Is The Stock Market Overvalued?
I was talking to a Pleasanton couple the other day who have been with us for the past 20 years. They always ask good questions and this day was no different.
“Don, where’s the market going to be in three years and in seven years?”
They are approaching retirement age, so they’re rightfully wondering how much they’ll have when they cut back their work schedules.
Which Way Is The Wind Blowing?
When I get questions like these, I like to respond by using one of my favorite market analogies: Sailing.
In our view, the current market is much like a sailor facing a swirling wind. When the wind is swirling, you don’t want too many sails up because you are at the risk of being quickly pushed off course and into the rocks.
That said, in our view there are clearly some pockets of the markets that are overvalued by historical metrics. At the same time, there are many stocks that are undervalued, but they are not capturing the imagination of investors.
Longer-term – say the next 5 to 10 years – we strongly believe the wind will be at our back. The market will move higher on the strength of global economic and population growth and unstoppable tide of innovation. The bear case is always easier to make than the case bull market, but we remain optimists about the future.
Headed In The Right Direction
Between the short-term and the long-term, a lot can happen – both right and wrong.
In managing more than $200 million for clients, Job No. 1 for us is making sure we’re not positioned in the wrong direction. You simply don’t want a strong wind at your back if you’re headed for the rocks.
Navigating in the right direction is always easier said than done, but we have a process in place at Mirador to achieve that goal.
Each day, we follow 200 to 250 stocks. We have either owned or monitored them for many years. We know the management, and we have a good idea how much they should be up or down given market conditions.
We’re typically looking for inconsistencies in the narrative for each stock. When that happens, we’re confronted with two options. First, is there something amiss that might warrant making an adjustment in the position? Second, is this a buying opportunity?
For as much fundamental and technical analysis as we do, a change in position is always a judgment call informed by experience. That’s the benefit of working with an investment manager who has been through good markets and bad.
The Long View
Over the long term, the stock market is absolutely the right place. Sure, there will be corrections, and we position our portfolios to anticipate the regular spasms in the financial markets.
But it’s important not to be too shaken when you occasionally take on water. It happens. If you stay on fixed point in the horizon, you have a chance to spot the turning point and know when to put the sail up and press ahead full speed.