The soaring valuations of tech stocks and the ongoing debate over a potential AI bubble have sparked questions about whether these market prices are backed by fundamentals or if investors are simply gambling on speculation. However, personal finance expert Dave Ramsey believes stock valuations are generally not irrational over the long term, except during a few extreme market events.
A caller asked Ramsey on "The Ramsey Show" whether he should put his money into real estate because he felt there's a disconnect between stock prices and their earnings. Ramsey rejected the idea that stock valuations are artificially high and said stocks are usually supported by fundamentals, except during rare and brief periods of hype or extreme undervaluation.
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"By and large the stock market overall is never overpriced over the scope of time" Ramsey said. "There may be a moment in time that it is or there may be a moment in time that it’s under priced."
‘It's Not A Casino'
The caller reiterated his concern that the stock market looks like a "giant casino" to him because of apparently "artificial" stock valuations. In response, Ramsey said the stock market cannot be called a casino because investors can use financial metrics to analyze a stock and predict its future trajectory.
"You're betting that Apple, McDonald’s, Coca-Cola, Home Depot are going to be worth more five years from now than they are today and why would you make that bet?" Ramsey said. "Well, you would look at their track record of growth, the stock price growth and you would look at the management team and you look at the profit margins and you would also kind of project in the future what you think the business climate is that they’re going to exist in. So it’s not a casino, casino is truly a game of chance."
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‘Ridiculous' Tech Bubble
However, Ramsey acknowledged there have been a few periods in history when stock prices became sharply disconnected from their underlying value. He pointed to the dot-com bubble and the collapse of Exxon Mobil Corp. (NYSE:XOM) stock price in 2020 when oil prices briefly turned negative amid lack of demand.
"We had a tech bubble in 1999, the dot-com rage, where people were buying stocks of companies that had never made a profit," Ramsey said. "That was ridiculous obviously and they shot through the roof, most of those didn’t survive."
Ramsey said some people react negatively to high stock valuations because they "emotionally cannot accept" them. He reiterated that he does not buy individual stocks and prefers to gain exposure through mutual funds.
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