The Wall Street Waltz: 90 Visual Perspectives, Illustrated Lessons From Financial Cycles and Trends, Revised and Updated Edition

Chart 18

Supply and Demand—the Real Drivers

This chart is updated using indexes more commonly used today, but you still cannot rely on first impressions. Here it looks like value stocks are simply better for all time and tech to be avoided. But strict adherence to (or avoidance of) one narrow equity category for all time is insane. Given enough time, all equity categories should have almost identical returns with any real variance being created out of what's been hot in the last few years—that's what this chart shows. The return variance is basically all since 2000 or 2003, depending on how you look at it—the period value has been hot.

Stock prices, like everything else you buy, are determined solely by supply and demand. Because IPOs, new stock (and bond) issuances, and even buy-backs and takeovers take considerable time and effort, in the short run supply is relatively fixed and demand drives prices. But over longer periods, supply can expand and contract nearly infinitely, meaning long-term prices will be determined by some unfathomable future supply pressures that no one has any way to predict with today's technology.

Here's how it works. Company A makes some neat new product and has a private market value of $1 billion. They need expansion capital, so they go public, giving up 20 percent ownership as they raise $250 million. Now, they're worth $1.25 billion and everyone is thrilled, including the investment bankers who collect a chunk of the IPO value in fees. Investors get ...