The Market Value, as noted in our recent post, is the highest ever.
An alarming recent development I have been hearing and reading from the Wall Street forever hype machine, is that even THEY are questioning the high valuations! The only time in my career I recall this happening was the late 1990s, the previous market valuation high.
In this Master Investor interview, the venerable Jeremy Grantham, one of the best investors of our time, who serendipitously called the bottom of the 2008 crash, is screaming WARNING about the high market valuations. He is a historian of the market and bubbles, we should all take heed.
Here are the key takeaways of the Jeremy Grantham interview video:
- Markets spend a lot of time getting back to even after losses – a significant point he made was that
- Extreme bubbles are all that matters (My comment – if getting closer to your goal).
- We are experiencing the highest valuations in history.
- Dot-com, railroads, AI…bubbles – the fact that the newest technology is an obvious game changer is what insures market overvaluation and a bubble.
- It is “PRECISELY” the fact that the new technology is so good that entices so many people to invest and drive up the price.
- An example is the advent of railroads – in the UK they built 6 rail lines between their two great industrial cities – they only needed one!
- Dot-com bubble in the late 1990s – Amazon was the ultimate winner and their stock lost 92% of its value.
- Humans have to work off of positivity which feeds the bubble – you don’t get it until you are hit in the head with the hammer.
- The reverse is also true – we stay in that euphoric state until bam and then the reverse – we are in a dejected state – this is where investment opportunity lies.
- Don’t worry about hitting the market bottom – when you can make good money at the current price – GO!
- Individual investors don’t have the career risk – the problem with institutional (non index mutual funds, ETFs, etc) is they have to stay in the market even when they know the prices are extreme and will fall at some point.
- I remember this back in 1999. There was a celebrated, successful value stock investor who managed a mutual fund for years that retired right before the market crashed. He had a long career so he was probably due to retire. I remember reading the Wall Street Journal article and thinking that he quit right before he was about to win. He (or his fund) was later vindicated during the 3 year market crash when value investing came back into favor and held its own.
- I remember this back in 1999. There was a celebrated, successful value stock investor who managed a mutual fund for years that retired right before the market crashed. He had a long career so he was probably due to retire. I remember reading the Wall Street Journal article and thinking that he quit right before he was about to win. He (or his fund) was later vindicated during the 3 year market crash when value investing came back into favor and held its own.
- With AI – now the Mag 7 (NVIDIA, Meta (Facebook), Alphabet (Google), Microsoft, Amazon, Tesla and Apple – have to compete! This was a very insightful point. The Mag 7 for years have stayed in their own lane and dominated their space.
- If you look at the current economic backdrop and into the horizon with low birth rates for a while, competition for scarce resources, extreme market valuations, tariffs?…it doesn’t look good but still positive long term.
- Europe/International (significantly undervalued compared to the US) will do well… they will drop maybe 20% in sympathy with the US market but as they did during the 2000 bubble, they will do well.
- From 2022 on – The Mag 7were the only thing growing in the market for a year plus, more recently some other companies jumped in. (My comment – the Mag 7 are currently 34% of the S&P 500 index, this was 12.3% in 2015)
- Bitcoin ultimate speculation- only tradeable no dividends.
- He feels it’s likely that NVIDIA’s stock value is going to significantly crash. He noted it is almost a certainty based on price.
- My comment – the stock is trading at almost 60 times earnings. I think most business owners would jump at selling at that valuation! The stock, and many others like it, are Priced for Perfection.
It all comes down to when you need the money to fund your goals. You need to have enough time to earn back the money after losses, before you need to start withdrawing money. Based on your plan, you may have ample money to be able to survive a big market downturn. You also have to know yourself, would you tolerate the losses and overreact during or after a bear market?
Our regularly published Market Value blog post provides guidance on how to navigate over, under and fairly valued markets.
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By Robert Bartley
Robert (“Bob”) is a Certified Public Accountant (CPA) and a CERTIFIED FINANCIAL PLANNER (CFP®). He is a Summa Cum Laude graduate of Merrimack College and a Presidential Scholar. He has over 30 years of business experience and over 20 years of experience as owner of Bartley Financial.
