“A question I have been wanting to ask you: P/E ratios are at or near an all-time high in the broad stock market. Concentration of valuations in seven or so equities in the S&P 500 is at or near an all-time high. Margin Debt (acknowledging the nuances you previously articulated) is at or near an all-time high. Yet it is a fool’s errand to try to time the market. All of these statements can be true at once. Yet, if one believes the market is due for a (perhaps major) correction, what is to be done? It seems that someone like Warren Buffett has cash on hand to take advantage of major distress opportunities. Do we have a strategy to be prepared to take advantage of a significant dislocation?”
~ Steve B.
All those premises have been true for a long time. To have been out of the market would mean missing 40% returns before a 10% drop, 20%, 25%? Now, Buffett’s cash story is completely misreported. It does not count the denominator: Cash TO ASSETS. He runs an 80-86% long equity portfolio, with more equity exposure as % than almost any client I have ever had. Fixed income is where dry powder should come from to buy distress events.
But back to the point of market valuations:
1. Broad S&P valuations are skewed by top-heaviness. Our Core Dividend portfolio is running at 16x, not 23-24x like the market.
2. Even for broad market investors, I just want to remind everyone that Alan Greenspan said “irrational exuberance” in 1995. See market returns: 1996, 1997, 1998, 1999.
In other words, valuation is not a timing tool. Valuations are most excessive in 5-10 names. Those allocated properly to begin with have less to do and less to fear than the top-heaviness of Mag7.
