I once wrote an editor’s letter here that wasn’t very nice about Warren Buffett. I got hate mail. I’ve steered relatively clear of the subject ever since (regular readers will know how much I dislike upsetting people). So I’m pleased to see that Bill Bonner has taken up the subject in his column this week.
He points out that, while there is no doubt that Buffett has been one of the most successful investors ever, his style looks like it has run out of steam. Since 2000 his returns, as one of our US colleagues puts it, “have been extremely poor”.
Why? Part of the reason comes down to the fact that Buffett’s biggest (and most well-known) early successes involved value investments: companies bought cheaply and left to thrive in a fabulous corporate environment (falling interest rates, spendthrift baby boomers, a falling share of national income going to workers and falling taxation). This doesn’t really exist any more.
Quantitative easing (QE), near-zero rates and the endless search for yield have left almost all markets rather more expensive than they should be and the corporate environment is on the turn too.
There’s no way that anyone could claim that there’s any value in the US market, for example: both the Cape and Tobin’s Q, the two best long-term valuation metrics, show equities as being very overvalued.
And according to one of our favourite strategists, Peter Bennett at Walker Crips, if you look at the median trailing price/earnings ratio for the US, you’ll see that it is as “overvalued as the big daddy of them all – 2000”.
This horrible overpricing of stocks matters for portfolio management. It used to be that you could consider blue-chip US stocks to be a medium-risk kind of an investment, or at the right price, a low-risk one. But with valuations at these levels, that doesn’t make any sense. Risk, says Bennett, is always a moving target and today those same stocks must be considered “speculative”.
The same goes for most of the bond market. It isn’t a great environment for anyone who has the hunt for value as a core part of their strategy. It also isn’t great for anyone who likes to buy and hold for the long term, as Buffett does. Clever traders will always do better in times of expensive volatility.
Still, there’s always something out there. Those looking for opportunities could try China, or perhaps India, which isn’t particularly cheap but does seem to be jammed with interesting opportunity.
Otherwise, Bennett has been looking in Europe, where the economy is getting up off the floor and where corporate profits are being revised up not down. He has bought a fund tracking the Italian market, which in Cape terms is currently under a third of the price of the American market.