Price-to-Fantasy Ratio: Self-Deception with Forward Operating Earnings

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A common error of earnings aggregation from stocks to the market persists. The aggregation fallacy is at its most extreme during recessions. Consider AIG. During the market lows of 2009, the share price fell briefly below $6 and GAAP (Generally Accepted Accounting Principles) reported earnings were a loss of $90.48. Neither an owner of AIG stock nor an owner of an index fund was on the hook for the $90 loss—their remaining downside risk was not even $6—yet aggregate earnings for the S&P 500 Index were reduced by the entire $90 per-share loss.