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And the bigger the bubble, the sharper, longer, and more painful the downturn. The further you move away from overvalued assets , the closer you are to the day they start business, the further you move away from the problem of bloated assets. You collaborate with the founders to some extent if you are at a fairly early stage.
I think the interest rate argument is an explanation of how we get there from a behavioral perspective. This is by no means an excuse. You won't justify anything by taking the most overvalued asset in human history—the bond market. I'm saying that compared to him, we are simply very overvalued, and therefore relatively cheaper.
"This is very cold comfort." Um, Solomon Brothers, uh, a major firm at the time in 1989, sent in a team of assassins, uh, justifying the Japanese stock market, which was approaching 65 times earnings, as we were told at the time. The data was presented as 65 times earnings. It had never been sold for more than 25 before.
Uh, that was, to put it mildly, a real McCoy. And this team went around pointing out that rates in Japan were so low that a 100%P/E would be fair. Of course, the crash that followed in the land, bond, and stock markets was cosmic. And that happened in 1989, and the company still hasn't recovered. It has still not reached the level of 1989, neither in the real estate market nor in the stock market.
Uh, which reminds us of the cardinal rule, which is: the bigger the bubble, the more ingenious the argument. And the bigger the bubble, the longer and more painful, uh, recession. Do you know what the alternative is? Are there no alternatives to stocks for long-term investors? That this argument is quite..." It's easy to understand.
But this is the broadest, as I said, asset bubble of all time, where three and a half of the four major asset classes are clearly in the zone of serious bubbles. Right. And the idea that you have no alternative but to choose one of four bubbles is a pretty bleak, ahem, way to look at life. I understand the argument.
So, pick a bubble, they will all probably go together and you will suffer a lot of pain. Uh, and the intellectual content of this argument that they were all bubbles so we had to pick the least bad one, ahem, will resonate in your head when the market unravels. Is there any way that these bubbles can, you know, just fix themselves?
And so that this is not some kind of Armageddon scenario . Or what is your scenario? From a dozen to a dozen to 15 years of a static market situation with normal profits and market rotation, everything will be fine. And almost every portfolio manager I've ever met has felt in market bubbles that this could happen.
This simply never happens. The market hates...long sideways moves, as we all know. It either grows faster than you think or falls faster than you think. You can always hope for a long-term sideways movement. But it never seems to come. By the way, I have great sympathy for those who participate in the bubble.
Right. When I was young in 1968-69, we had this amazing mini- bubble in the tiny stock market, and they all quadrupled and made us rich, and then they all burst together and most of them went bankrupt. And I just graduated from business school and made a small fortune. Almost enough to think about retiring to England.
And then, in about nine months, I lost everything down to $2,000 and was lucky enough to cover my leverage and exit without huge debt. This is extremely exciting, probably the most exciting time I've ever had in investing. So I completely sympathize. No one who is young, investing, and making money is going to listen to some old weirdo telling his war stories about how he got wiped out.
I understand that. So I can't say anything. say that it will make anyone change their behavior. The psychological power of a bubble to pull everyone in is incredible. And we've known this since the tulip bubble. And it will never stop. The market bottomed out in March 2009, effectively to the day. And you wrote an article called " Reinvesting When You're Scared," advising clients to get back into the market at this point.
At the moment, it seems like we are in exactly the opposite situation. Should you, you know, write an article about cutting back on investing, or cutting back on investing when you're scared, and you know you're recommending it to individual investors who may not be so young and will suffer terrible consequences in the long run from the bursting of these bubbles?
You suggested an interesting name for me. Cutting back on investing when you're scared. That's a better name than the one I came up with. Yes, cutting back on investing when you're scared. It's just as psychologically difficult as reinvesting when you're scared. They both capture the spirit of the exercise.
Well, I would look around and ask the question, what is the least bad? And the least bad is emerging markets. They are a little overvalued, for sure, but exactly at one of the three points of maximum difference with the S&P 500. Yeah. And each of the other two examples worked wonderfully for emerging markets.
Conversely, when emerging markets peaked, which they did in 2007, they sold at a P/E premium to the S&P. Uh, really bad things can happen, and they did. But emerging markets are relatively very cheap, Mhm. And almost close to fair value. And another thing is the ratio of cost to growth. Uh, low-growth stocks have been underperforming high- growth stocks for the decade ending in 2019 .
And then in 2020 they had their worst year ever . So you had the worst decade, followed by the worst year. And the ratio of cost, uh, or low growth, to high growth was also the highest it's been since 1974. And the result after 1974 for value was excellent. So I would consider...The intersection of these two ideas.
If you could buy value stocks in emerging markets, which ultimately includes the possible, right? What you can, and this includes some countries with very high growth potential, such as China, and together they will almost certainly have higher growth rates than developed countries, and they are selling at a huge discount.
I would say they are pretty cheap in a world of S&P which is extremely overvalued. And you could lock them in for 10 or 20 years and really expect a decent return , which is what I would recommend. Mhm. And since there's no hope of convincing people to actually get out of stocks, that would be the best I could offer.
But for those three people who have a will of steel, I would say also have a cash reserve of 20% or 30%, as much as you can psychologically sustain. Right. The advantage of much lower prices sometime in the not-too-distant future. So, would your only investment for a long-term diversified portfolio at this point be to have a cash reserve?
No, I'd like to have low- growth emerging markets as much...as I can stand. Good. And a cash reserve as much as I can handle. And, um, if you had 70/30 , 30% cash and 70%, uh, cheaper emerging markets, that would be a pretty resilient portfolio, I have no doubt. However, over the next 10 or 20 years, I think the S& P will certainly underperform , just as it went through tough times from 2000 to 2010 when it had negative returns.
The emerging market, by the way, has outperformed it by 11 or 12% per year in compounded returns. And Jeremy, is this what you do with your personal portfolio? I don't actually have a personal portfolio, but I do have a fund portfolio. Right. Uh, the job description is to make as much money as possible, because we can use every dollar we can make.
Good. And in the fund we have 75% early-stage venture capital, which is, of course, unheard of. Right. And 25%, now up to 30%, in liquid reserves that you have to have when... You have a venture capital portfolio because of the requirements on your funds that you have committed to. And that, of course, worked brilliantly this year.
This is the furthest thing from overvalued assets . The closer you are to the day of business launch, the further you are from the problem of overvalued assets. You collaborate with the founders to some extent if you are at a fairly early stage.
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