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.