To be honest, I am not sure if you and me don’t come from a different market with paradigmns that just no longer apply these days.
Historically, stocks were held by a combination of Investors that understood themselves to be entrepreneurs, plus banks and hedge funds that arbitrated away any anomaly. In such environment, stock prices were grossly correlated with EPS and Growth thereof.
With the shift to passive investing, the number of people that just don’t care about the entrepreneurial side of things has increased. By now, it probably just doesn’t matter anymore for something like 20-30% of investments. Especially in the US, the approach is that no matter where the stock market was, people as part of their 401 just invest every month. Valuations, EPS, RoE, … just doesn’t matter. At the same time, both Hedge Funds and Investment Banks got a bit of a beating. They are now in the situation where the can no longer dominate business - and they realize that the market was completely irrational. It doesn’t help when you know a share had zero intrinsic value, if the hords throught their index funds still buy it like crazy, the share will go up no matter what.
This leads to a situation where Shares overall become comparable to BTCish ponzy schemes. Just hope to find someone later on that buys (whatever it may even be) at a higher price later on. And this model works as long as people keep having a balance surplus that they can invest.
Investment Banks, Hedge Funds, … can probably surpriess shares for a few days and squeeze some money out of those people that sell. But latest after 1-2 months, they just can’t keep the downwards pressure anymore as they realize there was massive buying both from re-balancing of passive multi-asset funds as well as new inflows.
So what does this mean? Markets will keep going up no matter what, there may be some smaller dips that however proof to be “buy-the-dip” opportunities. These opportunities serve as a self-fulfilling prophecy so that there won’t be any crashes anymore. This continues until either of two things happens:
- we face a material recession with major unemployment and durress, so that joe sixpack no longer was a net buyer but became a net seller of shares (like in GFC or a prolongued stagflation)
- we face some systemic crisis that leads to massive bancrupcies and/or write-off of assets so that Institutionals need to massively sell their positions
If neither of this happens, and at the moment I don’t see any indications of this, we will have some short term volatility and maybe 10-20% over 2-3 months; but we won’t face a propper bear market. In these times, valuations can easily go to a PE of 200-300 for the entire S&P 500. Unless people are in distress and turn to net sellers at a large scale, PE’s will just keep going up and up and up.
What does this mean? Keep playing but do it in a multi-asset manner. This forces you to continuously realize some of these artificial, inflated gains in the market. So that when the inevitable happens (which could only be in 10-20 years)… you at least still keep some assets asside. The important thing is - keep your non-share assets in some other assets that don’t just get flodded by the stupid crowds.
