“And stocks are scarce… Buybacks have shrunk the quantity of S&P 500 company shares…”
There are quite of few problems with the scarcity argument as a sole driver for market-based securities. Remember, scarcity in treasuries trumps the severely overvalued mantra because there’s more to the story, including relative value with comparable treasuries clear across the developed world, safe harboring for those who need some assurance of capital preservation and a well-delineated slowdown in global economic activity. However, scarcity in stocks is unlikely to trump ridiculous overvaluation in equities ad infinitum. I suppose one can also explain that European and Asian injections of liquidity will also find their way into scarce stocks, though I suspect the high probability of recessionary pressures weighing on the U.S. in the near-to-intermediate term will make participants rush for the exits.
Josh Brown may well remember the 2000-2002 dot-com disaster as a fresh-faced University of Maryland graduate circa 1999. He may even recall how the “New Economy” had been expected to change the rules of investing altogether; that is, traditional measures of valuation no longer applied. Not only was Dow 40,000 and Dow 100,000 right around the corner, but trailing P/Es of 30, 45 or 60 simply reflected the realities of a new economic ideal. (Or so people erroneously thought.)
Here in 2015, Josh waxes philosophic about a scarcity paradigm:
“There aren’t ten Disneys, there’s just one. There aren’t two Apples, there’s one.”
Of course, there was only one Eastman Kodak founded by George Eastman in 1888. My first camera as a nine-year old in 1976 was a Kodak, when the company owned 85% of camera sales in the U.S. as well as 90% of film sales. As late as 2001, Kodak held the No. 2 spot in U.S. digital camera sales. Unfortunately, digital pictures moved to the world of smartphones and tablets. (Thank you Apple!) How did it play out for Kodak buy-n-hold-n-hopers? Existing stockholders were wiped out by Kodak’s bankruptcy.
I suppose I could talk about General Motors, Lehman Brothers, K-Mart or Pacific Gas & Electric, but the reader should get the point. The stock of great companies can go down… quite a bit. Even Disney is quite capable of falling 57%. (See chart below.) The math of loss does not make a recovery from 57% losses quite so easy, nor does human psychology favor anyone’s willingness to watch their dollars disappear. That’s why investors need to insure against monstrous losses, particularly in an absence of tailwinds from six years of quantitative easing and six-plus years of zero-percent interest rates.
Yes, my clients still own overvalued stocks; we still own core holdings like Vanguard Dividend Appreciation (VIG), iShares S&P 100 (OEF) as well as Vanguard Mega Cap Growth (MGK). That said, if one of these assets falls below and stays below a 200-day moving average, I am likely to reduce exposure. I may employ stop-limit loss orders to sell some or all of satellite ETF assets like Pure Funds Cyber Security ETF (HACK) and SPDR Select Health Care (XLV). Finally, when a preponderance of volatility measures and contrarian indicators give me reason to anticipate benefit from multi-asset stock hedging, I invest in the FTSE Custom Mutli-Asset Stock Hedge Index. Multi-asset stock hedging gives investors a diversified means for pursuing profits above T-bills.