The financial economic environment we are currently in is one which is driven by earnings. This isn’t new, it’s the same thing we had when the market was going up and investors still have the same problem they did before. Investors are not paying attention to things which matter. They are not paying attention to viability, a real measure of the ability of a company to produce increasing earnings in the face of expenses, market conditions, taxes, and inflation. There will always be inflation, sooner or later.
What makes a mutual fund go up in value? Is it the management of the fund? Is it the value of the dollar? Is it the hope of the investors? No, of course it must be the underlying positions which perform well. In many equity funds it isn’t even all of the positions, or stocks, which perform. It could be just a small number which pull the rest of them up. The point is that good stock selection is the key to performance.
Currently we must assume that a much larger portion of all stocks will not go up in value and that a very narrow group will.
Our biggest problem right now is that earnings expectations are way too high. As the analysts begin to approach reality on their estimates we could easily learn that prices are 30-40% too high right now.