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Do We Have A Stock Market Bubble And Will It Burst?

Most people on the market say that the American stock market is overvalued and they use the Shiller-Cape-Ratio in order to justify their comments.

Well, I say it's hard to say whether we are in a stock market bubble but we see definitely low yields in terms of free cash flow and high premiums on book value. It it’s a real bubble; it is a question about how fast the future growth can develop.

For the time being, the economy is recovering at a slow pace and the inflation seems to be flat. This is a good environment for the FED to keep the interest rates low which give the market more fuel.

Below are two interesting info-graphics which I have found by stumbling the economic theme space of the internet.

The first picture shows that it doesn't matter if you buy in a bubble. If you buy and hold stocks for the long period, you will make money in the end. The only difference is that your return will be smaller or over a long period negative.

What do you think? Would you buy stocks for bigger amounts of money? I personally keep around 15 net cash but that's in my view not an optimum when the yields for fixed income are so low.

My thoughts go into foreign stock markets. China and Europe stocks seem to be more fairly valuated but if you look what's going on in Europe and China, you would think about your investment a second time.

How do you place your money? Please let me know if you still buy stocks. Best Tom.



The Next Bubble


Source: BizBrain.org Demystifying the Tech Startup Bubble


7 comments:

  1. Howard9/15/2014

    Tom, if you're in for the long haul, then it seems the main concern about a bubble should be whether dividends will be cut. For me, that suggests that a longterm record of no dividend cuts is the highest priority. I will not even look at a stock that has cut its dividend in the past 10 years. If a stock weathered the 2007-9 recession without cutting dividends, it's pretty likely to continue that good performance.

    In addition to a 10-year record of no dividend cuts, my other absolute requirements are:
    1. EPS is greater than the annual dividend
    2. Dividend rate is > 1%
    3. No cigarette companies (I do have SOME standards!)

    Right now I own COP, IBM, VZ, KRFT, MSFT, INTC, PPL, BHP and PSX. ( I acquired the PSX when it was split off from COP, and kept it even though it didn't have the 10-year history.) The dividends range from 2.4% to 4.4% of current stock price.

    I began buying these dividend stocks in 2011. The current level of dividends is 4.3% of my purchase price.

    Best,
    Howard

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    Replies
    1. Thank you Howard for your comment. Your thoughts and insights are very good.
      I personally look at growth rates in the past. If the company doubled sales and earnings over the past ten years and need to invest only 25 percent of its income to keep the business alive, it's a damn good company. Most of your stocks you own are also some of my favorites but I don't like the energy stocks. I don't have an idea how big the punishments could be if our socialists claim for natural damages like climate changes or plastic trash.

      Delete
    2. Howard9/16/2014

      Thanks for the kind words, Tom.

      I think one has to very skeptical of efforts to beat the stock market. Most of the historical gain to investors has come by way of dividends, not price appreciation.

      If there is a major market downturn, you might have to wait 5, 10 or 20 years to recover your pre-slide price. But if the company keeps paying its dividend, then you're still getting a good return on your original investment. I think this is one of your own basic premises, too.

      When you wrote "I don't like the energy stocks", did you mean COP/PSX or PPL or all three?

      btw, your excellent blog helped me focus on the importance of dividend growth. Otherwise, I would have had a stock like Hawaii Electric, with it's 5.2% dividend, in my portfolio. When I saw that HE has not raised its dividend in the past 10 years, I eliminated it.

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    3. Yes, my thoughts were at all major integrated oil companies. I believe that it was better to buy those stocks at yields between 4-6 percent. For sure, they look cheap in P/E multiples but not if you include their risks. I see that governments need money to finance their budget deficits but they do also punish companies with CO2 Emissions. E-Cars will come with Tesla in 5 years for the broad market. That will create a huge pressure on the oil demand because around 50 percent of the oil demand is caused by traffic. Thank you for your comment, Howard.

      Delete
  2. Tom, I think Disney(DIS) and Apple(AAPL) are very good buys now. Their dividends are not the greatest, but I believe both stocks have tremendous upside in principal and I believe both are fair priced now. Disney starts coming out with all the Star Wars movies next year which will be sure to boost their profit while Apple has had record sales for their iPhone 6 and also their apple pay should boost profits too.

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    Replies
    1. Thanks Adam, DIS and Apple look good but I believe that they are too big to double. I would prefer stocks around the 10 billion mark, maybe a little big larger but you might be right because Disney and Apple can buy those companies and boost their growth too, What a good times for us investors :-)

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  3. Hello Tom, nice article(s) again, also the last one about Sales and growth.

    I also started in 2011 with my mainly dividend portfolio (most aristocrats or companies that pay at least 15 years dividend and increasing.

    Last 1,5 year i'm looking more for growth stocks like Apple, Google, Qualcomm, China Mobile, to name a few. Because I have enought time to let it grow (38,8 years now) :-))

    I reinvest every dividend dollar en every month i put some extra money on my share account.

    I commit myself ot buy some extra shares (a least twice a year) that are 'behind' in my portfolio. Sorry for my English native dutch(ie)

    70% stocks in US
    25% in EU
    and 5 in bonds, cash and some stocks around the world

    The 'best' thing that can happen a few times the next 10 years is a nice sell-off to buy some xtra shares (cheaper) with dividends rising off course for the compound effect!

    Best regards and keep on going the good work.

    You work with a free gift is isn't it to maintain the site ed.?
    pls let me know

    Goodluck all

    ReplyDelete

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