2. The profitless bull
We should only be so lucky that 2013's recovery was merely a jobless one. What made the this year's stock run-up downright lethal was that bottom-line net profits were as tough to find as a good job.
Investors seemed unaware that Amazon not only burnt money at about the same rate as domestic rail carrier Amtrak, but is on track to run in the red for a second full year. And forget the bellwether public offering for microblogging service Twitter (TWTR). Its losses were somehow spun as meaningless in the face of mere optimistic gross and operating margins -- which makes no sense for a company that does all its work on computers. After all, does anybody really know what the "cost of goods sold" is for Twitter? Or Facebook? Or Google?
"Why is it such an issue for company managers to step forward and admit they overreached and that what the upside investors are betting on maybe happens a little later," is how Andrew Left, executive editor of Citron Research, explained it to me. "But nope, quarter in and quarter out, it's always better and better, more and more, even though that can't possibly make any sense."
3. Stocks go up ... because they go up
But what really made 2013 a dangerous trip into the Twilight Zone is that whatever comparable valuation logic existed in this sector is now merely science fiction. On one hand, stars such as Google saw a 52-week low of $625, but now somehow trades at $1,000-plus even though net margins declined for that period. Huh? Then there's eBay (EBAY), one of the Web's real profit-making engines, which saw a 52-week low of $48 but only posted a high of $58 on what was basically a story of improving net margins for the year.
What's happening? Simple: More investors are piling onto some stocks, so more investors pile onto those stocks. The fundamentals of a company no longer matter.
"All I do is look for buyers to be in control on a share and then I buy it," said Rick Tonge, owner of Tonge Investments, the Oakland, Maine, investment adviser who says he's on track to post one phat year for his clients. And then when sellers take over, I step out of the way and sell."
"I don't bother with any other reality but that," he said. "I haven't looked at an income statement for years."