Hey, what's up guys?
Stock market just recently reached its new all-time high
But I would argue that this is not the right time to buy more
in this video legendary investor hovart marks will explain
Why we are in the bubble, then I will explain how you can profit from this madness
before we start
Smash that like button until it turns blue
There are lots of concerns about the future of financial market
We already know that the economy is pretty much in deep shit while the stock market is floating in the sky
One of the best indicators that can tell us if the stock market is overvalued
Undervalued or fairly valued is simple pe ratio of an underlining index
In this case. We are looking at snp 500 just very recently snp 500 reached its new all-time high
Surpassing thousand four hundred thirty bucks even higher where it was pre-pandemic crisis
In pre-pandemic it was at around three thousand three hundred seventy dollars
It took only five or six months to completely recover all the losses and this arguably the worst economic recession in the history
Just to give you some historic comparison in
2000.com bubble it took seven years for the stock market to reach its pre-pandemic territory
And in 2008 housing bubble, it took 5 years to recover to the same level
So this is another way of saying that the market is acting insane
Let's go back to simple price earning ratio
To calculate pe ratio. We simply take price of s p 500 and divide by annual earnings of four consecutive quarters
We know the price
3430 bucks now, let's look at earnings september 30th 2019 earnings were at 34
december 31st 2019 earnings were at
35.7 bucks
First quarter of 2020 which ended in march 31st earnings bam
11.88 cents second quarter of 2020 earnings were at
16.42 cents slightly better than first quarter
now let's do first grade math 34 plus
35.7 plus 11.88
plus
16.42 equals to 98
Now here's the interesting part we take the current price of s p 500 that is
Thousand four hundred thirty dollars and divide by ninety eight and we get thirty five
So actual pe ratio of s p 500 is not even 29 as it's shown in this chart. It is 35
And that is crazy and scary
the historic mean of pe ratio is 15
So we are modern twice higher than historic average
Imagine that in 1930s great depression pe ratio was at around 23
In 2000.com bubble pe ratio was at 45
And during 2008 housing bubble. The pe ratio was over 60
So now we are at 35 which still lower than 2 000 and 2008 recession
But by the end of 2020 we might surpass 40 easily
But you may ask yourself why we have such a high pe multiple
It looks like the fan companies dragging the entire s p 500
We should not be in the bubble
Well fan companies are great businesses indeed, but prices are way too high comparing to the earnings
And we can all thanks to our uncle jay paul who floated the market with cheap cash
In fact if you look at this chart
We can see the high correlation with the expansion of federal reserve balance sheet and s p 500 forward p e ratio
When fat printed 3 trillion dollars and inflated its balance sheet to 7 trillion back in march
Corollary to that the forward pe multiple increased as well
So in aggregate it has nothing to do with companies earnings, but everything to do with fats floating the market with the us dollar
This is the main reason why market is so expensive right now. And it looks like we are reaching a bubble territory
Here is another great chart that shows we might be in the bubble
cumulative real gdp increased only by 11 since 2007
while the s p 500 price increased by more than
134 percent
It looks like gtp will continue to stagnate
I think it will be better than second quarter 2020
But we won't see pre-pandemic 2019 numbers in gdp anytime soon
Now, let's take a look what legendary investor howard marks has to say about our current financial market and how to invest in this
Very uncertain and risky time. Let's take a look at this clip
Um, you know, I wrote a memo one of those ones you referred to and the title was calibrating
And I think that it's all a matter of calibration
And when I go on tv they try to get me to say buy or sell
In or out and it's not that black and white. Um
When should you own more?
And when should you own less? That's the question by the way, it's
It's kind of a distraction to think about buy sell by
itself own
we own
investments
when should we own more and when should we own less and
That's I think that's a rather easy question to answer
We should own more
When the environment is hospitable and i'll define that in a minute and prices are low
And we should own less
When the environment is precarious
And prices are high again. This is all discussed in the book about the the cycle but
What does it mean for the michael for the market to be precarious? Well, I described it a bit ago. I said it
It it occurs when?
Investors are optimistic and
There's not much risk aversion and there's a lot of money and a lot of eagerness to put it to work
um, so
When these things are true
then
Everything else being equal. It's likely that asset prices will be high relative
To asset values. That's really the key
Determinant where does the price of what you're considering?
holding
Stand relative to its intrinsic value
and uh
So that and that is determined by factors like the ones I mentioned
Let's simplify it
the more optimistic people are the higher the price is relative likely to be relative to its intrinsic value period
And you want to buy when the price is low relative to the intrinsic value or perhaps?
uh
Uh doesn't reflect all the merits of the intrinsic value and you don't want to hold that much
Maybe you even want to sell when the price is very high relative to the intrinsic value
so, you know my point is that
In the middle of march we saw a real panic
and um
And oak tree invested
Aggressively in the things we buy which are mostly credit
instruments, uh
Especially from march 9th when the panic I would say set in until march 23rd when it abated
Thanks to the actions of the government things went on sale think of it as just going to your local department store
and when things go on sale you
You should buy more
um, and we did
and uh
So, you know that and that's what we have done in past crises and that's what we try to do. That's our job
Is to own more when they're on sale
and
Uh, then the government came out, uh, and the news started to filter out around march 23rd about what the government
And fed of the us would do
and
Interestingly here. We are in this terrible environment this this terrible, uh, health pandemic and from
March 24 to 26 those three days were the highest
Returning three days in the last 80 plus years in the stock market going back to the 1930s and the depression
And
so
You you may say that it was a response to the government programs. You may say that it was a relief rally. Um
And the market rose, uh, the dow was up 19.8 percent. I think in the s p 17 6. um, and
so
well
Guess what after?
a rise of that
proportion and then it has continued higher and the s p which was up 17-6 in those three days is now up about
26
or so
um
from the low of march 23rd
And that's probably the quickest
Trip into bull market territory in history bull market defined as a period when the market's been up 20
without a decline
so
Very simple things aren't as cheap anymore. They're not on sale to the same extent
You shouldn't own as many now when I say you should own more. You should own less
Most people don't want to jump around from day to day. Most people shouldn't be trading daily in and out more or less
but the point is
We had a major move down things were put on sale oaktree bought
we had a a
not a
Corresponding move up but a strong move up and we we stopped buying as much because we couldn't get bargains of the same
uh
Magnitude and uh, so we first we thought the risk was great in past years and we were defensive
then people
panicked over the exposure of the risk and we bought and then people got
more comfortable and our buying slowed
That's that's the way I think about calibrating
Based on history now
There are no rules that say history has to apply but based on history the fact that we had a 34 decline
of the s p from uh, february 2019 to march 23rd and then a
26
gain, since then
Based on history, we would expect that there would be uh,
another testing, uh of the lows and maybe two the other thing I mentioned in in that memo was that
in
uh
In the bursting of the tmt bubble it took seven years
To get back to the stock market high of 2000
and it took in the global financial crisis aftermath it took five and a half years to get back to the
uh high of the stock market in 2007
if the stock if the stock market in the states rose another 15
We would be back to the 2019 high do we do we really think that it's appropriate?
For the stock market in the us to be back at its highs
After two months
or three months and despite this
This virus pandemic and it to me it seems uh,
illogical
I totally agree with howard that
Investing is not that easy. It's not black and white. It's not just buy and sell
If market is cheap
It's great time to be aggressive and buy lots of bargain assets when market is expensive as it is right now
You may want to trim your position or even hedge the risk, but why you should not exit completely
Well here is why because no matter what we think the future might look like. It's never certain. We do not know with 100
probability if the next year market will be up or down and the beautiful thing about investing is that we do not have to be
100 correct to make money
If we can only tilt the odds on our site we will do just great in the long run
So I do not think you should exit from the market completely in the time of uncertainty. Just unless or hatch
If you look at this chart, it shows the percentage of short sellers in the market
Right now we reached new all-time low, which means no one wants to short sell the market in 2008 housing bubble
There were over 3.5 percent of s p 500 market cap investors short selling the index
If you are not familiar with short selling in simple terms, you are betting against the market
I would never short sell and I would not recommend short selling to anyone
We all know how short selling played out with investors who tried to short tesla
So what else we can do? I think the great way to catch the risk is to buy put options on the index
I believe pre and post presidential elections. We might see increased volatility in the market
And if you own highly priced s p 500 buy long term put option
if the market blows up
You will make some money if the market continues to go up the option will expire and you will still come up
profitable or at least break even
Another great way to hatch and it is much easier way is to buy gold
Gold usually performs very well in the time of uncertainty
In the thousands dot com bubble gold increased by 12 percent while stock market was down 50
In 2008 housing bubble gold performed even better it increased by 25
while market dropped by more than 50
Percent, so these are two options how you can profit in this time of uncertainty
Let me know. What do you guys think about the current financial market? Are we in the bubble or not?
Leave your thoughts in the comment section below smash that like button
and subscribe if you haven't
