Repeat after me: excessive valuations and more
Welcome back, let’s start this week with a question: you know that strange phenomenon, the one where you repeat a word in your head several times and suddenly, it seems to have lost all meaning?
It’s called “semantic satiation” and from where I stand, it’s what has happened to words like “rational,” “typical,” “logical” and “normal” for investors in every asset class. Apparently, these words have lost all meaning, only to be replaced by one simple adjective: “Excessive.”
From all I see and read and hear, “typical” expectations of returns and valuations are all-but-extinct from our investing vocabulary. “Outliers” can’t even be outliers anymore, not when everything seems to be an outlier.
That’s why this week, “excessive” is the theme, specifically:
Excessive valuations in all asset classes
Excessive expectations for returns
Excessive disparities that cause me more than a little discomfort
Excessive valuations
Let’s start with the first point, excessive valuations. I won’t dwell on this point for too long because unless you’ve just landed on Earth, you’re more than well-aware of the (seemingly) never-ending increases in just about all asset classes. Take housing:
From Wolf Street.com
And stocks:
From Macrotrends.com
And while the media hubbub around non-fungible tokens (NFTs) has quieted down significantly since the start of the year, as the Wall Street Journal reports, they’re still sought-after by many digital-leaning investors:
“Nonfungible tokens, or tokenized digital art whose ownership is recorded on a digital ledger called a blockchain, continue to polarize the art world. Dealers like Moore dismiss them as a Pandora’s box of cryptocurrency-fueled speculation, even as others hail them for stoking a revival in fascination for art seen on screens. The cryptocurrency markets surrounding the NFT scene remain a rollercoaster, but collectors seem eager to splurge at the high end for art—including $17 million worth of digital art sold at the Sotheby’s ‘Natively Digital’ auction in June.”
That’s the case for crypto, too—although whether bitcoin, dogecoin, litecoin, ethereum or any of a growing list of others is the darling seems to change daily.
Suffice it to say that this is a remarkable time for investments of all types. And that leads to my next point.
Excessive expectations
What are excessive expectations?
An enlightening-yet-disconcerting article by Jason Zweig in the Wall Street Journal (disconcerting from my perspective, although maybe from yours, exhilarating), “When a 59% Return Isn’t Enough,” resonated deeply with me:
“In a recent survey of 750 U.S. individual investors, Natixis Investment Managers found these people expect to earn 17.3% this year, after inflation.
That might not sound like pie in the sky. The S&P 500 returned 18.4% last year, counting dividends, and is up 15.9% so far in 2021. Recent past returns always mold future expectations.
Over the long run, however, the people in the Natixis survey anticipate earning an average of 17.5% annually, after inflation—even higher than for this year. That’s up from the 10.9% long-term return they expected in 2019, the previous round of the survey.
It’s also more than twice the return on U.S. stocks since 1926, which has averaged 7.1% annually after inflation. It’s more than triple their 5.3% return over the same period after both inflation and taxes, according to Morningstar.”
Here’s the thing: it’s true that historically, most asset classes gain value over time. You’ll see that in stocks, in residential real estate, in fine art and fine wine. But the rates of returns that a growing swath of investors are aiming for simply have no basis in long-term reality.
From the Wall Street Journal
It begs the question: are they overly optimistic about their investments or are we experiencing some sort of paradigm shift with no basis in historical data, no moving averages to light the way in what increasingly feels like some sort of Oz-like existence?
It’s too early to tell, I suppose, but this isn’t the first time we’ve seen groundswells of exuberant optimism (heck, even I’ve felt this way many times throughout 35 years of investing, including over the last 12 months or so). Still, and I know this seems unbearable to new and new-ish investors, but 6-7% for average annual returns is not a bad way to amass your fortune.
When you’ve only known the upsides, it’s easy to see my view as pessimistic and possibly backward: In times like these, unmitigated optimism makes people take extreme risks (like new investors short selling) and we’re seeing that everywhere. Sometimes, though, “optimism” is simply a kinder word for greed. As I always say, it takes decades to make great fortunes and ten minutes to unwind them, so I think those of us with more time and experience in the long-haul game of the stock market approach it with a little more deference.
As Zweig rightly points out in the earlier-quoted Wall Street Journal article, “Optimism is as American as hot dogs and apple pie. Too much optimism, though, is about as good for you as eating a few dozen hot dogs and slices of pie.”
If we need to turn our thoughts from fantastical expectations, maybe there’s a simple solution: Just keep repeating words like “faster,” “higher” and “more” in our minds, until their meaning—and hold—dissolve.
Excessive disparities
This brings me to my third point: excessive disparities.
There’s so much money awash in the U.S. financial system right now, it’s easy to believe that everyone is riding high on a wave of fat cash.
The reality is that excess cash and unmitigated market exuberance are furthering the disparities between those who have enough extra money to play the markets and those who simply don’t.
From The New York Times
Another consideration: the wealth that baby boomers created is now getting passed on to subsequent generations, including millions of young Americans who are fond of risk. Certainly, if someone plays with their inheritance and loses, that's their right and problem -- but when this happens for a broad bunch of a generation or two, could there be cascading economic events from relatively small triggers?
My concern is this: Time and again, when things go sideways, those who have the least end up hurting the most.
Not everyone’s going to be wealthy -- at least, not at the same time and not to the same degree -- and that’s absolutely fine. But couldn’t we think about ways to ensure that our society is less lopsided?
This has come up in many posts because, in my opinion, it’s something that may have serious repercussions. I’ve also said that as we move forward, we have to stop thinking about wealth, education, job opportunities and access to health care as zero-sum games: Helping to make things better for others doesn’t take away from what we ourselves have.
Rather, it makes us all a bit richer, more secure and, I hope, more content.
Just something to think about. Thanks for checking in, have a great week.
