Is the Stock Market Fairly Valued?
Posted on | January 4, 2010 | No Comments
For anyone following this blog on a regular basis, you know that I have been a bear. I have definitely sided with the camp that feels that the stock market has surged ahead of itself and will be straining at this point to make anything like significant gains in the near future.
I read very broadly, not just in financial arenas, but in the Munger tradition of educating yourself on a number of a subjects. In that broad reading I have become less likely to accept the presumed wisdom of a field, any field, because I have seen time and again how often leads us astray. Which in a sense is why I am also a contrarian. Not a blind contrarian, but it is why I have gravitated toward Value Investing.With regard to market direction that means since early August when I began preaching my story, I have been wrong. S&P has risen more than 10%. I still have a high cash position. That will probably hurt my returns if the market continues upward. But if it doesn’t then I will have more capital to invest when the bargains appear.
In this vein, I had heard that Buffett had some metric for valuing the over all stock market, but I couldn’t seem to locate it. Thanks to the people at Gurufocus ( I really should get a commission for mentioning them so much). Gurufocus described that metric in their article Where are We With Market Valuations. So here it is: Total Market Cap/GNP. And according to Gurufocus the stock market is fairly valued. They suggest we should expect a 6% return moving forward. They speak about concepts like mean reversion, that are topics all by themselves.
The article is interesting for a variety of reasons, and you should check it out. I will only point out that when a Value Investor reaches fair value they sell their position. That does not mean their aren’t still deals. Since I have suggested recently with SODI and XING, I am not saying be out of the market. But tread Carefully.
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