From Jeremy Grantham's 3Q 2016 letter:
"We have been extremely spoiled in the last 30 years by experiencing 4 of perhaps the best 8 classic bubbles known to history. For me, the order of seniority is, from the top: Japanese land, Japanese stocks in 1989, US tech stocks in 2000, and US housing, which peaked in 2006..."
Grantham goes on to explain something each of these bubbles have in common. It essentially comes down to euphoria combined with widespread belief in the unbelievable. Things like:
- That "land under the Emperor’s Palace" should equal the combined value of all California real estate.
- That the Japanese stock market, at 65x earnings, was supposedly cheap.
(Apparently Solomon Brothers at the time thought that valuations should be more like 100x.)
- That U.S. tech stocks could also be considered cheap at 65x while Internet stocks had, at least in aggregate, negative earnings yet many sold at high multiples of their loss generating sales.
More from Grantham:
"...Greenspan (hiss) explained how the Internet would usher in a new golden age of growth, not the boom and bust of productivity that we actually experienced. And most institutional investment committees believed it or half believed it! And US house prices, said Bernanke in 2007, 'had never declined,' meaning they never would, and everyone believed him.
Indeed, the broad public during these four events, two in Japan and two in the US, appeared to believe most or all of it. As did the economic and financial establishments, especially for the two US bubbles. Certainly only mavericks spoke against them."
So how does the current environment compare? Well, according to Grantham, it just doesn't stack up.
"How does that level of euphoria, of wishful thinking, of general acceptance, compare to today’s stock market in the US? Not very well. The market lacks both the excellent fundamentals and the euphoria required to unreasonably extrapolate it."
This hardly makes for a wonderful investing environment. Grantham points out that the market these days economically and psychologically "is closer to an anti-bubble than a bubble. In every sense, that is, except one: Traditional measures of value score this market as extremely overpriced by historical standards."
He then adds...
"None of the usual economic or psychological conditions for an investment bubble are being met" though valuations are "almost on the statistical boundary of a bubble."
Investing well necessarily requires not only sufficient margin of safety to protect against unforeseeable outcomes (along with inevitable mistakes), it requires sufficient compensation considering ALL risks and understood alternatives.
High valuations make meeting these requirements nearly impossible.
During the financial crisis -- and actually for quite a long while after the crisis -- lots of equity bargains could be found.
These days...not so much.
Instead, in way to many instances, more than full valuations prevail these days even if there may naturally be the odd exception when it comes to such a generalization. Charlie Munger once said:
"Our system is to swim as competently as we can and sometimes the tide will be with us and sometimes it will be against us. But by and large we don't much bother with trying to predict the tides because we plan to play the game for a long time."
Unfortunately, valuation reveals little or nothing about what market prices might do in the near-term or even longer.
Judging how price compares to the intrinsic value of a business is a very different game than guessing how the "tides" might impact market prices.
The former is difficult yet not impossible while the latter activity is, at least for me, something destined to be ignored from the sidelines with great enthusiasm.
Adam
Related posts:
Isaac Newton, The Investor
Grantham om Bubbles
Charlie Munger: Snare and a Delusion
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
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Applying Newton's Fourth Law
Origin of Newton's 4th Law?
"Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, 'I can calculate the movement of the stars, but not the madness of men.' If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases." - Warren Buffett
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Find good businesses; buy at nice discounts to value; stay within limits & stick to what's understandable (necessarily unique for each investor); minimize trading, frictional costs, & errors of all kinds.
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Visitors should always do their own homework and consult, as needed, with a personal financial adviser who understands their specific individual circumstances before taking action on any particular investing idea. What makes sense as an investment in one set of individual circumstances may not in another.
Opinions found on the blog are just that, opinions, could easily be wrong in all kinds of ways, and should never be considered advice that is specific in nature. Stocks and other investment vehicles are inherently filled with risks including the possibility, or even likelihood, of permanent loss of capital. Past performance, of course, should not be considered indicative of future results. Due diligence is necessary.
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A temperamental market pretty much assures it.
Those with a long investing horizon, it's worth noting, actually benefit from lower stock prices in the near-term (though not many market participants seem willing to put this truism to effective use). Those who attempt to profit primarily via speculating on short-term price action likely won't find this way of thinking to be of much interest.
The bottom line: This site does not provide individual investment advice of any kind and the blog posts found here are never a recommendation to buy or sell anything. Visitors should start with the assumption that the ideas found here are not good ones and do their own homework (or get individualized help from an investment professional) before taking ANY action.
Otherwise, hopefully some occasionally find the site worthwhile.
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This site's emphasis? Put simply, it's on finding and buying -- with the long-term in mind -- good businesses at a plain discount to conservatively estimated value; it's on selling shares of those well-bought high quality business reluctantly. The view here is that selling makes sense only when core economics become permanently impaired, prospects have been misjudged, market price not just somewhat but, instead, meaningfully exceed per share intrinsic value, or opportunity costs are high. Buy/sell decisions aren't just an opportunity to increase returns; they're also an opportunity to make mistakes. It's easy to overemphasize the former and forget the latter. The focus here is on minimizing trading, frictional costs, and errors of all kinds; it's on staying comfortably within realistically assessed limits. First and foremost is the view that an investor should never make a specific investment based upon what someone else thinks. In other words, what makes sense to own is necessarily unique for each investor and it'd be unwise to not act accordingly. So, more generally, this site simply attempts to better understand some useful principles and ideas in context of investment. It's about, in a practical sense, what tends to work over the long haul as well as what, at times, gets the investor into trouble. It's not about grand theories in finance and economics. These too often distract from what matters or, worse yet, lead to costly misjudgments. As a result, they are mostly viewed with a healthy dose of skepticism here. Otherwise, the best thinking across disciplines should be learned well then put to good use in a way that's uniquely suitable.
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Notable Quote
"Warren and I have not made our way in life by making successful macroeconomic predictions and betting on our conclusions.
Our system is to swim as competently as we can and sometimes the tide will be with us and sometimes it will be against us. But by and large we don't much bother with trying to predict the tides because we plan to play the game for a long time.
I recommend to all of you exactly the same attitude.
It's kind of a snare and a delusion to outguess macroeconomic cycles... ...very few people do it successfully and some of them do it by accident. When the game is that tough, why not adopt the other system of swimming as competently as you can and figuring that over a long life you'll have your share of good tides and bad tides?" - Charlie Munger
Our system is to swim as competently as we can and sometimes the tide will be with us and sometimes it will be against us. But by and large we don't much bother with trying to predict the tides because we plan to play the game for a long time.
I recommend to all of you exactly the same attitude.
It's kind of a snare and a delusion to outguess macroeconomic cycles... ...very few people do it successfully and some of them do it by accident. When the game is that tough, why not adopt the other system of swimming as competently as you can and figuring that over a long life you'll have your share of good tides and bad tides?" - Charlie Munger