With tech stocks reaching stratospheric valuations and AI speculation running hot, plenty of investors are wondering if we're living in a bubble. Are these prices backed by real business fundamentals, or is everyone just gambling on hype?
Personal finance expert Dave Ramsey has a clear answer: the stock market generally makes sense over the long haul, even if it occasionally gets carried away in the short term.
On a recent episode of "The Ramsey Show," a caller voiced concerns that sparked the whole discussion. He told Ramsey he was considering real estate instead of stocks because stock prices seemed disconnected from actual earnings. Ramsey wasn't buying it.
"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."
The key phrase there is "scope of time." Ramsey's point is that while markets can definitely get weird for brief periods, fundamentals eventually win out.
Why Investing Isn't Gambling
The caller doubled down, saying the market looked like a "giant casino" to him because of what he saw as "artificial" valuations. This is where Ramsey drew a sharp line between investing and gambling.
"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 explained. "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."
That's the fundamental distinction. When you walk into a casino, you can't analyze the roulette wheel's earnings or the blackjack table's management team. But with stocks, you have access to financial statements, historical performance, competitive positioning and all sorts of data to make informed decisions.
The Exceptions That Prove the Rule
Ramsey isn't naive about market history, though. He readily acknowledged periods when stock prices absolutely did become detached from reality.
His primary example was the dot-com bubble of 1999. "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."
He also pointed to the bizarre 2020 collapse of Exxon Mobil Corp. (XOM) when oil prices briefly turned negative because demand disappeared during the pandemic lockdowns.
But these examples actually support Ramsey's broader point. Yes, markets occasionally go bonkers, but those periods are notable precisely because they're unusual. They're the exceptions, not the rule.
Ramsey also made an interesting psychological observation: some people "emotionally cannot accept" high stock valuations. It's not always a rational calculation that leads investors to think stocks are overpriced. Sometimes it's just discomfort with big numbers or anxiety about being late to the party.
For what it's worth, Ramsey said he doesn't pick individual stocks himself. He prefers getting market exposure through mutual funds, which spreads risk across many companies rather than betting on specific winners.
The takeaway? Markets can look scary when prices are high, but that doesn't automatically mean they're irrational. Over time, stock prices tend to track the actual performance of the underlying businesses. Patience and fundamentals matter more than gut feelings about whether things "feel" too expensive.