It’s precisely the failure of valuations to matter over shorter segments of the market cycle that regularly convinces investors that valuations don’t matter at all. This delusion is strikingly ingrained into investor behavior, and is almost inescapably revived during every speculative episode. As Graham and Dodd wrote in Security Analysis (1934), referring to the final advance that led to the 1929 market peak, the reason investors shifted their attention away from historically-reliable measures of valuation was “first, that the records of the past were proving an undependable guide to investment; and, second, that the rewards offered by the future had become irresistibly alluring.” The consequence of the delusion that “old valuation measures no longer apply” was predictably wicked, as it was after the 1969, 1972, 2000 and 2007 extremes. What’s distressing is that this delusion is actively encouraged by investment professionals who ought to know better.
Last week I discussed what I think will be the fallout from the Great Reset, when the massive amounts of global (and especially government) debt and the bubble in government promises will have to be dealt with. I think we’ll see a period of great volatility in the markets. I offered a solution for dealing with this complexity and uncertainty in the markets by diversifying trading strategies. But that diversification must reflect a rethinking of Modern Portfolio Theory, including a significant reshaping of valuations in asset classes. We’ll deal with those topics today.
My friend Mark Hulbert once had a philosophy professor at Oxford, who distinguished two ways of being wrong: “You can be just plain wrong, or you can be wrong in an interesting way.” In the latter case, Mark explained, correcting the wrong reveals a lot about the underlying truth.
This letter will cover the philosophical underpinnings of my thinking. I’ll also introduce some investment tools (which I will give you access to through a link later on in the letter) that express that philosophy, but you could also design a different answer that fits your own (or your client’s) portfolio construction.
When investors pay high P/E multiples on earnings that already reflect cyclically-elevated profit margins, they pay twice for their investment.
Today I’m going to share a small sample of Peter Boockvar’s daily output. Below are three articles he published on one day – Thursday, May 11, 2017. And he does this every day, week and month and year in and out. He never fails to make cogent, interesting points about the day’s events. Think about the brainpower it takes to generate this sort of creative output every working day.
China A-shares could shortly be included in a key international benchmark for the first time—in a way that highlights smarter efforts by the West to help China integrate fully into global markets.
I fully intended to end my series on “Angst in America” last week, moving on to portfolio construction and what I call the Great Reset. But as I did my regular reading and research this week and reflected on it, I realized there was one piece missing from this series. That is a discussion of the angst that the Millennial generation and generations that follow are facing. And this is not just a US problem; it’s global.
Every episode in history has its own wrinkles. But investors should not use some “new era” argument to dismiss the central principles of investing, as a substitute for carefully quantifying the impact of those wrinkles. Unfortunately, because investors get caught up in concepts, they come to a point in every speculative episode where they ignore the central principles of investing altogether.
Despite extreme valuations, investors’ fear of missing out is looking increasingly desperate. In market cycles across history, that has been an unfortunate impulse.