Jean-Marie Eveillard: Investors Have To Have The Courage To Say No

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In Ronald Chan’s Book – The Value Investors, Jean-Marie Eveillard provides two examples of when he had the courage to say no. Here’s two excerpts from the book:

Because I became worried about the Japanese stock market in the late 1980s due to its gigantic credit boom, we sold all of our Japanese stocks in mid-1988. Some investors questioned us for pulling out from the second largest stock market in the world, but I said it’s better to take some money off the table than to participate in market mania.

Obviously, I was wrong and unhappy in the next 18 months because the market went up another 30 percent, but in 1990 when the market collapsed, we owned nothing in Japan and our decision was proved logical.

GMO: When The Ducks Are Quacking Feed Them

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Stock issuance highest ever, as firms and Wall Street know when it’s time to sell to eager buyers.

Yes, we are witnessing new price records for the S&P 500, NASDAQ, and a host of other markets. That, in isolation, should not be worrisome. What should worry you, though, is that records are being set on the valuation front. By almost any measure – forward or backward-looking – we are staring at some of the most expensive valuations in history, especially in growth stocks. But we’ve talked about that inconvenient truth many times before. Here’s a new worry: Stock issuance in 2021 is also setting a new record, blowing away the last high set in the run-up to the Tech Bubble. This is a dubious item to celebrate if history is any guide.

The Folly of Ruling Out a Collapse

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A remarkable feature of extended bull markets is that investors come to believe – even in the face of extreme valuations – that the world has changed in ways that make steep market losses and extended periods of poor returns impossible. Among all the bubbles in history, including the 1929 bubble, the late-1960’s Go-Go bubble, the early 1970’s Nifty-Fifty mania, the late-1990’s tech bubble, and the 2007 mortgage bubble that preceded the global financial crisis, none has so thoroughly nurtured the illusion that extended losses are impossible than the bubble we find ourselves in today.

Benjamin Graham understood that even when extreme valuations are not immediately corrected by market losses in the shorter-run, they are typically followed by disappointing investment returns and very long, interesting trips to nowhere. The fact is that most of the fluctuation in 10-12 year S&P 500 returns is driven not by changes in fundamental growth, but by changes in valuation multiples. When valuations are depressed, investors not only purchase expected future cash flows at an attractive price; they also avail themselves of the potential for valuations to increase in the future. At extreme valuations, investors not only purchase expected future cash flows at an elevated price; they also expose themselves to the potential for valuations to retreat in the future.

Jeremy Grantham: Beware The ‘Confidence Termites’

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In his recent interview on The Moneyweek Podcast, Jeremy Grantham discussed what might bring this latest prolonged bubble to an end, and the role of the ‘confidence termites’. Here’s an excerpt from the interview:

Grantham: The history books are pretty clear, there doesn’t have to be a pin. No one can tell you what the pin was in 1929. We’re not even certain in 2000. It’s more like air leaking out of a balloon. You get to a point of maximum confidence, of maximum leverage, maximum debt, and then the air begins to leak.

And I like to say, the bubble doesn’t reach its maximum and then get frightened to death, what happens is the air starts to leak out slowly because tomorrow is a little less optimistic than yesterday. And gradually, people begin to pull back. And the process is very interesting, in that before the end of the great bubbles, and there’s only been a handful, so we can get carried away with over-analysis.

Chris Mayer: A Tale of Bubbles Past

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Winter invites reflection. As I look back on the year, I am sure I am not alone in thinking 2020 has been unlike anything I’ve ever experienced. But in the stock market, at least, I do have a certain feeling of déjà vu.

In the course of cleaning out a section of my office -- something I have to do every once in a while or risk burial by books and paper -- I came across a stack of old magazines that make my point.

This magazine was called Technology Investor and it debuted -- I am not making this up -- in March of 2000. As you may know, that was the peak of the great tech bubble. The magazine had an eye-catching cover, as you can see.

The NASDAQ peaked on March 10, 2000. It was a Friday. And the close was 5,048.62. Then the party ended. The NASDAQ didn’t bottom until October 2002, after it lost 78% of its value.