Recently, I was invited by the CFA Institute to contribute some thoughts to a discussion of investment versus speculation and how you can tell them apart. My commentary was published, and I’ve received some very nice feedback on it. You can read it here.

Yesterday, the Dow Jones Industrial Average hit a new record, up from its previous all-time high in 2007. As I have mentioned before, new records are generally a sign of market strength, at least for a while, and can spur more buying as investors fear missing the boat.

Markets take a roller-coaster ride

[youtube=http://youtu.be/wThB07fwmPw?rel=0hd=1]

Part of our conversation yesterday revolved around the tax increases we saw early this year and the spending cuts that took effect yesterday. As I mentioned, these are both positive developments, but they’re only the first steps on a long road. What remains to be done is a multiple of what’s been done so far.

Politically, both moves are problematic. But, in my opinion, the tax increases are by far the more difficult. Everyone seems to be in favor of both tax increases and spending cuts—they just can’t agree on whom to tax or what to cut! Taxes, however, are more challenging in that they require taking something away from people that they already have. In many cases, spending is more nebulous, and defense spending cuts won’t mean I have fewer dollars in my paycheck.

Despite the dire warnings, the sun rose today and people went to work. Planning shifted, if it hadn’t already, from avoiding the sequester’s spending cuts to implementing them. Entrepreneurs launched t-shirts and tchotchkes based the sequester and furlough.

Politicians, who had been warning of the disastrous consequences of the spending cuts, haven’t exactly backed off. Instead, they’ve adjusted the time frame—much like the doctor who had given his patient six months to live but then granted him an extension when he couldn’t pay off the bill during that time.

I was thinking about market valuations this morning in light of some of the volatility we saw last month and some discussions we’ve had internally.

For illustrative purposes Apple is a good stock to look at for this kind of discussion. By some metrics Apple could still be considered inexpensive, but it’s uncertain whether it can continue to grow sales as fast as it has. How much of the valuation is based on the assumption of continued sales growth, and how will the stock price be affected if sales growth slows?

The interesting story today is the stock market, as it manages to shrug off the worries from Europe, the sequester, and a power higher. The Dow Jones Industrial Average is closing in on its all-time high, set in October 2007. The S&P 500 Index is not quite—but almost—as close to the high that was set around the same time. Are happy days here again?

The numbers I mention above are a bit misleading, in ways both positive and negative. For both indices, if you include dividends paid over the time since the previous highs, we have already passed them. This would be positive. If you look at the indices adjusted for inflation, however, we are further away, which is negative. The key is that, surpassing the previous levels would just be numbers, with more psychological than economic significance.

“Those who can’t remember the past are condemned to repeat it.” — George Santayana

The quote above is often used to describe one of Ben Bernanke’s prime qualifications for his position as chairman of the Federal Reserve. As a student of the Depression, it is said, he has a unique perspective on what happened then and knows what has to happen now to avoid a repeat. Put another way, he understands the mistakes that were made last time so we can avoid them this time.