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I recently wrote a series of Newsletters highlighting the extraordinary level of US shares (see 22nd – 27th Feb 2017). Using the highly respected cyclically adjusted price earnings ratio, CAPE, based on ten years of earnings, the market has never been this high, except on two occasions – those years are 1929 and 1999.
Warren Buffett, in his 2016 letter to shareholders, reminds us that trouble can come and find us:
“the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: “We spend a lot of time looking for systemic risk; in truth, however, it tends to find us.”
It is interesting that Buffett has chosen this year to raise the issue of major market declines – such statements are not common in Berkshire Chairman’s letters. He normally emphasises the brilliance of the American economic/political/legal system for producing long-term wealth. He does this again this year, but also adds the bit about declines.
These ideas are not mutually exclusive arguments; in the long run I’m convinced America will grow its income and wealth to multiples of that it has today. But it is perfectly possible to also have a stock market downturn in the short- to medium-term.
I have no idea when a major market decline will occur, but I’m seriously contemplating positioning myself so as to be able to survive, and maybe thrive, under such circumstances (I’ll let you know about any action taken in future Newsletters).
In the meantime I have some reading to do. I have just bought these two books:
- Alibar, R.Z. and C.P. Kindleberger (2015) Manias, Panics and Crashes, 7th Edition. Palgrave Macmillan.
- Bob Swarup (2014) Money Mania: Booms, Panics, and Busts from Anicient Rome to the Great Meltdown.
I’ll write Newsletters reviewing these books.
Some reassurance from Buffett
“During such scary periods, you should never……………………………To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
