23 Jul Don’t Worry Be Happy!
The reason I haven’t written a letter for the past few months is not because I’ve been on a long vacation, but because not much has changed. We are now entering the 5th longest rally in the stock market since 1928 without so much as a 10% correction, and the bond market continues to price interest rates as if inflation will never rear its head again. So as you can see, it’s pretty much the same as last year. I always find it easier to write about something when there’s a little chaos, but for now, I’ll just be happy that we were able to invest significant sums of money a couple of years ago when prices were lower.
With the exception of a few areas of irrational exuberance, the market overall doesn’t appear to be significantly overpriced. Sure there are some causes for concern—Russia/Ukraine, Israel/Palestine, record new issuance, rising margin debt, quantitative easing, momentum investing or investor bullishness to name a few. Well, then again maybe I should be a little more worried!
What I’d prefer to focus on are some of the things we can control. One of them is the record number of IPO’s (initial public offering) today. The main reason most of these companies are going public is because they can sell shares at a very good price! That may be good for them, but probably not so good for you. As a general rule I wouldn’t buy an IPO unless we were in a little more distressed market. The truth is, I don’t think most individual investors are even involved in individual securities any longer. The public is accessing the market through 401k’s, IRA’s, managed accounts, ETF’s and mutual funds. What we really need to be worried about is when the majority of professional investment managers (the ones scooping up these overpriced IPO’s) get scared and want to exit the market at the same time!
There are really two ways for both professional and individual investors to lose a lot of money—by paying an extremely excessive price or purchasing a business that has too much debt. Both of these things can usually be avoided, but the trade-off can be a missed opportunity to own the next great turnaround or spectacular growth stock.
The legendary investor and teacher Ben Graham, used to refer to the stock market as ‘Mr. Market’. He described ‘Mr. Market’ as being open for business most every day and willing to either buy shares from you or sell shares to you. The great thing was that it was up to us to either accept or reject his offers. He went on to observe that occasionally ‘Mr. Market’ would let his emotions take control, thereby enabling us to take advantage of him during periods of unusual generosity or extreme pessimism. The reason for my reference to ‘Mr. Market’ is that these days he’s in quite good spirits, especially towards stocks (although I have seen him happier) and absolutely giddy about bonds. And why not, his costs were more than 13% thirty years ago compared to 3.50% today. It’s hard to believe there are buyers willing to accept such a low-rate for the next thirty years, given the amount of global credit currently being created. Good luck with that!
Ok, back to business. As I mentioned earlier, the market has risen fairly uninterrupted for the last few years, but if you’re willing to be patient there are always a few interesting ideas available. Companies such as General Electric, Coca Cola, Tesco PLC., Ebay, Coach, Sysco or the gold miner’s index (this one’s for an unknown event) are all reasonably priced. That doesn’t mean they’re cheap, it just means you should earn an acceptable rate of return as they gradually improve their businesses. We would all like to own much faster growing companies, have little risk and make tons of money, but remember ‘Mr. Market’ is pretty happy today. The higher the price you pay, the greater the risk and lower the potential return—the lower the price you pay, the lesser the risk and higher the potential return. Wow, that was confusing. Bottom line: it’s getting more difficult to find businesses you want to own at a price you’re willing to pay. The last five years have been great, but it’s the next five years that matter. So don’t worry be happy. Eventually there will be a correction in stocks, interest rates will move higher and ‘Mr. Market’ will offer us more choices.