In the long run the market is a weighing machine but in the short run it counts votes. Eventually, fundamentals will determine the right price but eventually can be a long time coming. In the meantime, being right at the wrong time is frustrating, career-threatening and expensive.
This is what Keynes was getting at when he described investment as a beauty contest with a difference. You are not there to judge the most beautiful contestant but to guess who the other judges will rate. The sensible thing might be to temporarily do what you think makes no sense.
The vote-counting always comes to an end at some point but if the authorities are really determined, they can disable the weighing machine for longer than you expect. And while that’s happening markets can do strange things. Fundamentals can simply go out the window.
Last week we saw the fallout from a landslide vote in favour of tech and bio-tech stocks. The weighing machine has been re-activated, perhaps only for a short while, perhaps for longer. If we’re really back to weighing not counting, however, then I suspect this process has further to go. The scales are a long way off balance yet.
There were some pretty punchy corrections in individual technology stocks last week, with the likes of Amazon, Facebook and Google off more than 4pc on Thursday alone. And it’s been a global correction, with internet stocks under the cosh from Shanghai to Silicon Valley and all points in between. With Nasdaq still trading at around twice the average multiple of earnings in the broader S&P 500, however, I think there’s still plenty of air to come out of this bubble.
A degree of caution is still warranted over at least the next few months. What does this mean more specifically?
We have seen a rally this week in response to a short-term oversold condition and Fed Chair Janet Yellen’s reassurances on monetary policy. However, I maintain that upside scope is limited for Wall Street and many other stock markets, not least where they did particularly well last year. Nevertheless, monetary policies are generally very accommodative, not least in developed countries. This reduces the risk of bear markets in equities.
If I was adjusting my portfolio, I would favour shares on relatively low valuations which also have attractive yields. Two examples: old tech rather than new tech, and corporate Autonomies which have lower valuations than their respective indices.Back to top