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Bubble? Bubble? What Bubble?

December 5, 2017

So much has been written about whether we are in an equity market bubble that, not to be outdone, I thought I’d offer my two cents. As an added feature I’ll also offer up my thinking about Bitcoin and crypto currencies! I can’t be any more wrong about these things than all the other commentators, can I? It appears from reading all the garbage commentary that nobody really knows what is happening anyway.

So let’s start with the equity bubble…..

Of course we’re in an equity bubble! Just look at the most favored stocks on the US equity exchanges, the FANG stocks. They mostly trade at impossible multiples of current earnings. Doesn’t anyone remember the Nifty Fifty? (and what happened when they were no longer Nifty?) No one in their right mind believes corporate earnings can be predicted with any semblance of accuracy; Earnings 2 or 3 quarters out can hardly be guessed at, never mind 5 or 10 years. So why should any company be valued at over 100x earnings (unless of course it is sitting on assets worth its market capitalization)? Current multiples anticipate earnings 5, 10 or more years out! Many pundits find all sorts of ‘logical’ explanations for the market trading at current lofty multiples; the low interest rate environment, new technologies, a quantum shift in the digital economy, etc. etc. All I can say is “Give me a break!”. How many times have we heard “Its different this time”, that is, until it isn’t. Sorry, I’m a non-believer! I think the market moves in waves, from dearth to excess and back to dearth. We just happen to be near the crest of the wave right now.

And bitcoin? Well, does Tulipmania ring any bells? I’m wondering just when ‘investors’ in cryptocurrencies wake up and find that poof!, their investment went up in ether last night. Now, I’m certainly not predicting this will happen tomorrow or next month or next year; bitcoin could go to $100,000 in the next two years (or two weeks!) for all I know before the proverbial ‘stuff’ hits the fan… but hit it, it will! The value of bitcoin is simply based on demand and supply. Supply is limited and recently demand has been high. Very high. It could get higher. But, because there is not much that can be done with bitcoin that cannot be done with any other currency (like pay for the necessities or even the luxuries in life) I don’t really see what kind of edge it has. Well, it has an edge; its anonymous. But how long will national governments let ‘investors’ invest speculate in UNREGULATED assets (and I use that term loosely) that CAN’T BE EASILY TAXED??? My guess is not too too long…..

The real question an investor has to ask him/herself is WHAT TO DO knowing that we ARE in a bubble. I’ve been asking myself that question for the past 2 or 3 years, that is, since I began thinking that we had entered bubble territory. To my mind the question has become more urgent in the past year, since the presidential election, with the 20+% rise in the US equity market. For the general investing public I think the best thing to do is nothing. Remain fully invested with the understanding that your portfolio WILL INEVITABLY DECLINE at some point by 50 or 75%. If you get used to doing nothing on the way up, then perhaps it will be easier to do nothing on the way down! It’s important to remember that timing the market is a fool’s game… so don’t even consider trying! But for an investor who can spend a bit more time and energy looking into various market opportunities, is there anything he or she can do to position his/her portfolio for the inevitable bear market, short of holding only cash? And even holding only cash ‘equivalents’ is not without risk as we saw in 2007/2008. It doesn’t help that cash provides close to zero return in this environment. My answer to this is simply to look for what appear to me mis-pricings and ignore the overall market. I’m also trying to be careful to move up the corporate priority ladder in terms of securities, for example the preferred units in Steel Partners LP (SPLP-PRA). And of course, I have a number of investments that are in liquidation so the cash SHOULD be coming back sooner rather than later (NYRT, FUR).

So that’s it. My advice is to do nothing more than prepare mentally to see your portfolio lose half its value in the next couple of years….. And then DO NOTHING when it does begin the decent! That latter ‘DO NOTHING’ is, of course, a real challenge.

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One Comment
  1. Tom permalink

    After reading your article and your recommendation to do nothing the following thought experiment came to my mind:

    Let say your portfolio value is 100 today and you’re feeling we’re close to the peak in equity markets and expect to lose 50% in a market crash. If you have 100% of your portfolio in cash, it will still be worth 100 in 1 or 2 years, ignoring inflation. Consequently, even if the market doubles from here and your portfolio would be worth 200, in the following market crash it would come down to 100 which leaves you at the same position as if you keep it all in cash.

    The current bull market being more than 8 years old and having a lot of bubbly sings in the market, how realistic is it that we’ll see another doubling from here on? So why wouldn’t you increase the amount of cash in your portfolio?

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