September 2015

 

Stocks valuations are as cheap as they have ever been in the last decade.

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Notice how I don’t say prices, because on a price basis, they certainly aren’t as cheap as they were in 2008. The reason why I don’t look at price alone is that it fails to take into account the years of economic productivity.

Businesses have made money in the last few years, which were either paid or to shareholders in dividends, or are represented in earnings which are retained in the company.

There’s a certain danger in anchoring to the last “crisis”, simply because the price then and now reflects a different situation.

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I can imagine someone in 2009 thinking that prices hadn’t hit the all time lows of 1997 (Asian Financial Crisis), or 2001 (Terrorist Bombings of 2001), or even 2003 (SARS Crisis in South Easy Asia), and always waiting for a “better deal”.

The problem is that you would have missed out the subsequent rally. Again, bearing in mind that in 2009, any objective valuation metric would have told you that stocks were a screaming buy. In all this market volatility, I think its easy to get caught up in the noise.

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Despite conventional wisdom, very little successful investing behaviour is built on market timing. All investors can do is value a business, and decide what a reasonable price is to pay based on the current market conditions.

Buying a cheap stock is no guarantee that it will go up (it normally tends to go down), and shorting an expensive stock just because it is expensive does not mean it will go down (it normally goes up with momentum).

Investors have a huge advantage when it come to the stock market. Their holding period.

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And yet investors time and time again forsake their advantage by trading in and out of the market. Like now. The worst part is investors time and time again sell at low prices, and only proceed to buy the same stocks again at much higher prices repeatedly.

Investing may be simple, but its never easy, and its the nature of the stock market that it is intrinsically volatile. Lets remember that volatility works both ways, both on the way up and on the way down. The fact that investors like to see stock prices go up does not make it “right”.

Are Stocks Cheap?

That depends on which market you’re looking at. Stock market prices in the United States are by my measure, overvalued or richly valued – which is one reason why we exited most of our US holdings back in 2014. Stocks were overwhelmingly cheap in the US back when we started in 2011 compared to the Emerging Markets.

On the other hand, stock market valuations in the Emerging Markets are overwhelmingly cheap today. Just take a look at some of the headlines:

How farmers from rural China bet on the stock market and lost – The Washington Post

Foreign investors flee South Korea stocks, bonds – CNBC

Investors are fleeing once-popular emerging markets – CNBC

 


 

Why do I look at stock market valuations? Simply because they are an overwhelmingly reliable predictor of long-term price appreciation! Here’s a warning though: they do very little in way of predicting short term price movements.

I don’t think this is academic theory at this point: just take a look what has actually happened in the stock market in the last couple of decades – What Has Worked In Investing

To end off this post, let me just end with two quotes from Sir John Templeton, one of the most celebrated investors of our time.

The four most dangerous words in investing are “This time it’s different.”

and my all time favourite:

“Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria.”