Are Stocks Overvalued?

The word ‘overvalued’ is being thrown around by analyst, talking heads, writers and traders as if it is a simple fact of life we all understand and can measure. From my view overvalued is in the eye of the beholder. I went to look at a set of jet skies for sale yesterday, and from my view they were overvalued at the price they were being offered. However, from the sellers point of view, they were a fair value or even a ‘deal’ at the offering price. That got me thinking as I read this mornings headline, “Stocks as overvalued now as they were at the 2007 high”. The article goes on to state how the valuation is derived and for how many years it has worked. I appreciate all of that and I appreciate the study that someone spent hours and years developing. In the end, the market direction or valuation will be determined by the buyers and sellers. Unfortunately, if enough people read this, and believe this, it will become a self-fulfilling prophecy. By which it will validate the study. By the way, 4 out of 5 dentist choose Crest.

Only you can decide if stocks are overvalued based on your beliefs and analytic’s. The reality for me is a measure of risk. How much am I taking now at today’s prices versus what I would have taken last November when the market was at it’s previous low? The S&P 500 index as an example is now up 23.2% off that low through last nights close. From my view I am taking significantly more risk today than I would have taken then. That concerns me more than a historical study of valuations based on some criteria of which I don’t understand. Not because I am stupid, but because it is not my study. My study says how far have we come, what are the current fundamentals, and can they drive prices higher? I have voiced my concerns the last month about earnings relative to the top line revenue growth and compression of margins. If stocks can’t grow earnings they will correct and you can call that overvalued if you like. For me, it greater risk relative to the potential return. Thus, I am focused on risk of the market currently versus potential reward of the market.

In the end it all comes down to making decisions based on your beliefs and accepting the responsibility of the outcome. For example, if I raise cash (which I have) and am willing to forgo upside, as I deem the risk to be too high, is there anything ‘wrong’ with that? My answer, NO! I am making a decision and I am willing to live with the consequences of the outcome. The same as an investor who believes the market is heading to 2000 on the S&P 500 index by year end and is willing to invest 100% of their assets. They are making a decision based on their beliefs and they are willing to accept responsibility for the outcome. The same is true with handing your money to an investment adviser, mutual fund, or other third party, you are accepting the responsibility of their outcome based on their strategy for managing your money. You can only look back to determine what you could have done better and to learn relative to going forward. You cannot look back and place blame. Accept the responsibility for your actions and you will grow into a better investor or client. Blaming only causes remorse and cannot change the outcome one bit.

Thus, as we go forward… Are stocks overvalued? The answer to that question is yours to answer, not mine. My view of the market is based on risk relative to the reward that I am willing to take looking forward, based on today’s fundamental data and or technical analysis. For me, I am very concerned about the forward looking risk and I have adjusted my stops accordingly. Take it one day at a time and remain focused on your goals and objectives, after all, it is YOUR money.