My Investing Ego Is Worried About Tomorrow More Than Today

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.

These Markets Are Making Everyone Look Brilliant…except Value Investors

Markets keep going up.  Everyone keeps getting more and more confident in the markets.  It’s now to the point where when I hear someone say “Boy, this market is overpriced”, what they typically mean is “This thing is gonna fall 5-10% and it will be a great buying opportunity.”  Hardly the sign of overpriced.  That’s a run-of-the-mill market pull back during normal markets.

I am not a believer in that just because something has gone up for so many years does it mean it’s overvalued.  What makes something overvalued is that it is selling at a level that, based on history and fundamentals, is well above the normal range of valuations.  We are at levels, right now, that historically will produce break-even results INCLUDING DIVIDENDS over the next 10 years.  This historical accuracy is around 90%, based on John Hussman’s Weekly Market Commentaries.  This means that 10 years from now, we can expect the S&P 500 and Dow Jones to be 20% lower than they are today, on a nominal basis.  This is also the valuation metric that Warren Buffett has said is probably the “single most accurate measure of stock market valuations at any given time.”

Since 2000, we are only up 43% or so on the S&P, not including dividends.  That’s a mere 2.4% annual growth rate on the S&P 500, but what you need to remember is that valuations in 2000 were at all-time highs compared to history and we are NOW at valuation levels that are merely 10-15% lower than 2000.  Everyone thought that the markets would keep going up back in 2000 and 15 years later, we have only seen 2.4% capital growth on any dollar invested in the year 2000.  So let’s not forget that valuations DO matter.  There is a capitulation point for every market, good or bad.  No one remembers the bad times when things are good and no one remembers the good times when things are bad.

Could the party end again? Of course…and it will. When?  No idea.  I’ve been calling for it since 1500 or so on the S&P…that was many moons ago, and I admit that I was trying to fight momentum.

In late 2008 and early 2009, I was one of the few positive investors out there.  A lot of people have said “But you used to be so positive on the market! What happened?” Valuations happened.  My views on the market are based on historical valuation metrics that have proven to be highly accurate over time.  Clearly my timing has been off, but over the long run, these will prove to be true.  There will be a time in the next 5 years where I will be one of the few bulls out there talking about the incredible buying opportunities and low valuations.  Yes, when I make those calls, things will likely get worse and people will question me then like they question me now…but historical returns will eventually take grip then and a new secular bull market will take hold.

Unfortunately, this is all part of the process.  The excesses of 1982-2000 were so large that it will take a few ups and downs in the market for people to give up on stocks and, only then, will a new secular bull market be ready to take force.

I will wait patiently until valuations are at the right levels.  I have no idea when that will happen, but when it does, you will be able to read these posts and see that sound value investing can make someone look stupid for a while but brilliant later on.  I’m not hoping to look brilliant at the expense of others, but I am writing these words and showing that I will be putting my money where my mouth is.

What is a Value Investor?

I was just on CNNfn.com and I came across an article by Scott Fearon, CFA.  He is discussing what we can learn about investing by looking at the death of pay-phones (http://cfainstitute.tumblr.com/post/111879028236/what-investors-can-learn-from-the-death-of-the-pay). His point, in a nutshell, is that back in the last 1990s, he received “Buy” recommendations from analysts about inexpensive pay phone companies but they were inexpensive because they were a dying company. Now those are penny stocks, if they even exist. He said the value investor who cares about those metrics miss the forest for the trees…hmmm.

I don’t disagree, much, on that point about why pay phone companies were a bad buy in the last 1990s.  However, I would make two points.  1.) Most EVERY company that wasn’t a high tech high flying company was ignored in the late 1990s and had lower valuations.  Unlike today’s market, small and midcap companies were actually reasonably priced even during that late 1990s boom because the overvaluation was centered on high tech highly valued companies.  2.) He has no idea what a true value investor does.

Scott goes on to point out that value investors need to care about growth.  Uhhh.  We do.  That’s what he is missing.  A true value investor isn’t just looking for a “cheap” stock.  They are looking for an ignored stock or company, for whatever reason. Last year when I was buying Microsoft like crazy in the $25 range, everyone was telling me how stupid it was because Microsoft was dying…yet when I looked at their yearly revenue and profit numbers, every single year they were growing.  So here was a GROWING company who everyone was ignoring because they weren’t sexy anymore and therefore was selling at 8-9 times earnings. THAT is value investing.  I didn’t buy Radio Shack when it was dying.  I didn’t buy his example of JC Penney because it was dying and a true value investor isn’t looking for dying businesses.  They are looking for OVERLOOKED businesses.

Ironically, we see an article like this during a major bull market and at a time when valuations are through the roof.  I get it.  It’s easy to dismiss value investing when things are going gang busters.  Ironically, the best investors of all time tend to be value investors and they tend to do best when markets are dull and down.  That’s when they get the best deals.  When the markets are so far down that people don’t even want to buy the good companies at good prices, that’s what a value investor is looking for. Not the dying companies when markets are going great.