As we progress down this road of massive overvaluation and incredible arrogance of not seeing what history has proven time and time again, I am, unfortunately, finding myself getting heated over what the future will hold…not because there will be massive decreases in stock prices and money will be lost…quite the contrary. When that happens, I will do quite well. What bothers me is that the same people who think that I am wrong today are the same ones who will say how obvious the overvaluation was…the same people who say that about 1999/2000 and the real estate bubbles in the mid 2000s.
The reason this is causing me worry is that these are the same people who are ignoring the advice of today. In the world of valuation, the levels we sit at today are so beyond obviously overpriced that it hurts to even think about how the justification can be made for current stock prices. Financial memory, according to Galbraith, is 4 years and that is quite apparent today. Everyone forgets 2000 and 2008, and everyone most certainly won’t even look at data going back to the 1940s with 90%+ correlation. Why? It’s not fun to see what the past has shown and what the future could very likely be.
It is a matter of ego. Part of the reason I started this blog was for ego purposes. Yes, I have been wrong as of late, but when the markets start to do what is apparently obvious over the next 2-5 years, I will have the ability to say “not only did I think it, I said it.” Is that mature? Absolutely not. But it’s no less mature than not looking at data and history to see what has been undeniable for decades.
A man I write a lot about, John Hussman, quoted his works from 2000 when he wrote this about the NASDAQ and S&P 500…”
It’s instructive to look back on the comments that we published in 2000 as the bubble, in hindsight, was about to burst:
“The issue is no longer whether the current market resembles those preceding the 1929, 1969-70, 1973-74, and 1987 crashes. The issue is only – are conditions more like October of 1929, or more like April? Like October of 1987, or more like July? If the latter, then over the short term, arrogant imprudence will continue to be mistaken for enlightened genius, while studied restraint will be mistaken for stubborn foolishness. We can’t rule out further gains, but those gains will turn bitter… Let’s not be shy: regardless of short-term action, we ultimately expect the S&P 500 to fall by more than half, and the Nasdaq by two-thirds. Don’t scoff without reviewing history first.”
– Hussman Econometrics, February 9, 2000″
The NASDAQ ended up losing 78% by its low and the S&P lost about 50%, as he said they would. Yes, it took some time to get to those points, but once it did, it was ugly and he called it.
Many don’t realize that this kind of analysis does not take excessive time. Keeping it as simple as possible is the best way to eliminate confusion and error. Investing in equities is purely an analysis of what you believe your profit to be over a certain amount of time based on risk and potential reward. Right now, the risk is too great for not enough reward on a time horizon of 5-10 years. Will it go bad today or tomorrow? Who the heck knows?
As I told my Bloomberg sales rep the other day and I repeat very often to others “Bull markets make the Average Joe look like an investment genius.” It’s easy to say things will continue going up because if they don’t, everyone else lost too, so you’re among a large company of bad investors. If it continues to go up, it’s easy to say “See, I told you.” The question becomes not how well you do when everyone else is doing well but how well do you do when everyone is losing their shirt.
I will continue to look dumb and feel the bruising of my ego for a bit longer, but one day that will change…and I will talk about how great equities are and valuations are so good while others are saying “Stocks are the worst investment to be in.” Trust me, that day will happen. And when it does, you need to start buying because that is when fortunes and wealth is created.