More and more investors think we are in an epic stock market bubble.  They may be right, but we won’t know until after the fact.  There are a few important differences between now and the dot.com bubble of 20 years ago.  First, 2000’s high valuations were based on peak earnings as the economic cycle was ending, whereas currently we are coming off a 2020 recession and trough earnings.  The market valuation expansion now seems more like what took place following the 2009 low.  Second, in 2000 the real fed funds rate was historically high and financial conditions were tightening.  It is totally opposite today.
 
We would agree, however, that there are speculative pockets in the market that are, in fact, a bubble.  The IPO market comes to mind.  But the poster child for euphoria in this market is Tesla stock, up over 600% last year alone.  Tesla is now valued at $1.6 million for each car it sold in 2020, compared to $9,000 for GM.  Tesla’s valuation, per dollar of revenue, per dollar of profit, or per car produced, is well over 100 times that of each of the nifty nine largest global car manufacturers.  Even if you make the argument that Tesla is more of a tech company than an auto manufacturer, it still competes in an industry that is quickly designing and soon to be selling a complete array of electric vehicles.  GM recently announced they plan to have 20 electric models offered by the end of 2025.  Stiff competition is coming.

It is no secret that we are overdue for a correction.  The stock market has soared about 70% since last year’s March 23rd low with no real retracement.  We anticipate it is coming, and maybe soon.  Time will tell. Corrections only feel natural, normal, and healthy until you are in one.  We see light at the end of the tunnel for a global economic reopening as vaccinations accelerate.

VALUE IS WHERE YOU FIND IT

Legendary investor and deep thinker Howard Marks recently published his latest memo on January 11th.  Marks is the chairman and chief investment officer of Oaktree Capital Management.  Even though Marks has spent most of his 50-year career in credit-related investments, his insights into stock investing are extremely insightful.  Here are some of the gems from his latest memo, ‘Something of Value.’
 

  • Value investing should consist of buying whatever represents a better value proposition, taking into account all factors and including both ‘growth’ and ‘value’ stocks.
     
  • To be a good equity investor you have to be an optimist – it’s no activity for doomsayers.  You should believe that our economy has a solid foundation and will grow over time, and that companies offer products and services to improve the lives of consumers.  On the other hand, an optimistic bond investor is almost an oxymoron.  Bond investors spend most of their time analyzing the likelihood their principal will be paid back.
     
  • We live in a complex world where a range of tools is necessary to be a successful investor.  One of these tools is being open to alternative valuation and analytical methods.  The old framework – Benjamin Graham and early Warren Buffet – included a search process that was difficult and opaque.  Because it was so difficult to get information on companies, it was easier to find investment gems.  Today the industry is wildly competitive.  Access to information is easy and cheap for all investors.  Successful investing today has to be more about superior judgments concerning qualitative non-computable factors, and how things are likely to unfold in the future.
     
  • ‘Value’ stocks should, in theory, be safer than ‘growth’ stocks, anchored by today’s cash flows and asset values.  Growth investing often entails beliefs in unproven business models.  It is different than a mean-reversion approach.  Some growth stocks may turn out to have fade-defying business models.  In today’s market, we’ve never seen businesses with the ability to scale as rapidly and frictionlessly.  It makes sense for investors (even ‘value’ investors) to consider investments that 1) involve high tech companies considered to have unusually bright futures, 2) have futures that are distant and hard to quantify, and 3) sell at valuations above historical averages.  After all, there are lots of things about a company’s present condition and its future potential that don’t get picked up in a P/E ratio.
     
  • Many sources of potential value can’t be reduced to a number.  The fact that something can’t be predicted with precision doesn’t mean it isn’t real.  The fact that a security carries high valuation metrics doesn’t mean it is overpriced, and one with low valuation metrics doesn’t mean it’s a bargain.
     
  • Finally, when you find a company that can print money, don’t sell just because it has appreciated.  Big winners are hard to find – get the most out of those you do find.

 

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We think Marks wants us to look at many of today’s high tech growth companies through a different lens.  Those with exciting prospects that come with high valuations might be worth a look.  Some of today’s valuations are justified by future prospects, while others are laughable.  It’s up to us to know the difference.

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Are you prepared for the next market correction or financial crisis?

Knowledge – Results

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Are you prepared for the next market correction or financial crisis?

Knowledge – Results

Experts in Risk Management

Are you prepared for the next market correction or financial crisis?

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Richard Furmanski

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has been a portfolio manager and analyst for over 35 years. He manages conservative, tax-efficient portfolios for both pre-retirees and retirees. His lower risk approach appeals to investors who want less volatility and competitive risk-adjusted returns.

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Do you manage both stock and bond portfolios?

Yes. We build a portfolio of conservative, high-quality stocks and hold them for the long-term. The average holding period is 4 – 5 years. Our focus is on stocks that are suitable for retirement portfolios.

Our high-quality bond portfolios are designed to provide both income and stability of principal. Bonds provide the anchor for balanced accounts (those holding both stocks and bonds).

What is your investment philosophy?
We take great care in purchasing only high-quality stocks and bonds intent on a multi-year holding period. Portfolio turnover and taxable realized gains are modest in comparison to other active managers. We do not time the market but will become more defensive, in terms of stock holdings, when market conditions warrant.
Will the portfolio be managed in accordance with my financial goals?
Yes. Each of our clients has a custom-tailored portfolio. These custom portfolios are designed to meet specific client objectives with a thoughtful approach to specific constraints such as risk tolerance. And as each client’s situation changes, the portfolio does as well. There is no cookie cutter approach.
What kind of expertise do you have and how can that help me in difficult markets?
We have been working with high-net-worth clients like you since 1982. Over that time we have helped them to navigate several bear markets and financial crises (including the stock market crash of 1987). We hold the Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP) designations.
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How do you charge for your services?
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