Episode 53 is another “radio show” format. This means we tackle a handful of topics from Meb’s blog and tweets.
TOPIC 1 – VALUATIONS
3 DIFFERENT TAKES ON CURRENT VALUE PICTURE:
Meb’s recent blog post “A Bar Too High” indicated that for stocks to meet expectations over next 10 years, valuations must rise to highest they’ve ever been in history. With a current CAPE ratio of 29, that means the stock market multiple needs to INCREASE to all-time 1999 bubble highs to meet investor expectations. He thinks tepid growth is more realistic.
On the other hand, James Montier, member of the asset allocation team at the Boston-based asset manager GMO, is convinced that the US stock market is in bubble territory. However, European equities aren’t particularly cheap, either. Only emerging markets value-stocks appear vaguely attractive to him. Investors should be patient and hold a lot of cash in their portfolios in order to be able to buy when markets are correcting.
What would make the US equity market attractive again – how much would it have to correct? To get back to our sense of fair value tomorrow, it would have to fall by more than 50%. Then we would be on average valuation, which again we estimate based on profitability going back to normal.
A third option from a reader question: “Lately there seems to be a lot of talk about CAPE measure not being as meaningful as many seem to think that it is because the very low yields on bonds and full pricing of bonds are basically changing the overall risk adjusted returns landscape. I think the point people are making is that stocks are fairly priced for current overall market conditions, despite many indicators which suggest that prices are historically high.”
Three viewpoints – how does Meb see them all? You’ll hear his take.
TOPIC 2 – INVEST IN SINGLE STOCKS AT YOUR PERIL
A new study by finance professor Hendrik Bessembinder, called “Do Stocks Outperform Treasury Bills?” found that while investing in the overall stock market makes sense, individual stocks resemble lottery tickets: A very small percentage of winning stocks have done splendidly, but when gains and losses are tallied up over their lifetimes, most stocks haven’t earned any money at all. What’s more, 58 percent of individual stocks since 1926 have failed to outperform one-month Treasury bills over their lifetimes.
Professor Bessembinder found that a mere 4 percent of the stocks in the entire market — headed by Exxon Mobil and followed by Apple, General Electric, Microsoft and IBM — accounted for all of the net market returns from 1926 through 2015. By contrast, the most common single result for an individual stock over that period was a return of nearly negative 100 percent — almost a total loss.
Given all this, what reason is there for the average retail investor to be in specific equities instead of broader sector and index ETFs?
TOPIC 3 – VOLATILITY
We'll post a chart about our current low volatility – actual U.S. stock market volatility going to back 1928 has only been lower about 3% of trading days.
How does Meb interpret this – do these low readings mean a reversion is likely? Or is it the opposite – more of a trend approach where objects in motion tend to stay in motion?
Also, how would an investor act upon this using a tail-risk hedging strategy involving puts?
There’s plenty more and a handful of rabbit holes in this radio show episode, including investor sentiment, the name of Meb’s new child, how to avoid value traps, and yes, as the title suggests, the cheapest countries in the market today.
What are they? Find out in Episode 53.
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