My business is to constantly look for new stocks by running stock screens, endlessly reading, looking at the holdings of respected investors, talking to a large network of investment professionals, attending conferences, scouring through ideas published on value investor networks
And finally, scouring a large (and growing) watch list of companies to buy at a significant margin of safety.
With all of that, my firm is having little success finding solid companies at attractive valuations.
If you don’t know whether “enormously” is greater than “tremendously” or vice versa, don’t worry, I don’t know either. But this is my point exactly: When an asset class is significantly overvalued and continues to get overvalued, quantifying its overvaluation brings little value.
The average stock today is trading at 73% above its historical average valuation. There are only two other times in history that stocks were more expensive than they are today: just before the Great Depression hit and in the 1999 run-up to the dotcom bubble burst.
We know how the history played in both cases — consequently stocks declined, a lot. Based on over a century of history, we are fairly sure that, this time too, stock valuations will at some point mean-revert and stock markets will decline.
After all, price-to-earnings behaves like a pendulum that swings around the mean, and today that pendulum has swung far above the mean.
What we don’t know is how investors will fare in the interim. Before the inevitable decline, will price-to-earnings revisit the pre-Great Depression level of 95% above average, or will it say hello to the pre-dotcom crash level of 164% above average? Nobody knows.
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