I've been trying to find some empirical evidence to support my hope that the current bear market is already "overdone" and we must surely be close to the mythical "bottom". I was thinking that now the market is back down to where it was four years ago it must be getting below "fair value" - after all, it wasn't considered to be too excessively priced in 2004, having just started to recover after the bust of the dot-con bubble. And since then the Australian economy has experienced continuous economic expansion. With the current view that Australia is liable to suffer an economic soft landing rather than a recession, that would mean that the listed companies (which are, after all, a large chunk of the economy) must be worth a bit more than they were four years ago.
Unfortunately (for my current peace of mind) I then looked up the stats on Australia's GDP (gross domestic product) and the ASX200 Index since the 1970's. As you can see from the graph below, all it shows is that the stock prices did get vastly inflated compared to the value of the underlying economy during the past decade, and the recent 45% decline has only now brought it back in line with it's "normal" ratio to the value of the Australian economy (GDP). I had a feeling during 2007 that the bull market had gone on for a bit too long, and considered either taking some profits or "insuring" my portfolio via Index Put Options. In the end I bought some put options that expired in Dec '07 but then didn't replace them with new ones! If I'd had this chart to hand last December I would have made sure I kept my portfolio insurance in place for another year. It's nice to say "live and learn", but I suspect that this is one lesson I've learned a little bit too late to be of any use.
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