On Thursday, August 11, 2016, all three major market indices, Dow, S&P 500, and NASDAQ closed at historical highs. This is symbolic because the last time it happened was 17 years ago on New Year’s Eve. However, just because the markets are high doesn’t mean that investors should be “high.”
Amid a sluggish global economy, particularly China, the surprised Brexit, and the Fed’s failure to raise interest rates, the NASDAQ has still been able to increase more than 180% from 2009’s low. Naturally, a legitimate question arises that if there is another tech bubble waiting to burst. Nowadays, almost all of the largest, most widely held household names are in the technology sector, as investors are constantly searching for tomorrow’s Apple and investing in today’s Facebook.
Stocks, such as Google, Facebook, Amazon, Microsoft, Apple, and IBM, are all traded at or near their historical highs. They are also on the most brokerage houses’ recommended buy lists for their retail clients. However, like any other decision, getting out of a position is much more important than getting into one. Retail investors are known for “riding the loss too long.” This is why the stock market historically returns 6-8% a year but average retail investors only got 5-6%.
Although, it is always easier to say “cool” than actually be cool in reacting to market volatility. For retail investors of IRAs and 401Ks, they should be the “investors,” because they have neither the skills nor the time to be the “traders” of the stocks. For that reason, the right question to ask is not if they should get out of any stock now. The right question to ask is whether the reasons they got into the stock are still there.
For example, most investors who bought into Amazon were drawn to Amazon’s absolute dominance in e-commerce, which is the inescapable future of retail. Amazon is the new Wal-Mart!
Facebook has finally been making money. Other than just reaching more than 1 billion users, Facebook has successfully monetized the social media culture, just as Mark Zuckerberg has successfully transitioned himself from Steve Jobs to Tim Cox. Even with a PE of 60, it is still a bargain for next 20 years.
“Elon Musk Premium” is done! You have to like Elon Musk just because he has a cool name. He is the master of producing a continuous “buzz” in an ever boring automobile market. Musk has electrified the 50-year old concept of electric cars since his first “Master Plan” in 2006. His followers have given him all the benefits of doubt. Musk and Tesla seem invincible in that the company has never made any money, yet TSLA trades at an ungodly PE of 70. There is such a thing called the “Elon Musk Premium.” At the end of the day, though, before you buy into TSLA, you have to first buy into the notion that the electric car, specifically Tesla’s electric car, is finally the future… after 50 years.
Volkswagen’s “Diselgate Scandal” is overdone! In contrast, all hands are on Volkswagen’s lawsuits! Contrary to “populists” belief, we believe Volkswagen’s shareholders have more than paid their due on the “Diselgate Scandal.” Since news broke on September 18, 2015 that the company cheated on emission tests, VW’s shares have lost more than $70 billion in value. This would suggest that the market has more than factored in the conservative estimate of $55-60 billion in costs for the already settled and forthcoming lawsuits. We are pessimistic, though, as it will take a long time for the market to realize that VW has been investable.
By the way, if you had asked Warren Buffett, who has made Berkshire shareholders 1,826,163% return over the last 50 years, why he still bought Apple recently after its EBITDA’s guidance had been lowered for next quarter, he would say, “EBITDA whaaat?”