The American company that has shown the best three-year total return is Dell Computer, which pays no dividends but has generated returns of 2,619 per cent to its shareholders over that period.
Dell is a wonderful company, which has transformed the industry in which it competes. Its direct-selling, build-to-order business model, with an emphasis on corporate sales, protects it from the bloodbath at the bottom end of the personal computer market.
Investors have increasingly appreciated its strengths. Between December 1997 and April 1998 Dell's share price nearly tripled, to reach a high of $98.50. Since then, along with other tech stocks, it has dropped back, closing on Friday at $85.63. At that price it is still selling at nearly four times revenues, 60 times current earnings.
Can such a price possibly be justified? To raise the question is not to criticise Dell, which certainly deserves to be rated higher than its rivals. But the Dell case highlights the extraordinary expectations about the future built into present levels of share prices.
Consider a comment from an experienced market observer, writing in 1934.
"Instead of judging the market price by established standards of value, the new era based its standards of value upon the market price. Hence all upper limits disappeared, not only upon the price at which a stock could sell, but even upon the price it deserved to sell. This fantastic reasoning actually led to the purchase for investment at $100 per share of common stocks earning $2.50 per share. The identical reasoning would support the purchase of these same shares at $200, at $1,000, or at any conceivable price."
This measured judgment comes from Benjamin Graham, the creator of modern fundamental stock analysis, writing on the "new era" thinking that produced the stock market bubble of the late 1920s.
He went on to single out investment trust managers for particular criticism.
"Investment trusts actually boasted that their portfolios consisted exclusively of the active and standards (ie, the most popular and highest price) common stocks. The man in the street, having been urged to entrust his funds to the superior skill of investment experts for substantial compensation was soon reassuringly told that the trusts would be careful to buy nothing except what the man in the street was buying. Irrationality could go no further."
At least these days investors in indexed funds are not paying "substantial compensation" for their herd-mentality portfolios.
People who worry about present levels of share prices tend to focus on the frothy "concept" stocks that emerge from nowhere, generate huge market value on the back of non-existent earnings, then disappear as quickly as they have come.
But such stocks are not, in fact, the most disconcerting feature of the bull market: since they are impossible to value properly, an absurdly high price is only slightly more irrational than a low one. In any case, if they are really worthless, they are quickly found out. The setback in technology stocks over the past couple of weeks bears witness to this.
What is more worrying is the high value placed on sound companies, where there is a real history and a testable business concept. With Coca-Cola selling at 47 times current earnings, Disney on a rating of 36, and a clutch of other blue chips selling at multiples in the high 20s, investors are valuing a dollar of earnings in the distant future almost as highly as they value a dollar today.
At the same time, those same individual American investors are continuing to run up credit-card debt at interest rates which imply a high preference for consuming today over consuming in the future. As long as there are stocks around that show a three-year return of more than 2,500 per cent, investors in US stocks have no need to decide between these rates of time preference. But at some point they may be forced to make a choice - and the long-term outlook implicit in the current level of stock prices may be the loser.
