I've been reading "A Short History of Financial Euphoria" by John Kenneth Galbraith. He simplifies these euphoric markets into a few key points:
- Financial memory only lasts a maximum of 20 years, often shorter.
- This time frame allows for the next generation of people to enter the market who did not experience previous bubbles.
- People who become wealthy by participating in bubbles attribute their success to "their own superior acumen."
- People who are not wealthy view wealthy people (who became that way because of market euphoria) as having "exceptional mental aptitude" even if they came about this wealth simply by buying and selling at the right time.
- Leverage is often used to fund these financial bubbles which end up causing more problems than just bankruptcy to the participants. For instance, creditors become much less likely to lend after bubbles in real estate... For a time.
- People (some not necessarily all people) who bought the top and then were crushed by the eventual precipitous drop off from bubbles always blame someone other than themselves for losing money.
- Bubbles usually happen in the presence of new financial instruments (such as derivatives and junk bonds) as well as innovations in technology.
If you follow markets, you can probably tell many of these characteristics are being seen now. I won't speculate on when a bubble will happen but I'd say there is ample evidence that we are heading in that direction:
- S&P 500 trading at a PE of 38.33, the mean is 15.87.
- About 13 years from the last great bubble popped.
- Loads of new investors speculating on expensive (read: innovative) tech stocks.
- Incoming investors saying "this time is different" to defend their purchasing of 1000+ PE stocks or non-profitably companies.
- Cheap debt allowing publicly traded companies to load up on leverage for current or future use.
I'm currently not seeing many deals that meet my lofty expectations. I was seeing a decent amount in H1 of this year, but my liquidity was low. You're seeing the prices of literally everything going up, up, up.
My current strategy is to hold what I have because what I have are great businesses with great returns on equity that I bought at a price where I could generate returns excess of 15%. Now that the prices have inflated, generating a similar return becomes harder and harder. On top of this, your margin of safety is all but demolished which leaves little to no room for error for these high-priced stocks to grow into their evaluations.
I'm always on the lookout for great opportunities, but am simply not finding many. So I plan on letting my cash pile accumulate until I find more great opportunities.
Good luck out there!
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