Time to Exit the Bubble… Or Not

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Time to Exit the Bubble… Or Not

Taken from On Target 263

Those of us who have been around long enough know something about booms and busts (I was lucky enough to choose to exit the dotcom mania on the day the market peaked). So, is this the right time to flee the share markets? Not yet. I agree with Eoin Treacy that although “there is clear evidence a mania is evolving… there is no evidence it has reached its peak.”

There’s no doubt that stockmarket conditions are frightening. And extraordinary. Tesla, the electric-car pioneer, has been changing hands at 1,000 times its net income and 135 times the ratio of its enterprise value to EBITDA. At a recent market valuation its shares were worth $1¼ million for each car sold each year compared to just $9,000 for GM.

FullerTreacyMoney recently calculated there were 152 large listed companies in the US with share price-to-sales ratios higher than ten – ones that only make sense if you make assumptions such as zero costs of goods sold, zero employee expenses. Here are a few notable price-to-sales ratios: Visa and Nvidia (both 22 times), Zoom Video (49x), Shopify (57x), Moderna (179x).

It’s not only the share markets that have gone mad. At the end of last year there was nearly $18 trillion of fixed-income securities trading on negative yields. In just one year the world’s three leading central banks accumulated nearly $8 trillion of additional debt on their balance sheets.

Jeremy Grantham, one of America’s most successful fund managers, says: “The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble featuring extreme overvaluation, explosive price increases, frenzied finance and hysterically speculative investor behaviour.” He believes we are experiencing one of the great bubbles of financial history like those of the South Sea, 1929 and 2000.

However, as all experts know, an investment bubble can go on inflating for a long time. You may be able to make a fortune if you stay for the ride in the final stages.  And exit in time.

Mohamed El-Erian, the renowned American commentator, says that tactically it makes sense to stay invested. “Be like a surfer on a wave, knowing that the liquidity [driving up asset values] will end at some point.” Looking around, you can see that many other surfers are riding the same wave. What happens if you get into each other’s way, or if the wave breaks? “I would be a very nervous investor.”

Tim Price, the British adviser, says because he believes that market timing “is essentially impossible,” his approach at Price Value Partners to investing is to be more or less fully invested at all times. But where? “We diversify our own, our families’ and our clients across three core constituents…

► Attractive highly-cashflow-generative ‘value’ stocks trading for sometimes mysterious reasons at extremely undemanding multiples. The net is cast as widely as possible. “We have no interest whatsoever in index weightings or benchmarks”. With the US stock market “wildly overpriced… we search quite happily for diamonds in markets like Asia (but not China).”

► Systematic trend-following funds. They can be expected to provide zero, sometimes negative, correlation to stocks and bonds. When markets really hit the skids they offer the potential for strong positive returns – not least because such funds are content to be short of all types of assets.

► Real assets, including but not limited to the monetary metals gold and silver. This year allocations will probably be raised to broader commodity markets.

We may soon find out how successfully defensive is such a charity. Graham says: “My best guess as to the longest this bubble might survive is the late spring or early summer, coinciding with the broad rollout of the Covid vaccine.”

Time to Exit the Bubble… Or Not taken from our ‘On Target Newsletter’ issue no 263

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