Not Afraid!

We have used this story before, but we like it . . .

Around the turn of the century a bandit rode in from Mexico, robbed a small Texas bank and fled back across the border. A Texas Ranger picked up his trail and nabbed him in a Mexican village. The bandit spoke no English and the ranger no Spanish, so another villager was asked to interpret.

“Ask him name,” said the ranger.

“He says his name is Jose,” said the interpreter.

“Ask him if he admits robbing the bank.”

“Yes, he admits it.”

“Ask him where he hid the money.”

“He won’t tell me.”

Leveling his pistol at Jose’s head the ranger said, “Now ask him again where he hid the money.”

Jose quickly blurted out in Spanish, “The money is hidden in the well in the village square.”

“What did he say?” demanded the ranger.

The interpreter replied, “Jose says he is not afraid to die!”

We have used the “Not Afraid” story many times over the past 48 years, but we dredged it up again this morning because of the many questions about “being afraid” we got in Boston two weeks ago and New York City last week. Said questions came from our financial advisors (FAs), their clients, and even some portfolio managers (PMs). The questions went something like this, “Hey Jeff, aren’t you afraid of (you can pick one) valuations, trade tariffs, Turkey, the currency crisis, rising interest rates, slowing growth in China, the flattening yield curve, etc.” Our response has been a resounding, “Not really.” So, let’s attempt to speak to these questions in order. On valuation, the most overvalued chart we know of is the S&P 500 Price-to-Sales-Ratio chart. We do not have a really good counter argument to this other than to say sales are surging - implying valuations, according to this metric, may be reduced in the future. The next most expensive chart is market capitalization to GDP, Warren Buffett’s preferred market valuation gauge. Hereto, we do not have a really good counter argument other than to say GDP has been growing at a subnormal rate for eight years, but recently has increased rather dramatically. This suggests this indicator may look more reasonable in the quarters ahead. As for the price to book value, we have argued for a decade that book values are understated. For instance, until the recent corporate tax code, a company would buy a piece of capital equipment and depreciate for, say, seven years, even though the effective life of the equipment was 30 years (read: book value understated). Turning to price to earnings measurements, if you believe S&P’s earnings estimate for 2019 (~$177), at the February 9, 2018 “undercut low,” which we told folks to buy, the S&P 500 (SPX/2850.13) was trading at 14.3 times next year’s earnings.