happens next year if earnings growth actually blossoms again?) To close, Parlay addressed his topic well. I might vote for his lucid argument to win this Duel, if that wasn't a vote for market timing and the Wise notion that tomorrow can be known by simply looking at today. It simply can't. Hence, the Foolish long-term investment philosophy where the S&P 500, and Spiders, reign supreme.

Next: The Bear Responds