[marco_yolo]

irrationality is the sign of free and healthy market. ascribing the subjective theory of value I believe value is determined by the individual. so what seems like an irrational move to an outsider looking at the fundamentals is meaningless because what looks irrational to one set of people could be the completely correct decision long term. specifically, the possibility of profit is the immediate value. can this be speculation, yes, but speculation is what drives innovation imo. that's the beauty of healthy market different people trying different endeavors and the cream rising to the top. the reality is irrationality can only last for so long because if a company is an impostor or playing accounting tricks they will crumble(unless government bails them out with taxpayer dollars). so even when the market is overvalued or irrational there are corrections. and this a good thing. there is no such thing as risk free universe.

[Nevermark]

The problem with that view is subjective value based on financial engineering isn't sustainable, for business investments.

Financial engineering is not sustainable because it cannot compound.

Financial engineering also increases asset risk, as it doesn't reflect real returns. It can take a long time for inflated prices to deflate to the mean PE, but they will. Then someone pays for that.

In the meantime, the misallocation of capital to financially engineered assets slows growth.

Art has subjective value that may, in some cases, compound indefinitely due to the fact that the greater the wealth in an economy, the greater the most rare subjectively valued things will be worth.

[marco_yolo]

slows growth comparable to what? how do you know the slower growth isn't actually an appropriate correction? slower growth without innovation is probably bad. slower growth with innovation is probably good. but i generally agree that there are potential negative outcomes but I accept the risk I don't pretend that I or anyone would be better at the allocation of others capital.

[Nevermark]

There is a difference between allocating capital for long term economic growth, vs. allocating capital to get a return on financial engineering.

Experts at making money are happy and very good at both, and will do whichever gets them the best return - and they don't have to care about the long term with any liquid asset.

But financial engineering isn't a compounding improvement, like improved manufacturing, or more efficient distribution, or faster and more reliable data systems, or developing a team of very creative problem solvers in some difficult area, ...

So allocating capital to financial engineering is legitimately attractive for an individual investor, but is a chimera as far as the overall economy goes - since the value of financial engineering doesn't compound and often doesn't last. PE's are unlikely to keep going up due to financial engineering no matter how you "package" (essentially market) the assets they are related to.

[Nevermark]

You may not see this comment - coming so late as it is.

Maybe I am just thinking aloud to myself, but this may communicate better than my other response.

There are two ways of increasing value of a money machine. It can make more money (sales, rents, etc.), or you can convince people the machine is in a trendy category (AI startup!).

While in the short run, the way you market the money machine (stock) can have huge impact. In the long run its worth will come from how much money the machine actually prints.

People will never keep paying a higher and higher price for a stock just because you keep slapping on better logos and giving the company better stories.

It might take a while, but any value growth due to externals hits a limit. And anything overvalued that has a limit will fall back inline with competing products. I.e. a mean price/earning ratio.

That kind of "value growth" doesn't compound, and the entire point of stocks is to compound value.

Alternatively, actually growing the business does compound. The more sales, the more resources to add employees, create more products, pay for more marketing (of actual products), etc. There is no ceiling at all.

That doesn't mean people don't play games with valuation, or that you can't make money off of assets getting temporarily over valued at the right time.

But it does mean the economy won't get more valued due to these games, as someone will lose every dollar that was won through gaming the market.

Every unearned increase in stock price now reduces the return for someone else buying the stock after that increase.

When people realize earnings are not really growing commensurate with stock prices for a whole class of stocks, we get worse than just lost future earnings, we get a crash.

In the end the games do decrease growth of stock prices total, even though some investors will come out ahead for all the gaming.