I had a discussion today with someone who said the market may “just be taking a breather”. In 1929, college professor of economics, Irving Fisher wrote, “Stock prices have reached what looks like a permanently high plateau”. “Breather” and “plateau” sound like the same thing to me.
If you had bought based on Fisher’s “stock tip”, by 1932, you would have lost 89% of your money. Not a bad return, eh?
You may have noticed that this blog has trended towards warning in the recent months. I cannot in good faith recommend very many stocks at this time. A restaurant like McDonalds is trading for 30 times earnings, Clorox for 28 times earnings, etc. To return to historical norms, the earnings need to double or these stocks need to drop around 40-50%.
All investing is about opportunity costs. The reason why people bid up stocks like this is because bonds are returning so little (thanks, Janet Yellen). They are all searching for yield/return on their money, especially the retired people who depend on bond yields for their income.
Last night, I had a discussion in our investment partnership, where one person said, “You can’t sell stocks, because you might miss the next 20% upside. Even if you do sell, and the market drops, you probably will not catch the bottom.” What is speaking here is fear. Fear of missing the “melting-up”, which is a result of a 7 year long bull-market, and fear of holding cash (in one of the lowest inflationary environments in the last 80 years). When the market turns, this fear turns around and people rush to preserve their capital. In other words, fear of cash and 0% yields will, one day, turn into a fear of stocks. That’s when we look to buy.
On Saturday, at Mohnish Pabrai’s annual meeting, he stated that he could not find any stocks in the USA to really jump into for a good return. He is down to 3 U.S. stocks (stay tuned for his latest 13-F filing). Buffett is sitting on a $100B cash pile. Several executives at Goldman Sachs have sounded the alarm of an overpriced market.
Heed the warnings of those who do this for a living.
Sept. 3, 1929: The market reaches its highest point before the Great Depression