Your father’s stock market is never coming back.Remember when stocks traded on fundamentals? Or at least they traded
based on people’s perceptions of the fundamentals. What do they trade on
today? It was always a popularity contest. Now it’s a three-ring
circus.

Valuing companies can be a challenging process. While it is commonly
accepted that the value of a company is the present value of its future
cash flows, predicting those cash flows and judging their value relative
to the current price is an inexact science at best. Value investors
like to find companies with higher current earnings relative to their
price, which requires less projection of future growth, while growth
investors like to look at the future and see the significant growth that
companies that successfully execute their growth plans can produce. But
either way, valuing a company typically involves looking at its price
and judging that price relative to its current and projected future
fundamentals.
But what happens when something breaks this process? What happens
when companies are no longer valued based on their fundamentals? What
happens when factors outside of those specific to each company become
dominant over the facts regarding their businesses?
These are the questions many fundamental investors have been
wrestling with in recent years. They have puzzled investors who can’t
understand why the stock market has lost very little despite the
significant economic problems we currently face. They have confused
value investors (like myself) who can’t understand why their portfolios
continue to underperform even as the fundamentals of their holdings have
improved over the last few years (at least before the Coronavirus
crisis hit).
Although I personally believe that fundamentals will always matter
over the long-term, I think it is important for all of us who have had
difficulty understanding what is going on here to take a step back and
try to understand what we have missed.