For most of 2019 and early 2020, I didn’t have much to say about the stock market in general because most of the stocks worth buying and holding for a lifetime were trading between 20x earnings and 30x earnings, or even in some cases a valuation above that.
I am generally skeptical when most mega-cap companies trade at valuations north of 20-22x earnings, because with very few exceptions, it means that a stock is becoming overpriced. As someone who appreciates the underlying business that is owned by the common stock, I cannot help but grow uneasy when a stock price (already at 20x earnings or greater) grows father than its underlying earnings. Usually, a piper must be paid at a later date. Sometimes, the correction is slow and gradual, with earnings growing faster than the stock price for a period of years. Other times, some global or firm-specific event causes investors to regain rationality, lucidity, and sobriety in evaluating the company all at once, and the stock price comes down quickly.
For much of 2019 and 2020, we were in overvalued territory. With the COVID-19 inspired declines causing a near 30% drop, coupled with a 20% re-gain, we are now starting to broadly see valuations at rational levels again (and incredible deals available in 2-3 sectors of the overall economy).
Part of the response that messes people up is that, during periods of economic dislocation, the people that have substantial amounts of cash and know what they are doing tend to grow very quiet and move to gobble up assets while granting almost no media interviews.
In 1987, during the October 1987 Crash that saw equities decline in prices by 22% over two days, with the bulk of the declines occurring on “Black Monday”, Peter Lynch was quietly gobbling up shares of La Quinta Hotels and Pep Boys’ stock at one-fifth of their prior-existing stock value. Warren Buffett was about to begin making his famous Coca-Cola investment, in which he allocated $1 billion over a five-year period that is now worth $18 billion and has paid out $5 billion over the past thirty years. Seth Klarman was buying up oil assets in Delaware’s bankruptcy court that were stricken by the 1986 oil bust and couldn’t draw in new investors at the bankruptcy asset sale due to the volatile stock market.
Here in 2020, the median age of a financial advisor in the United States is 48. If you have a financial advisor, it is more likely than not that he was a teenager or younger when the crisis of 1987. Unless he is a student of market history, there is unlikely to be anything like an “institutional memory” of wild fluctuations in stock prices except maybe the collapse of tech bubble in 2000-2002 and the financial crisis of 2008-2010.
Moreover, the 1966 to 1987 stock market was 247% as volatile as the stock market from 2010-2019. The consequence is that investors who were around in the 1970s, 1980s, and certainly before then, grew up in an era accustomed to stock price moves of 5%, 10%, 15%, and so on in short order.
Investors with that type of historical/institutional memory know that volatility means irrationality is in the air and therefore good deals in select spots are available. However, there is a strong spotlight bias, as those that know what they are doing are often quiet and making decisions to the benefit of themselves and their clients, while those in the financial press stand to benefit by scaring people about the circumstances because fear sells over calm historical perspectives every time.
There is a reason the usual calming voices like Warren Buffett, Charlie Munger, and Seth Klarman are not in the public eye the past month or so. They are quietly buying while those who make the most noise are loudly distracting.