Date: 2015-09-10
Valuation is the only reliable truth in dealing equities
A common misconception most people have on the equities is that, equities rise when there is more buying and vice versa. In reality, the micro-structure of the traded market allows extremely confident buyers to bid up the price without having to commit too much capital in the trade, and vice versa. Without such a structure in the capital market, wealth tied to equities would not swell or evaporate at the collective level. In reality, it does. Without such a structure, whenever net buying is positive, the stock price needs to go up. In reality, positive net buying is not a sufficient enough condition for the asset price appreciation.
In equity investments, valuation is the most reliable factor to consider, and other factors are at best only less important than the valuation. While the mechanical dynamics of the price setting in the market place has more to do with the dealings, what has more to do with the prolonged level of the asset price is valuation, not the investment flow. This is because humans are insecure. The most reliable link between the tangible assets and the intangible asset prices is humans' instinctive desire to justify whatever is going on around themselves. Without the justifications that they themselves think are acceptable, they turn all vulnerable and they are incapable of holding their ground firm, not only alone but also collectively. Collective effort put into sustaining a certain asset price level is available only if the justification for such an action is widely understandable. Therefore, only valuation is important and this truth is not likely to change, thanks to the static nature of human nature.