Review

Robert J. Shiller, a professor of finance at Yale University, has painted a frighteningly real picture of the recent overvaluation in the stock market with his book, Irrational Exuberance.  The opening ten pages are some of the most shocking ever written, especially for an investor whose been riding the bull of the last five years.  One graph in particular makes the story truly horrifying:  a graph of the real prices of the S&P 500 over the last 100 years.  Never before has there been such an enormous spike in stock prices; the 1920's seems meager in comparison to the last five years.

The publishing of this 300 page study could not have been more timely.  The March / April 2000 correction in both the Dow Jones Industrial and the NASDAQ seemed to follow Shiller's prophecies, and much of what the book examines should be heeded by investors of all backgrounds.  The first part of the book examines the raw evidence that the stock market is overvalued; the remainder studies the psychological and social explanations of how prices got the way they are.  Most of it is remarkably well written and easy to understand, unlike a tremendous amount of the economic and financial literature on the market today.

And unlike majority of the garbage churned out by writers today, Irrational Exuberance is anything but superficial.  Shiller is not out to make money with his tome:  he's trying to convey the message that investors need to be cautious when playing the stock market.  While returns in the Dow and in the NASDAQ averaged about 10% over the last five years, the recent correction and the soaring popularity of stocks has decreased the likelihood that this high level of returns will be maintained.  For anyone interested in a comprehensive study of the late 90's surge in the markets, Irrational Exuberance by Robert J. Shiller is an insightful, poignant read.          

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