Bubbles Pop, They Don't Just Deflate

In his paper, “The 13th Labour of Hercules: Capital Preservation in the Age of Financial Repression,” author James Montier makes a Ben Graham reference:

The investor has no sound basis for expecting more than an average overall return…[from] common stocks [JM: Indeed, on our measures global equities look priced to deliver around 3% real p.a. in our current forecast]…But even if these expectations should prove to be understated by a substantial amount, the case would not be made for an all-stock investment program…The common stock buyer at today’s prices will be running a real risk of having unsatisfactory results therefrom over a period of years.

He goes on to point out that when markets are overvalued, there is a greater possibility of a significant pop in subsequent years.

Where are we today?

CAPE: 98th Percent Rank

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Expected 10-year Return

Principle: If you pay a premium for a market, you may expect more pain.

Montier makes the point that when “at forecasts of zero and below, investors run the risk of seeing their investment halve over the next three years!”

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Disclosure: The information provided here is for educational purposes only and should not be construed as a solicitation of an offer to buy or sell securities.

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