Many investors acknowledge that we all were feeling greedy back in the 1990s. But now that stocks have performed poorly for over eight years, those days are behind us. The problem today is that, if things keep going like they have been going lately, it is our feelings of fear that will be getting out of control.
Today’s P/E10 value is 25. We are now at one of the highest valuation levels experienced in the history of the U.S. market. Stocks have never given a strong long-term performance starting from these valuation levels. We are not today living in times of extreme fear or even moderate fear. We are today living in times of extreme greed.
It doesn’t feel that way because things were so out of control in the late 1990s that even eight years of poor performance have not been enough to get us back to reasonable price levels. The P/E10 level in the month before The Great Crash of 1929 was 33. We were at 44 in January 2000. Today we are at 25. Yes, we are moving in the right direction. No, we are not even close to where we need to be for stocks to begin offering a strong long-term value proposition once again.
This came up in the interview that Fortune recently did with Warren Buffett.
Here’s what the interviewer said:
“By your rule, now seems like a good time to be greedy. People are pretty fearful.”
Here’s what Buffet said:
“You’re right. They are going in that direction. That’s why stocks are cheaper. Stocks are a better buy today than they were a year ago. Or three years ago.”
There’s not one word in Buffett’s response that is incorrect. Stocks are a better buy than they were a year ago or three years ago. Stock prices are moving in the right direction.
But the interviewer is wrong to say that “now seems like a good time to be greedy” and “people are pretty fearful.”
If people were truly fearful, they would lower their stock allocations. There would be massive sales of stock. That would bring prices lower. It is not right to say that people are fearful at a time when stock prices are at one of the highest price levels in history.
There’s a bit of fear mixed in with the greed today, that’s all; the greed is no longer a pure greed. We are in the process of moving from a greed-based market to a fear-based market. We’ve got a long way to go. We have so far traveled perhaps halfway to completion of the journey.
I wish that Buffett had corrected the misimpression voiced by the interviewer. I wish that he had said: “No, that’s not right, prices are scary today, those who have not yet lowered their stock allocations need to do so immediately.” The sooner that message gets out, the better.
The interviewer’s comments are not fearful comments. They are greedy comments. It is greedy to expect strong long-term stock returns starting from these price levels. When we are truly feeling fearful, interviewers won’t be making comments like that. When we are truly feeling fearful, interviewers will be mocking anyone who says that stocks can ever offer a strong long-term value proposition. That’s when the long-term value proposition will be the strongest it can be.
Don’t be fooled by false fearfulness.
Become truly fearful.
Make greed fun again.
Today’s Passion: The article entitled Woody Allan’s Take on the Efficient Market Theory argues that we lie to ourselves about how stock investing works because — well, we need the eggs!