All of you know that I am not a professional investor at this point, but I am a student of history, I even have a useless degree in it. The real point is though that I have seen over and over again how cyclical history is and what happens to those who do not choose to heed its warnings. The bottom line up front (BLUF) is that we are overdue for a major market correction.
Not the most original statement I know and there is a large part of this that is nested in the Shiller P/E profile and Wilshire GDP. As a value investor I started following them because I knew Warren Buffet did, and it was hard to argue with his record. Since that time I have started studying it more as a student of history and listening to what the market bulls are saying.
If you believe in Dave Portnoy’s statement that,“I’m not saying I had a better career. … He’s one of the best ever to do it,” he said. “I’m the new breed. I’m the new generation. There’s nobody who can argue that Warren Buffett is better at the stock market than I am right now. I’m better than he is. That’s a fact.” I would not recommend this post to you because I’m ready to tear his ridiculous statement to shreds.
Alright, that was a bold statement, so here I go. Nobody can argue that Buffett is better than Dave, if you want to compare their records we would have to see Dave’s trading record, but then again you would also have to compare private holdings because they are part of a portfolio. I look at their net worth and if Dave was doing as well as he said he is then why isn’t he a billionaire yet?
His version of “investing” is essentially gambling on being able to call the highs and lows of individual equities. This has been proven to work…for a certain amount of time, but there haven’t been many traders who have been able to do this effectively over a period of years. Considering his attention span, the short term is likely all he has to hold on to, so thereby his claims of superiority carry an asterisk at best and outright laughable at worst. I know I chuckle.
Why do I put out a bearish sentiment? Because I find the statement that all stocks do is go up to be laughable yet sad and an indictment of my generations attention span. Investing is a process that is done looking 5 to 10 years to the future with a rough idea of 30. That is until something happens, an event which puts a wonderful company on sale. Or in the case of a true market correction it can put everything on sale, much to the chagrin of those who were buying near the top based on this unrealistically bullish mindset.
I know the arguments that the Shiller and Wilshire aren’t meaningful anymore because technology and the market have evolved, but if that’s true then why does the market stall or retract whenever there’s an announcement of interest rate news? It’s because the big players know we are in an overinflated bubble that is driven by new traders coming into the market and buying everything that seems to be heading up over and over again.
Tesla (TSLA) today is trading at P/E ratio of 1176.51 according to a search on Google. Think about that, over 1000x earnings, so over 1000 years to make back the price of buying, with a late jump because of the splitting stock that guess what, will trade at one fifth of the price no matter where it ends today. Tesla is not the only one but it is one of the most agregious examples of a company that just recently turned profitable and has a valuation above and beyond any sense of reason. I share this even as I say I am long TSLA, with no intent to increase a stake or sell in the next 72 hours even though I am not held to that standard. I’m making an argument against my own position, because it was ridiculous when I bought in (I am holding out for Batter Day this year to see if they announce what I think they will) and the bonus of a stock split and consumer psychology being a blessing.
The fact is that we have wildly inflated market right now and the tune over and over again is that “This time is different.” and that’s a load of garbage. The same thing has been said before every major crash to include this little thing called the dot com bubble burst in 2000. I understand technology is different now, but at some point someone is going to stop buying and ask the simple question, “How much is this company earning and if the calamity bell rang and they went bankrupt today what would they have to pay out to shareholders?” and I will tell you it is an uncomfortable question to ask yourself.
Now while Tesla’s debt isn’t the worst, they are actually by ratio not in a bad place, however they have averaged negative ROE and ROIC for the past ten years only turning positive looking at the trailing twelve months (TTM). I don’t know about you, but when I look at multiple and over 30x price to book value I start to grow concerned about what is supporting this giant structure. Elon Musk has done a wonderful job building a brand and business, but the followers have gone past committed in their evaluation of the companies value. So the question remains, why should we prepare for a downturn? Everything is going fine and obviously people are still buying whether Daddicus thinks the market is overinflated or not. I choose to look back at the 2008 mortgage crisis and see the possible similarities where it only took one company folding to start a domino effect in the US market and eventually the world market at a time where no one believed there was a correction coming and credit was cheap and easy.
No country can avoid inflation forever and lowered interest rates can’t go on forever either, it’s just not sustainable or good for the economy. Right now the government is essentially controlling our economy in a micromanagement sort of way and investors have overall overwhelmingly allowed it to control them. Whenever Powell utters a word the markets react and we all know the Federal Reserve has deep roots into the governmental structure. I’m just afraid that the pin that might get pulled on this current construct of a market will be when he steps up and says that interest rates are going to be raised, then I believe we will all be in trouble…unless you start planning now.
I would look at my portfolio and think, how recession proof is my portfolio and if I look at the value of the companies I am invested in are they capable of keeping their current levels in a full on recession? There is a part of your portfolio for the Tesla’s of the world, but there should be a greater part that is made up of wonderful companies with markets that will not be as susceptible to market down turns. Also, if you are a value investor then you should be keeping a kitty to the side waiting on the downturn to buy those companies you’ve been eyeing at a great discount.
So you see, my bearish outlook is somewhat bullish in nature. Do I think the market is due to go down? Yes. Do I think that the underlying great companies are doomed? No. Is it worth it to prepare for the next great investing opportunity? Yes. Are we reasonably confident that there will be a recover in the next twenty years? Pretty sure. I often said prepare for the worst but expect the best, here I do that by seeing a long term growth of the economy, but I am preparing for what history has reminded us of over the past 100 years, that no economy is eternally bullish. I hope you will take this and think on it as you make your investing plans, I have started to rearrange my percentages and I hope that people will still need the things they rely on every day no matter what the market does. I hope you succeed as well and don’t take the thought that Buffett is washed up to heart, because deep down he knows he’s seen this all several times before and been part of bailing out some of the most longstanding institutions in the country, I feel that at least should earn him the benefit of the doubt. Till next time.
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