2017 has been easy…really really easy.
Saul is up 65% at Sept month-end and most of us have truly amazing returns in a short period time with several stock doubles this year alone, a 4 multiple in SHOP and numerous stocks over 50%…sure has been easy…almost the “dart board” analogy of years’ gone by.
But we should not invest in a vacuum and be unaware of our surroundings…lest one’s hubris upends humility…resulting in investment expectations becoming unrealistic and perhaps weighted towards higher and higher risk.
This has been a truly amazing year and assuming Predident Trump gets his middle class and corporate tax reform through Congress, we will hopefully see the GDP return to historical norms that could help fuel this market further.
Since Saul is the leader here, it was interesting to look back to his biggest year returns and see what transpired the year after:
1999 - 115%…we know what happened the next year ;(
2003 - 124%…the market lagged the following year with wild tumultuous year of radical fluctuations
2009 - 111%…the market rose 17% the following year.
What can one conclude from this? First of all, Saul has a lot of work to do this year to catch those three amazing year returns :). But second, the year after such amazing returns might be a bit rough (2010 being the exception) from an investment return perspective.
Now for those who have already clocked substantial gains on paper, sitting and holding on those stocks can be easier than making a new decision of where to deploy “new” money given the probablities of follow-on years’ returns above. So for those who continue to invest new money, there may be additional considerations to ponder when dealing with stocks with P/S of 20 and beyond.
Quite honestly, we havent had to be that great at stock picking this year to have amazing returns. But the next 12 months will likely be different if history is to be repeated. Even barring some Black Swan event like the Trump tax reform not getting passed (I personally believe the market already assumes it goes through), we have near every indicator saying this market is overvalued.
Let’s look at just a few recognizing that they are NOT “timing” indicators, but rather an indication of what future returns might be from a probability perspective:
- The Schiller PE is at the second highest in its history (second to 2000):
- Inflation adjusted PE is at the upper end (but not close to the nosebleed 2000 and 2008/9 levels):
- The BMW chart of S&P and NAS are at near 1 SD above mean:
- The Tobin Q is 43% higher than its norm:
- The Buffet Indicator is at high levels closing in on 2000:
- As a measure of market complacency, the VIX is at all time lows:
While these indicators are NOT a timing methodology, they do point to a richly valued complacent market and the “Saul Indicator” above could be also construed to be consistent with that thesis.
New money entering the market at this time, likely will need much more skill than dart boards. 2017 has been easy…maybe too easy…I really doubt 2018 will be as lax.
Humility is a real asset in the stock market…hubris over the long haul can be a real detriment…we cannot consistently and successful invest in a vacuum and be unaware of our surroundings.
These above indicators are our “surroundings” IMO.
So sharpen your pencils and skills…adjust expectations for risk…be discerning where to deploy your hard earned cash…be critical of higher risk margin/options trading…there is still money to be made…but it won’t be this easy IMO…what a great year!