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Legendary investor John Templeton is credited with the first observation that believing ‘This Time Is Different’ is costly for investors. In his 1933 book, 16 Rules for Investment Success, he wrote:
“The investor who says, ‘This time is different’ when in fact it’s virtually a repeat of an earlier situation, has uttered among the four most-costly words in the annals of investing.”
It has become a timeless reference, with the warning commonly used by financial analysts who prefer to draw on the history of stockmarkets, economic cycles and long-term company valuation metrics. It’s a way of saying, “We’ve seen it all before” ... the manias, the over-pricing, the FOMO.
The argument that circumstances are now unique is often rejected using a version of Winston Churchill’s phrase that:
"Those that fail to learn from history are doomed to repeat it.”
In which case, many of the respondents to a recent survey in the Firstlinks Newsletter are in for a shock because a high percentage believe investing has fundamentally changed.
The Firstlinks audience is generally older and more experienced in investing than the readers of most newsletters, based on our past surveys. For example, three-quarters of our readers in over 2,000 responses reported they are over 55.
It was expected that they would overwhelmingly vote ’No’, that this time is not different, as they have seen markets rise and fall in many economic cycles, and the current high valuations and record stockmarket levels are yet another top in a long history of market over-reactions.
Yet almost 40% believe This Time Is Different, and with over 7% in the ‘Don’t Know’ camp, that leaves slightly over half falling back to a more traditional view on market ups and downs.
There is no limit to the examples of valuations and market events that seem crazy to many seasoned investors. Jeremy Grantham has long called the current conditions a bubble, as he has seen many cycles over his decades in the market. Here he discusses the 'Top of the Cycle' in August 2021:
“I think it’s clear that we’re deep into bubble territory ... most of the data suggests that this is the new American record for highest priced stocks in history. Then there’s the most important thing of all, which is crazy behaviour, the kind of meme stock, high participation by individuals, enormous trading volume in penny stocks, enormous trading volume in options, huge margin levels, peak borrowing of all kinds, and the news is on the front page. This is all characteristic of the handful of great bubbles that we’ve had.” (my bolding).
Two popular, long-term charts show market values over time, and both are at extremes.
Warren Buffett calls this ratio “probably the best single measure of where valuations stand at any given moment”. With the current market value of US stocks reaching US$50 trillion versus US GDP of around US$24 trillion, the ratio hit a record high of 215% in November 2021. Prior to the year 2000, it was normally around 50%, and even allowing for the fall in interest rates and a rising trendline, a level of 120% looks fairly valued, as shown below. At 2.4 standard deviations above historical average, the market is testing those who look for value signals. But is this time different?
Again, a widely-accepted measure for the value of the S&P500 is the Shiller PE, and currently it is over 41 times when the long-term historical average is 17.2. It was as low as 4.8 in 1920 or as high 44.2 in the dot-com boom of 2000.
1. Electric vehicle manufacturer Rivian recently raised US$11.9 billion in its IPO, valuing the company at over US$100 billion at issue. It quickly doubled in price as investors scrambled for a piece of the action. It became the second-most valuable car maker in the world behind Tesla, recently worth over US$1 trillion. Ford Motor Company is valued at about US$77 billion and sells over 4 million vehicles a year. In its IPO prospectus, Rivian advised:
“In the consumer market, we launched the R1 platform with our first-generation consumer vehicle, the R1T, a two-row five-passenger pickup truck, and began making customer deliveries in September 2021. As of September 30, 2021, we produced 12 R1Ts and delivered 11 R1Ts, and as of October 22, 2021, we produced 56 R1Ts and delivered 42 R1Ts.”
2. Elon Musk is the richest person in the world. Can you imagine Warren Buffett taking investment advice from a Twitter poll? Musk recently tweeted:
“Much is made lately of unrealized gains being a means of tax avoidance so I propose selling 10% of my Tesla stock. Do you support this? … I will abide by the results of this poll, whichever way it goes.”
The poll closed with 57.9% of the votes in favour of Musk selling 10% of his stock. Tesla's share price fell and wiped US$200 billion off its market value in two days, which is more than the value of Ford and GM combined.
3. The total market value of cryptocurrencies recently reached US$3 trillion, with Bitcoins valued at US$60,000 each and a total market cap of US$1.1 trillion. In 2011, a Bitcoin was worth US$1. Is this time different? Financial markets have never experienced a new technology like this, and while billionaire investor John Paulson cannot be branded as someone who does not understand markets, he told Bloomberg recently:
“I wouldn’t recommend anyone invest in cryptocurrencies. I would describe them as a limited supply of nothing. So to the extent there’s more demand than the limited supply, the price would go up. But to the extent the demand falls, then the price would go down. There’s no intrinsic value to any of the cryptocurrencies except that there’s a limited amount.”
Part of the market's unlimited optimism stems from recent experience that the US Federal Reserve and other central banks will protect the market. Central banks inject liquidity and lower rates during a crisis. In any market condition, there are always reasons to sell, but even in a global pandemic, the market recovered quickly.
So is all this talk of bad news and excessive valuations just noise in the long-term growth of stockmarket indexes and the success of wonderful companies? It is with some justification that the market is expensive because it has been driven by tech companies with strong growth prospects which deserve their high P/E ratios. However, the concentration of the largest five stocks in the S&P500 is higher than it has ever been in history and the destiny of the index lies significantly in the fortunes of a few great companies.
There are always reasons to sell and today is no exception. The market is worried about rising interest rates, inflation and new versions of the virus. But nobody can accurately pick the top, and the market may run for much longer before taking a breather. Over time, the stockmarket recovers to push to new highs. While there is a strong case for caution at the moment, company earnings are recovering well from the pandemic.
Let’s leave the final word to Jack Bogle, the Founder of Vanguard, the second-largest fund manager in the world:
“The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in the business, I do not know of anyone who has done it successfully and consistently.”
First published on the Firstlinks Newsletter. A free subscription for nabtrade clients is available here.
Graham Hand is Managing Editor of the Firstlinks Newsletter. Analysis as at 6 December 2021. This information has been provided by Firstlinks, a publication of Morningstar Australasia (ABN: 95 090 665 544, AFSL 240892), for WealthHub Securities Ltd ABN 83 089 718 249 AFSL No. 230704 (WealthHub Securities, we), a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 (NAB). Whilst all reasonable care has been taken by WealthHub Securities in reviewing this material, this content does not represent the view or opinions of WealthHub Securities. Any statements as to past performance do not represent future performance. Any advice contained in the Information has been prepared by WealthHub Securities without taking into account your objectives, financial situation or needs. Before acting on any such advice, we recommend that you consider whether it is appr