Last week, an investment reporter asked four prominent market strategists for their take on the market's valuation.
David Rosenberg of Gluskin Sheff and Associates said: "No matter which way you look at it – forward P/E, trailing P/E – the market is vastly overpriced, (and) so the strategy is to sit on the sidelines, be selective in our equity choices, and wait for the correction to come or for the fundamentals to catch up with this overvalued, overbought, overextended market."
Another said: "People who are raising the red flag about markets being overvalued are those who missed the rally."
While entertaining, the confrontation is simply a minor bull and bear scrum stimulated by a financial writer asking an irrelevant question. The market is never priced on what stocks are worth today, but rather what stocks will be worth several quarters from now. The markets are forward looking and that is why the "valuations" never catch up to rising prices in a bull market.
These are harmless bull and bear arguments that are, for the most part, just noise and quickly forgotten.
The real danger to the average investor are the professional fear mongers, who use fear to influence the opinions and actions of others towards some specific end. The feared object or subject is sometimes exaggerated, and the pattern of fear mongering is usually one of repetition, in order to continuously reinforce the intended effects of this tactic.
Inciting fear is also a technique to gain notoriety and influence. Some financial advisers and money managers use fear mongering as a means to attract investors to the safety of their enterprise and away from their current and supposedly dangerous adviser.
I recall a "Night with the Bears" held on April 7, a speaker's series organized by Sprott Asset Management. Guests include Eric Sprott, Meredith Whitney of Meredith Whitney Advisory Group, Nouriel Roubini of New York University and Ian Gordon, author of The Longwave Analyst newsletters.
A packed house gasped as "lunatic fringe" cycle expert Ian Gordon predicted the Dow Industrials would hit 1,000 before this downturn is over. Gordon's analysis is based on the Kondratiev long wave or K-wave which spans about 50-plus years as measured from trough to trough.
Fear mongering can sway many investors into avoiding any type of risk. Sit on cash and don't invest. Don't buy a house. Don't change jobs. Don't borrow. Don't start a business and don't trust anyone.
The following is a quote from the classic publication, Reminiscences of a Stock Operator by Edwin LeFevre: "Among the hazards of speculation the happening of the unexpected, I might even say of the unexpectable, ranks high. There are certain chances that the most prudent man is justified in taking – chances that he must take if he wishes to be more than a mercantile mollusc.
"Normal business hazards are no worse than the risks a man runs when he goes out of his house into the street or sets out on a railway journey.
"Life itself from the cradle to the grave is a gamble and what happens to me because I do not possess the gift of second sight I can bear undisturbed."
I recall a recent conversation with a good friend whose daughter had just bought a small house in a Hamilton suburb. "She's crazy," he said. "Paying that much and going into debt like that."
I responded; "Calm down, I have owned several homes over the past 40 years and I paid too much for every one of them. My first East York bungalow cost me $18,000."
Most of the financially independent people I have met acquired their wealth either by inheritance, real estate, stocks or a family business.
Although most of us will never inherit a fortune or own a successful business we should at least take on some risk in the form of home and/or common stock ownership.
Our chart this week is 25 years of monthly closes of our own TSX Composite stock index plotted above the average Greater Toronto resale home price. The longer term trend for both asset classes is upward with the TSX returning about 10 per cent annualized and the single family home returning about 5 per cent annualized.
The higher return of stocks is accompanied by higher volatility and lower return of the home is accompanied by tax-free gains and shelter.
All and all, both are worth the risk, so don't be a mercantile mollusc.
Bill Carrigan, CIM, is an independent stock-market analyst.