The Worst Market Call of All Time… and What It Tells Us Today
On August 13, 1979, Businessweek famously had a cover story trumpeting “the death of equities.”
The article inside argued that after such a long period of poor performance by U.S. stocks, both individual and institutional investors were abandoning them for real estate, commodities, precious metals and other hard assets.
Relentlessly bearish, the article concluded with the words “The stock market is just not where the action’s at.”
In hindsight “The Death of Equities” – to the mortification of the folks at Businessweek – was perhaps the worst market call of all time. Within a matter of days, stocks began the greatest bull market in U.S. history, one that didn’t peak for more than two decades.
Why do I mention this bit of nostalgia? Because as Mark Twain famously noted, history may not repeat itself but it rhymes.
Last week’s Wall Street Journal reported that “value investing is mired in one of its worst stretches on record… Stocks that are cheaper than many peers relative to earnings or reported net worth… have significantly lagged behind their growth stock counterparts this year, compounding a gap that has persisted since the end of the financial crisis… [Value stocks] have fallen so far out of favor that Goldman Sachs in June questioned whether the markets are witnessing the death of value investing.”
Got that? Buying stocks that are inexpensive relative to their near-term business prospects is officially dead.
Instead most investors are chasing the same handful of superexpensive shares. I’m referring to companies like Amazon (Nasdaq: AMZN) at 182 times earnings, Netflix (Nasdaq: NFLX) at 206 times earnings and Tesla (Nasdaq: TSLA) at negative 70 times earnings.
This is hardly new. Every decade or so we get some variation on this same madness of crowds.
In the late ‘60s it was “the Nifty 50,” go-go stocks like Disney (NYSE: DIS), McDonald’s (NYSE: MCD) and Coca-Cola (NYSE: KO) that ended up underperforming for years. In the ‘70s, it was resource stocks that quickly went from boom to bust. In the ‘80s, it was Japanese stocks. (Twenty-eight years later, the Nikkei 225 is just half what it was in 1989.) In the late ‘90s, it was the dot-com bubble. (I’m sure you remember how that ended.) And last decade investors convinced themselves that “real estate always goes up” and flocked to mortgage-backed securities just before the meltdown.
Of course, if you had invested in resource stocks in the ‘60s, Japanese stocks in the ‘70s, technology stocks in the ‘80s or real estate in the ‘90s, you could have made a fortune in each sector before it peaked.
Unfortunately, most traders and investors were busy buying whatever was hot instead.
With that lesson in mind, let’s return to “the death of value investing.”
The conventional wisdom is that stocks like Tesla and Amazon carry nutty valuations, but they will ultimately justify them down the road with spectacular earnings.
Growth stock bulls concede that the leading stocks “are priced for perfection” but that that’s OK in this “Goldilocks economy.”
Alas, in my short time on this little blue ball I’ve learned that perfection can be hard to attain. Even Goldilocks didn’t wake up until the bears had already appeared.
But here’s a radical thought: Instead of chasing stocks priced for perfection, why not scour the market instead for sound businesses that are “priced for rejection.”
These firms are unloved, unappreciated, underowned and breathtakingly cheap relative to sales, earnings, cash flow and book value.
Moreover, history shows that when sentiment shifts the ensuing appreciation can be breathtaking.
Over the long haul, value stocks have outperformed every other sector of the market – as well as cash, bonds, precious metals and real estate.
So where do you find these overlooked beauties? That’s the subject of my next column.
About Alexander Green
An expert on momentum investing, value investing and investing based on insider activity, Alex worked as an investment advisor, research analyst and portfolio manager on Wall Street for 16 years. He now runs the wildly successful Oxford Communiqué, ranked as one of the top investment newsletters by Hulbert Digest for more than a decade. He is also the author of four national best-sellers: The Gone Fishin’ Portfolio, The Secret of Shelter Island, Beyond Wealth and An Embarrassment of Riches. He shares his wisdom in his free daily e-letter, Liberty Through Wealth.