People are often prepared to say they are right and the world is wrong. This is a very dangerous game particularly when played against the stock market.
Of course there are two sides to that coin, the other is, being a contrarian is a great way to make money.
However “fighting the tape” even if you are right is a great way to get poor.
So lets no do that, lets imagine that by and large stock market values are correct.
It pains me, especially as a contrarian to do this. Apple is in this model, just fine trading in the orbit of planet earth worth more than half a trillion dollars. The market is right and I am wrong.
Perhaps I can be a contrarian-contrarian, a “contrarian squared” if you like.
Let’s get past Apple, let’s look at plenty of crazy valuations.
Let’s start with Rackspace.
As an English investor guy I can shout “how the blazes can a company with $76m in profit be worth $10 billion,” but look at the wonderful Amazon’s market cap.
Words simply fail me, even though my investment book to be in there 10 ten in the UK week in and week out I simply cant find the words or the numbers to justify that.
The valuations of these companies are just stupendous.
But wait, I’m not going to say they are wrong, I’m going to bow to the market and say, “alleluia they are near enough right.”
I’m going to bite my tongue and accept them.
With the right mood music playing, the correct balance of wine and incense I can see valuations like Apple, Rackspace, Zynga, Facebook, the list goes on and on, being just fine. They’re just cool and groovy. Everything is OK man.
If this is true what does this mean. Is this good or bad?
Actually it’s marvellous.
If sketchy companies like Groupon can be worth billions what about the rest of the 20,000 stocks on the US markets?
Most of the 20,000 companies listed in the US get easily understood valuations with single or low double digit P/Es. If you controlled the market cap of the new breed of “divide by zero” metric companies like Facebook, you can buy up most of the listed companies in existence with your, inflated perfectly valued stock.
So what?
So perhaps these companies of the future are insanely valued, instead maybe they sketch out the future of the stock market.
Perhaps they are indicating, like a supernova in the sky, what might happen to stock valuations in the next 20 years.
These incredibly valued companies aren’t a product of a stock market bubble; they’ve been born and floated then traded in one of the harshest period of economic and stock market history ever.
If Rackspace deserves a p/e of 100 why shouldn’t Exxon deserve on of 25 or GE one of 30, or some metal bashing company on a 9 p/e deserve 20 p/e or 40 p/e or even 100 p/e too?
Is Rackspace and the rest of the stock market stars, way, way too expensive or is the general market way, way too cheap?
Markets rise, sideways trade and then move up again. At least that’s the pattern of the last hundred years.
It forms a ballistic index growth curve, which in any decade from 1900 would seem ludicrous to project forwards, yet threw crash, scandal and war that’s what happened.
…and the market has gone sideways for 12 years.
What happens if we project that 100 year chart for the next 20 years?
We, for a start, need a log axis. What is more, the Dow number, for instance, quickly looks absurd.
.. just like Rackspace and Zynga and the rest of the tech stars look absurd, right now.
So as a “contrarian squared” I should just go long and wait for the Dow to break 20,000, 40,000, 60,000….
Insane?
Well with the US deficit already going up 1,000,000,000,000 dollars a year, the endgame of inflation could most certainly do that to the Dow, without an economic miracle.
If cash starts to die through inflation, there will be many more “divide by zero” stocks in a world, operating on a log scale. I own a wad of $100 trillion dollar Zim notes.
However I must stop myself. Let’s look on the bright side, unless it’s over for the US, and it could be, the last twelve years of sideways trading must end and the market must rally. Unless progress is over the markets of the west will at some point head north.
If people can stomach 100 p/e today on pretty sketchy reasoning, there is plenty of room for much more aggressive valuation amongst the blue chips.
So I can be “contrarian squared” without putting my tin foil hat on and go long and wait for the big wave that is to come.
At least till the day Rackspace, Amazon and their ilk revert to valuation metrics that value investors can understand there is a possibility that the century long run stock chart of exponential growth might resume.