November Update

This is far from an ideal environment for true value investors as market valuations remain in rarified air. The median EV/EBITDA and Price/Book ratio of the S&P 500 are in the 98th percentile historically. The P/E to growth (PEG) ratio for the S&P 500 is the highest it’s ever been!

One of my core investment philosophies is that I can’t time the market, but I can make probabilities work in my favor. While anything can happen in the short-term (and usually does), probabilities show that the risk to the downside is much higher than the reward of trying to catch the last few percentage points to the upside, over the short to medium-term.

If it gives you comfort (it does to me), I’m not alone in this sentiment. In recent issues I’ve mentioned the historically high levels of cash held by Oaktree Capital, Warren Buffett (~$100 billion cash) and Seth Klarman of Baupost Group (42% of its portfolio in cash).

It’s up to you to decide which type of investing model you’re comfortable with. Personally, I’m terrible at momentum investing and chasing price. If I can protect elevated gains from the past few years while staying within striking distance or slightly ahead of the S&P this year while holding cash, I’ll be ecstatic.

In closing, Jim Reid, credit strategist at Deutsche Bank recently released an extended report on the markets. Among his observations he had the following to say, “we’re in a period of very elevated global asset prices – possibly the most elevated in aggregate through history.” …There is evidence that in the US, for various reasons, actual earnings have outstripped nominal growth…. profits can’t permanently outstrip nominal growth.”

“For equities, current valuations are certainly stretched relative to nominal GDP through history. We have been more expensive but we are approaching the peaks of 2000 and 2007 and are in line with the most stretched valuations from the 1930s on this metric and higher than the 1929 crash point.”

How does that make you feel?