Today's Valuation and The Perils Market Timing

A quick post as I try to avoid macro tourism as much as I can.

The stock market is on fire.

The Schiller PE ratio has only been higher in 1999.

We’ve got SPAC mania, meme stocks and endless supply of anecdotal stories like celebrities giving investment advice.

Enthusiasm is undeniably high and speculation is rampant.

So sell everything right?

I haven’t.

Like a brick of cheese that has a bit of mold on it, I just cut out the bad part.

As Brooklyn Investor recently wrote: “In some places, yes, valuations are silly, but who cares? If you owned, say, Berkshire in 1999, who cares what the market valued at? Just don't buy!”

Investors operate in a world of choices. And with the 10 year interest rate at 1%. Buying great companies with strong pricing power at 4-5% earnings yields is an obviously better option for long term investors than holding cash or bonds.

Here is a chart of the S&P forward earnings yield relative to the US 10 year bond rate.

Although the S&P 500 is near its all time low earnings yield (meaning multiples are at an all time high), the gap to the 10 year interest rate has never been wider.

That’s not to say that stocks are absolutely cheap but trying to time the next crash by jumping into bonds or cash is not the obvious answer.

Just to prove how hard timing the stock market is. Here’s a clip from November 2010 with Jeremy Grantham who has spent his entire career studying stock market bubbles and who oversees $64 billion of assets under management.

Grantham called the S&P 500 “substantially overpriced” on November 11, 2010 and said that fair value was 900. He later went on in the interview to praise holding cash as an attractive option.

The S&P at the time was 1200. If you had moved to cash in expectation of the S&P falling to Grantham’s fair value, you would still be waiting. The S&P is now at 3900.

Here’s Buffett on marking timing in 1994.

“I never have an opinion about the market because it wouldn’t be any good and it might interfere with the opinions we have that are good. If we’re right about a business, if we think a business is attractive, it would be very foolish for us to not take action on that because we thought something about what the market was going to do.”

Timing is hard. Stick to investing.