With the stock market volatility coming back how do you navigate where to invest for the long-term?
Warren Buffet said. “Price is what you pay, value is what you get.” This is a simple statement that should be applied more often. Dr. Hussman recently wrote an article that explains in great detail the exuberant prices of today compared to value. An easy way to think about this is selling a home. When you sell a house, the price should be near its fair-market value which is determined by the surrounding houses, (The fair-market price). Now let’s apply this concept to the market. For this example, we will use Tesla’s P/E ratio (price per earnings) as a representation of value. Tesla as of September 4th closed at $418.32 with a P/E of 1089.38, compared to its peer in the tech industry, Amazon which closed at $3,294.62 and has a P/E of 126.67. This tells us that Tesla’s price has “run up” 8 times more than Amazon’s, in relation to its earnings. Considering that Amazon has been a “darling of Wall Street” for decades this is a feat. This is concerning to us because, in our opinion, it is indicative of the excessive returns that have far outrun reality in the stock markets today. Why does value matter? You can listen to our explanation on the video, look at Dr. Hussman’s chart below, or WealthShield’s white papers, Value Matters either one will get you to a similar solution. But in short, “It’s exactly when past returns are most glorious that future prospects are most dismal.” Dr. Hussman shows below, as of the 28th of August, 2020, a 12-year nominal (before fees) return of -0.95% on a conventional mix of 60/30/10 of S&P 500, Treasury bonds, and T-bills respectively.
Before we turn “all doom & gloom” tune in next week and we will discuss what we have planned to do about this….