After we argued last week that market lows are not a relevant point by which to measure this year's "giant return" and cry fire ("We've risen too much!"), this week let's revisit a column from earlier this year that posed the question, "Are you an irrational investor?"

The fact that many of us are irrational in the short term affects the stock market more than we might imagine, and supports the argument that recent lows were not relevant. Multi-year lows are almost always arrived at through fear rather than by reasoned valuation analysis.

Let's revisit the column, with updates and additions:

With the stock market up four months running, and with many days positive by 1% or greater, we're seeing investors come out of the woodwork again. We're also already hearing from stock market apologists.

A headline recently proclaimed, "Stocks Shouldn't Rise Without a Cause." Yet, after a long bear market, that's usually when stocks do rise -- when there isn't an obvious reason; when sunshine isn't yet streaming through the end of the tunnel; when headlines are still dripping with bad news, gloomy words pooling on computer monitors everywhere.

Yes, we've had some good economic news lately, but the overall outlook remains foggy. Today, even after three abysmal years, few big money managers are aggressively buying stocks in anticipation of a recovery. Instead, they're looking in the rearview mirror with worry, and that's largely why stocks keep rising. Each day the market rises, it draws waiting money in from the sidelines. A market climbs a wall of worry.

But already people are apologizing for the rise. "It's too much, too fast," "It isn't based on anything." It's even been said, "This is the bubble revisited." Everyone who's telling the market to "cool it" seems to be ignoring the fact that the stock market is a sloppy machine, has always been sloppy, and will always be sloppy. When I say sloppy, I mean irrational, emotional, or (to be positive) playful.

Valuation is a generality
Valuation -- let alone the valuation of a stock market -- is not a science. The last century has taught us that as a form of reason, valuation will be hammered, twisted, molded, and reshaped time and again based on current market sentiment. And anyone investing in the last five years knows market sentiment is rarely calm or reasoned.

Mere individuals buying and selling stocks determine market prices. So, if one person out there is a so-called "irrational" investor and willing to pay a higher price for a stock than a so-called rational person, it lifts that stock price and then another "irrational" person may decide to buy it, and so on, until finally others capitulate. Rather than greed, call this hope. Hope can drive a market higher for months.

On the flip side, people sell at irrationally low prices, again in droves, because irrational people will push a price lower and lower, beyond reason, until the so-called rationals in the market crack and sell, too, making everything worse. All those stocks that were $3 six months ago and are now $15 -- those lows were driven by fear rather than reason.

On a daily basis, the stock market is emotionally driven. Given this, it's not surprising to see the market rise with strong momentum again, news or no news. And although it's far too early to draw comparisons to 1999, the reasons for this rise are the same as always: emotion. It's hope sprung to life. A few good numbers, or a lack of bad ones, and hope rises.

I'm not saying this is right or wrong. Others are. Others are saying it's wrong. ("The market should not rise without a real cause.") But why confront a deaf market with an argument of reason? The stock market's vagaries will never change. People as herds will always drive prices and many people, if not most, are going to be emotional when it comes to making or losing money.

And let's be honest: Not one of us -- not Greenspan, nor Buffett, nor anyone else -- knows what the economy will bring in the next 12 months. If someone wishes to pontificate on such issues, they're forced to use speculation. Speculation involves opinion, and opinion -- putting your name and money on the line -- involves emotion. Bulls are emotionally calling for an economic recovery based on opinions they've formed, and this is driving stocks higher, as buying attracts more buying.

Overall, when the stock market is rising, the people makingit rise justify higher valuations to fulfill their own predictions. When the market is falling, and especially falling far enough, people justify below-average valuations, just wanting to "get out, get me out!" Between these extremes, the market swings and dips, zigs and zags, largely based on news that seems big one day but is forgotten the next. On a daily basis, focused emotion drives stock prices. This emotion is wrongly focused, because it too often ignores the long term.

Long term is the only market sanity
The Fool rarely talks about the market's short-term movements because for most of us -- and for those we're trying to reach most -- the stock market is a long-term investment vehicle, period. Former Fool staffer Dale Wettlaufer wrote an excellent column about investing vs. speculation, arguing that energy spent speculating near-term events is energy wasted. This is especially true given that investors around you, those collectively setting share prices, are often irrational and always unpredictable.

The one solution is to focus on finding strong businesses at good prices -- as the Fool does best in its stock newsletters, Stock Advisor, Hidden Gems and Income Investor -- and let volatility work in your favor (as buying opportunities) rather than rattle you. That, or regularly buy an index fund, and dollar-cost average.

Of prices, demand, and other unknowns
Yesterday, Standard & Poor's released market valuations as of Sept. 30. The S&P 500 is trading at 28 times earnings for the year ended June 30; it's at 30 times 2003 estimated earnings and 18 times estimated earnings for 2004. (Obviously, analysts are hoping for a strong rebound.) How do these multiples compare to history?

      S&P 500 average P/E on reported earnings
    Since 1996            29.6          Since 1989            23.9Since 1935            15.5Today                 28.7On 2003 estimates     30.0On 2004 estimates     18.0
In a way, what's most interesting is how the market's average P/E has risen, not just since the recent bull market, but going back to 1989 (and earlier, too). Why? I haven't seen arguments beyond empty ones of "overvaluation," but could demand have something to do with it? Today, a majority of Americans own stock, while just seven decades ago the market was a swimming pool for mainly the rich.

Or, could it be that today people know stocks have returned 10.5% annualized since 1926, so with this knowledge they're willing to pay a higher price for shares? In effect, could stocks' past success help ensure at least some future success by creating demand? Both may be poor arguments, or both may have merit. The point is, value is not static, and when we measure current valuations against history's prices, we should consider how we've changed, too, along with how stock prices have changed.

The only thing that has not changed: In the short term, the market is irrational. In the long term, it's brilliant -- or at least it reflects what all its participants deem is "right."

The Fool has a disclosure policy and Jeff Fischer welcomes feedback, though it usually takes him some time to respond.