September 17, 2002, on Intelligence and Investing
I have received a reply from Ms. Leigh Proctor at the University of London regarding Geoffrey Sare's thesis. (Geoffrey Sare submitted a Master's Thesis in 1951 in which he putatively reviewed the distribution of IQs arising from various testing populations.) Ms. Proctor wrote Mr. Sare but received no reply. She will now request the University of London library send me a photostatic copy of Mr. Sare's thesis.
As you know, I discovered last spring that, in the case of the S&P 500, the U. S. stock market had reached a level of price inflation that was close to twice as high as it has ever been before in the history of the S&P 500. The Dow reached about 1.45 times its highest previous value. I was diffident about interpreting this because all the talk at the time was of the stock market charging back up to something like its early-2000 levels.
That was then and this is now. The stock market then was hovering around 10,200 on the Dow. Today, it closed at 8,208. And that's still at the upper end of its range by historic standards. The talk now is of a return to historic standards of valuation. In the meantime, there's been enough slow leakage of revelations that I haven't felt it necessary to seek confirmation.
Bottom Line: Unfortunately, the stock market was drastically overpriced. Unfortunately, it may still be overpriced. The economy may be heading for a double-dip recession.
Note also that there has been a run on Treasury bonds. Only if the economy tanks and we head into a depression would Treasury bonds be a good investment right now. Otherwise, if the economy eventually rebounds, people who are buying bonds right now will lose money on them when interest rates rise again.