Overvalued!

Why Buffett Pulled Back: Companies Overvalued after “Purchasing Frenzy” Fueled by “Cheap Debt”

by Wolf Richter • Feb 25, 2018 • 

Warren Buffett explains in his annual letter to Berkshire Hathaway shareholders why he made only one large deal in 2017 (the 38.6% stake in Pilot Flying J) though his investment vehicle is sitting on a huge pile of cash, and why it will continue to sit on this pile of cash, rather than invest it. This “recent drought of acquisitions,” as he says, came down to this: Companies are overvalued. 

Buffett goes through it step by step. One of the four “key qualities” for acquiring stand-alone businesses is a “sensible purchase price,” he said:

That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers.

Market Valuation and Actual Subsequent 10-Year Total Returns

Points of ‘secular’ undervaluation such as 1922, 1932, 1949, 1974 and 1982 typically occurred about 50% below historical mean valuations, and were associated with subsequent 10-year nominal total returns approaching 20% annually. By contrast, valuations similar to 1929, 1965 and 2000 were followed by weak or negative total returns over the following decade. That’s the range where we find ourselves today. Of course, we also won’t be surprised if the S&P 500 ends up posting weak or negative total returns in the 2007-2017 decade, which would require nothing but a run-of-the-mill bear market over the next couple of years. - John Hussman

DYI:  The U.S. stock market is significantly overvalued at price levels in relation to sales, earnings, or dividends will produce going forward – stock held or purchased today; go to sleep like Rip Van Winkle waking in 10 to 12 years – returns that will be negative.  That is before and then on top of any fees, commissions, trading impact costs, taxes, and the ever present inflation.  To say the least this is a dreadful time period to purchase stocks in this environment of extreme overvaluation.

 DYI