Many a book has been written on the back of the stats that show that buying low P/E, low P/B companies is far, far more rewarding in the long run than buying the expensive stocks regardless of the potential for growth. As you say it is a judgement call and of course momentum can go on for longer than you can remain bearish to serially misquote Keynes! But Jeremy Grantham is fond of saying value managers are never wrong just early! I'd rather wait for those opportunities which are hard to find right now unless you go looking in unusual places like Vietnam and Burma!

Eoin Treacy's view

Thank you for sharing your experience and for this email of general interest. Thanks also for the related article. Here is a section:

As you can see, every time the market fell to a P/E ratio of between zero and 7x, you would have made, on average and after inflation, 11% a year, every year for a decade The small print, of course, is every time the market was at those levels, there was something so scary, so apocalyptic, so death-of-equities going on, you would have had to force yourself to buy in but, if you did, you saw a fantastic real return.

Whenever you paid a higher price, however, you would have seen a correspondingly worse return and here is the killer – whatever helped you to justify paying a higher price was irrelevant. Better business? Stronger economic environment? Higher growth? World-changing new technology? It did not matter. What is more, it did not matter even if it turned out you were 100% right about the outcome.

Is it better to enter following a market crash rather than when you are six years into an uptrend? Yes. Is it the only time you should buy? No. The whole point of looking at trends and consistency is so that you can get the rhythm of the market, identify when the best time to participate is, manage the position and identify topping activity which is not something cyclically adjusted P/Es offer. Above all else we have to cultivate the ability to deal with the market as it is rather than how we would like it to be. 

If we take a step back, the valuations on offer in 2008 and 2009 are unlikely to be repeated in the absence of a crash. There is potential for Wall Street’s period of underperformance to persist a while longer as the gradual normalisation of monetary policy, a stronger Dollar and spottier corporate profits sap speculative interest. However even that is unlikely to result in valuations getting back to the rock bottom levels of six years ago. 


As I said on Wednesday, one of the primary threats high valuations represent is that there is less room for error. This week has been a great example of that. Amazon delivered a profit beyond the expectations of the market and surged. Biogen missed its earnings and collapsed. The size of these moves is unnerving. A great deal of money is chasing increased volatility in a small number of large cap shares. This is not beneficial for sentiment because the market is looking increasingly like a casino.