The market is richly valued, only in 2000 and 1929 has it been more expensive, and we know how those years turned out. From Michael Batnick at theirrelevantinvestor.com:
Eight days before the market bottomed in July 1932, Ben Graham wrote an article in Forbes, Should Rich But Losing Corporations Be Liquidated? In it he wrote, “More than one industrial company in three selling for less than its net current assets, with a large number quoted at less than their unencumbered cash.” At a time when the CAPE ratio was just above 5, many businesses were worth more dead than alive.
In the ten-years leading up to the crash in 1929, the CAPE ratio went from a low of 5.02 up to 32.56. Today, it’s as close to the 1929 peak as it’s ever been, with the exception of the late 1990s. “The CAPE ratio in the United States has never gotten above 30 without a subsequent market crash” would be a true statement. Perhaps misleading, with a sample size of two, but true nonetheless. So is it possible that today is 1929 redux?
What would have to happen for companies to be selling for less than their net current assets? I don’t have the slightest idea. An asset bubble built on the back of artificially low rates seems like the obvious answer, so that can’t be right, but if it is, I warned ya. But honestly, for the market to fall 90%, I’m thinking aliens, an asteroid, or another world war seem the most likely culprits.
The aftermath of the depression was a gold mine for value investors. Well, really for any investors, but for those that measured intrinsic value, it was nearly impossible to miss. From The White Sharks of Wall Street:
Here was a company being offered for sale for less than the cash in its pocket! All a fellow had to do was borrow the purchase price, buy the company, and use the company’s own cash to pay off the loan- it was like getting the company for free. Why wasn’t everyone lining up to bid against him? The answer lies partly in the psychological baggage that American industry carried out of the Depression. Despite the almost unprecedented prosperity brought by government wartime contracts, many American business leaders believed that the nation would slide promptly back into a depression the moment the war was over. A gamble on the scale that Evans was prepared to take was simply unthinkable for most of them. The engine for the deal, after all, was debt. And going into debt to finance a speculative venture- well, wasn’t that what the 1920s had been about? And didn’t it end very badly?
To continue reading: If This is 1929…