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I am a skier. When someone says this, you assume he or she is good. Well, I thought I was good. I was not Lindsey Vonn, but I had the technique down. I’d be the fastest person going down the mountain, always waiting for my friends at the bottom.
Value Investing
Then, at the beginning of last season, I went skiing with my kids at Vail. It had snowed nonstop for a few days. Vail is a very large resort, and the mountain crew could not keep up with the snow, so I found myself skiing on unusually ungroomed slopes in powder more than knee-deep.
Suddenly, something changed. I could not ski. I could barely make turns. I was falling multiple times per run. My kids, including my nine-year-old daughter, Hannah, were now waiting for me as I dug myself out of pile after pile of snow.
My technique – along with my confidence – was gone. The discomfort comes from constant falling turned into fear. I was ready to go back to the hotel after only two hours on the slopes.
I was devastated. It was as if I had never skied. So I talked to a ski instructor about this incident. He told me that I’m a “good skier” on groomed slopes because they allow me to go fast without trying hard. Speed covers up a lot of mistakes and lack of skill. Skiing in powder requires different skis – not the skis I had – but more importantly, it slows you down and makes you rely on skills that I thought I had but didn’t.
During the past six years, the Federal Reserve neatly groomed, manicured and then finely polished investment slopes for all asset classes by lowering interest rates to unprecedented levels – providing a substantial accelerant that indiscriminately drove valuations of all assets higher. But ubiquitously rising valuations cover up a lot of mistakes and often a lack of skill. Whether you had a rigorous investment process or were throwing darts, over the past six years it hardly mattered – you made money.
Bull markets don’t last forever, and this one is not an exception. Stock valuations (price-to-earnings) are just like a pendulum, swinging from one extreme to another. Today the stocks in the S&P 500 index trade at about 50 percent above their average valuation (if you adjust earnings down for very high corporate margins).
Historically, above-average valuations have always been followed by below-average ones – taking away the riches that the previous years provided. In other words, at some point it is going to snow and snow hard. Just as I, the great skier, found myself overconfident and unable to deal with the new terrain, investors will find themselves doing face-plants when the stock market turns from bull to bear.
But here is great news: Today the stock slopes are still finely groomed with stocks near all-time highs, and we all are given a unique opportunity to make adjustments to our portfolios and investment process.
By Vitaliy Katsenelson, read the full article here.
