Having engaged in some of this behavior myself, I feel somewhat qualified to make the following statement: Those who make blanket statements about "the market" and its state of value are doing you a grave disservice.
How many times have you seen this? Some fresh-faced money manager type comes onto BubbleVision and declares that "the market is undervalued," or some grizzled oldster opines in Barron's that he's never seen such an overvalued market, that there is "nothing to buy." Next question: How many times have you seen either type today? My guess is "more than none."
Again, I have been that guy, mainly the second of the two -- though I hold the line at being described as "grizzled" just yet. But every time I catch myself saying such a thing, I grimace just a bit: Am I really saying that everything is overvalued?
After all, just what is the market?
If we're talking about the American stock market, it is a collection of 6,000-plus publicly traded companies, plus the odd several thousand more on the bulletin boards and pink sheets that range from the "Why aren't they listed?" variety to the more prevalent "Why aren't they in jail?" ones.
There are scores of other markets -- bonds, derivatives, real estate, commodities, international markets, farmers markets, and so on. What's said here can be loosely applied to all of them. There's no such thing as universal overvalue or undervalue.
Making the complex both simple and wrong
One of the big debates ongoing in the U.S., as well as in several other countries, at the moment is whether the real estate "market" is overvalued. Having watched my house appreciate several-fold in the six years since we bought it, I think the answer is in the affirmative where housing in my area is concerned. But real estate markets are not universally correlated. Earlier this year National Geographic had a fascinating feature about the dying towns in rural Kansas. You think real estate is overvalued in those parts of the country where houses are just as likely to be abandoned as sold? (Alternate answer: Yes, of course it's possible, just in the same way that companies on their way to bankruptcy are overvalued at every point en route. But that's a different argument.)
So when someone comes out and says "the market is overvalued," or its opposite, be sure to set your garbage filter on "high." It's not necessarily that these folks are out to sell you something, perhaps beyond wanting to show that they have a sort of universal grasp on things. They may even be correct, universally speaking. In February 2000, the market, under its common definitions of being the S&P 500, or even the Nasdaq Composite, clearly was overvalued, and the relatively few people who were saying so, or were warning about this possibility, were plainly correct in the cosmic sense.
But the person making this statement is still grossly overstating his or her knowledge. I read this weekend where one money manager was lamenting that "there was nothing to buy" because every single sector of the market was so overvalued. What arrogant claptrap. (Incidentally, I'm being vague here as I'm unable to recall where I saw this conversation. If this jars anyone's memory, please let me know.) Such a statement presupposes that this manager's knowledge of every single sector of the stock market is complete.
What he needs to say, to reflect that he's not quite that smart, is that the places where he tends to look don't seem to offer compelling bargains. This is important: He hasn't looked everywhere. It's just not possible. But it sure as heck sounds smart. "I've looked and looked, and nothing meets my stringent investment standards." Now, I'm not suggesting that folks suddenly change their standards to respond to the overall market's losing its mind one way or another. What I am suggesting is: Look harder. Look in new places. Look where no one else seems to be looking. Just because a Qualcomm
Can't find anything? Keep looking
Here is the biggest secret of the stock market: There are always bargains among the 6,000-plus listed stocks. Always. At the same time, even in the most depressed of markets there are companies that are spectacularly overvalued. Any discussion of the market being too high or too low is a convenient excuse for people to quit paying attention to the valuation of the individual equities that comprise the markets. Especially those individual equities that are in their portfolios, or the ones that should be, if only they'd open their eyes.
If anything I'd suggest that most investors' definitions of what is a promising investment are way too loose. For example, earlier this year it seemed that you couldn't dodge the grandiose assumption that China was a great investment because it was growing so quickly. Some of the people who made this assumption, decided it was sound, and made investments based upon it have quickly lost boatloads of money. Why? Because it takes neither particular skill nor insight to overpay for any one company, that's why. Just so, it doesn't take a whole lot of brainpower to look at a field of 6,000 various companies and announce that not a one of them fits your criteria for investment.
In times when the overall market has risen rapidly, the number of companies that are inexpensive relative to their potential future cash flows are naturally reduced.
Bargains in a time of dementia
Going back to February 2000, which in hindsight stands out as the most egregious case of market overvalue in the better part of a century, it also seems that there were some screaming, screaming bargains. In fact, outside of the technology, telecommunications, and Internet sectors, there were scores of 'em. Berkshire Hathaway
The market -- even if we just limit ourselves to publicly traded, listed equities -- isn't really definable in general terms, which in turn means that it offers pretty poor fodder for TV. I mean, who wants to hear the truth each day that "some are expensive, some are cheap," when the definitive is so much more attractive? So we get what we want to hear, something understandable. But when you must generalize something so much so that most people can understand it, oftentimes the very generalization obscures what could be some real opportunities -- or dangers.
Might as well not bother looking -- "the market" is overvalued, or worse, "buy anything, the market's undervalued," are two sides of the same coin. This particular coin is not one you need to pick up. Focus on what you own, or if you're not finding too much, focus on expanding your circle of competence. Look harder, look smarter, and most of all, be instantly suspicious of generalizations. Don't take what's handed to you by the market gurus. Even if they're right in aggregate, they're still wrong.
That's the secret: When you hear that it doesn't even make any sense to look, look harder. And when the world seems to think that investing is easy-peasy, be very, very careful.
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Bill Mann is really good at making generalizations, but he finds that self-suspicion is pretty tiring. He holds beneficial interest in Berkshire Hathaway and Procter & Gamble. The Motley Fool has a disclosure policy.
