March 20, 2019 // Shaun Cornell, CFA
Is The Market Obscenely Overvalued?
In his recent letter to investors, fund manager John Hussman stated, “This is an obscenely overvalued market.” There are reasons to worry that he might be right. The current market capitalization of U.S. equities stands at $40 trillion, more than twice the level of GDP. That is the highest ratio of market cap to GDP ever recorded. The previous high-water mark was 1.9 at the height of the dot.com bubble. The Shiller CAPE index (reproduced from Prof. Shiller’s website below), and most other measures of price to earnings and cash flow, are also close to all-time highs. On the other hand, as economists like to say, times are also good. Unemployment is at record lows, inflation is subdued, the economy is growing steadily, and monetary policy is accommodative. As a result, some analysts argue that current market levels are justified. Prices are high but not “too high.”
How We Invest
Our thinking is based on the proposition that future cash flow is the ultimate source of value. Although this seems self-evident, we believe that situations arise in which market prices diverge from levels consistent with a rational assessment of future cash flow. Those situations serve as the basis for our investment decision making.
Energy and Investing: Assessing the Political Risk
February 18, 2019 // Bradford Cornell
The public debate regarding climate change rages daily in the popular press and in the halls of Washington. This report takes a different tack and focuses on the investment implications of what we call the great transformation away from reliance on carbon-based fuels.
Shaun Cornell, CFA
President and Chief Investment Officer
Research Analyst and Chief Technology Officer
The Conceptual Foundations Of Investing
This book explains the conceptual foundations of investing to improve investor performance. There are a host of investment mistakes that can be avoided by such an understanding. One example involves the trade-off between risk and return. The trade-off seems to imply that if you bear more risk you will have higher long-run average returns. That conclusion is false. It is possible to bear a great deal of risk and get no benefit in terms of higher average return.