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Weekend reading: The ‘fair value’ market is probably overvalued in the US

Good reads from around the Web.

I hear every day in the news, on CNBC, and even from investors in real-life that the market is “fair value”.

If it’s fairly valued now, then everyone must have thought shares were a screaming buy five years ago at half the price, right?

Sadly, history – or a bit of Googling – and the mere fact that it was 50%-off [1] in the first place tells us otherwise.

One forecaster who does change his mind when his valuation techniques point to under- or over-valuation is Jeremy Grantham, of the US firm GMO.

That’s one reason his quarterly reports are widely read. The other is he’s an excellent (and often funny) writer.

Alas, Grantham isn’t as sanguine as all those fair weather fellows I keep hearing from. GMO’s famous 7-year forecast (via TRB [2]) looks decidedly sickly for equities and bonds in its latest incarnation, especially in the US.

Only timber is predicted to offer a really decent return, and it’s hard to buy a forest:

Click to see the big (miserable) picture. [3]

Click to see the big (miserable) picture.

Are Grantham and his number-crunchers right?

For my part I still have my doubts about this “new normal” of years of miserably low returns from equities, but they are certainly far more likely from here – after a 50-100% move higher – than back when the worrywarts first started predicting them a few years ago… 😉

But outside of the expensive-looking US I’d still plump for… fair value. (For what it’s worth, which is no more than anybody’s finger in the air).

Third time unlucky

Grantham isn’t any sort of perma-bear – he said shares were cheap in 2008 and 2009. In his new quarterly letter [4] [PDF] he explains the trouble he sees ahead, which he blames on low interest rates from central banks:

My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years, with the rest of the world including emerging market equities covering even more ground in at least a partial catch-up.

And then we will have the third in the series of serious market busts since 1999 […]

In our view, prudent investors should already be reducing their equity bets and their risk level in general.

One of the more painful lessons in investing is that the prudent investor (or “value investor” if you prefer) almost invariably must forego plenty of fun at the top end of markets.

Most Monevator readers are mainly passive investors (I hope) and shouldn’t take this as a call to change asset allocations – doubly so if this is the first you’ve heard of Mr. Grantham!

Valuing the market [5] is impossibly tough, and forecasts from anyone are extremely unreliable [6]. If you’re fascinated by investing and can adopt the appropriate air of amused intellectual detachment then it can be fun to follow and make predictions, but for very few people is market timing a route to extra riches.

There’s also the issue of how would you rearrange things anyway, assuming you’re already well-diversified? The returns graph above shows not much is predicted to do well, and a quick 20-30% missed from equity returns could take decades to recover in cash or bonds at today’s rates, leaving you banking on a crash. Probably best not to play that game, and keep focused on the long-term. It might be best to use any extra free cash to pay down your mortgage, or even to invest in non-financial assets like professional qualifications or similar.

At the least though, Grantham’s message is a good reminder to stick to your plan and not start chasing what nearly everyone finally seems happy to call a bull market in equities.

(And it must be a bull market – if everyone is now confident enough to talk about “fair value”…)

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: HSBC [16] has waded into the murky Help to Buy waters with two competitive deals, including a five-year fix at 4.99% on a 95% deposit. But The Telegraph [17] quotes says that affordability tests will be tough.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1 [18]

Passive investing

Active investing

Other stuff worth reading

Book of the week: I forget if I’ve sung the praises of Conscious Capitalism [30] before, but as I just bought it for a friend to try to sway him from the path of unthinking neo-Marxism (in its modern form of endlessly citing The Guardian, taking foreign holidays, speculating on property and buying designer trainers, yet condemning the profit motive at every turn) I might as well recommend it again!

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  1. Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.” [ [33]]