Respecting Values

When you’ve been an investor as long as I’ve been, you see all kinds of cycles. You see high interest rates (early 1980s) and you see low interest rates (2004). Bear stock markets end (1974) and bull stock markets end (1999). Oil prices collapse (1986) and oil prices boom (today).

As a long-term investor, the best you can do is respect value. At different times, different forms of investment are either overvalued or undervalued. Our goal should not be to follow the herd mentality, but to simply follow boring common sense.

Early in the 1980s interest rates reached ridiculously high levels and home owners were dropping off their house keys at the bank and walking away. It looked like interest rates would never fall. But by the summer of 2004, rates fell to their lowest level in about half a century.

In 1974, no one wanted to buy stocks. The market was simply dead. No buyers. By the end of 1999, the greatest stock market rally in history finished its bull cycle. In 1999, one could say, the stock market had buyers and no sellers.

In Texas, in the mid 1980s, oil prices fell to $13 U.S. a barrel. Texans felt their world caving in. Oil companies were closing their operations daily. Many jobs were lost. Twenty years later, oil is trading near $80 U.S. a barrel and oil companies are making money hand over fist again.

Investments, by nature, either become excessively overvalued or undervalued before they start a new price trend. And that brings me to my message of today.

In my opinion, stocks, after an unprecedented bull market that ended in 1999, to which valuations were extremely excessive, never started a price cycle towards undervaluation. Yes, one could argue stocks have stayed at about the same price level for about six years. But bull markets (that bring excess valuation) are followed by bear markets (that under value the market). That hasn’t happened yet. And that’s why my bet is that lower stock prices lie ahead… likely lower than anyone can imagine today.