The Current State of the Stock Market (2021)

So that right there is Charlie Monkey. He's essentially Warren Buffett's right hand man. He is the vice chairman of Berkshire Hathaway. What we're looking at right here is him giving a talk at the Daily Journal shareholders meeting, which happened a couple months back. Now, in this talk, he discussed at length why he believes we are in a big speculative frenzy, a big stock market bubble.

So in this video, what I wanted to look at is, well, how overvalued, how bad is the stock market right now, and why is it like that? So, hope you enjoy the video! Leave a like on it if you do, and let's get started. This video is sponsored by Hyper Charts. Sign up to Hyper Charts using the referral code New Money or use the referral link in the description and save 10% for your first year of Hyper Charts premium. Details in the description.

So the S&P 500, which is the index that is following the 500 largest companies in America, is currently the highest it has ever been. In fact, at the moment, it's sitting over 4,100 points. In the last 12 months alone, it's gained over 47%, which is an insane one-year return to get on any investment, let alone the 500 largest American companies grouped together.

But of course, just looking at the price of something doesn't give us any indication of the value. So, if we want to look at how overvalued or undervalued the market is right now, we have to compare the price to something else, right? Give it some context. So one of the ways, really the primary way that investors do this for the market over in America is they look at the Schiller PE, which is comparing the price of the S&P 500 with the average inflation-adjusted earnings of the S&P 500 over the past 10 years. It's really like a big P/E ratio for the whole market.

Now typically, this number sits at around 16 and a half. That's the historical average for the Schiller PE. What that means is that if the S&P 500 produced a dollar of earnings in a year, then investors would be comfortable paying about $16.50 for the shares of the S&P 500 theoretically. Currently, what we are seeing is a Schiller PE of 37.4, which is absolutely abnormal and absolutely insane.

What it means is essentially people are willing to accept half the value for money. They're willing to pay double what they would normally pay historically to own the S&P 500 at a time like this. That seems a little bit weird. Of course, I say this all the time when I make one of these videos, but the Schiller PE has only been over 30 twice in history before now; that was in 1929 and in 1999.

So 1929, well that triggered the Great Depression; 1999, well that was the tech bubble. Now we're sitting at 37.4, so that's a worrying sign. Yes, definitely if you look at the market, the cyclically adjusted P/E ratio—that's what the Schiller P/E is, it's a CAPE ratio—then yes, the market looks very, very overvalued.

Another point, another metric that investors like to look at is something which is now known as the Buffett Indicator, which is actually called the Wilshire GDP, and what that does is it compares the Wilshire 5000, which is essentially like a total market index over in America, with the actual gross domestic product of America.

So the underlying GDP typically, the rule of thumb is: between kind of 60% and 90% to 100%, the stock market's fairly valued. 100% or more, the stock market is quite overvalued currently. And this is just seriously insane, seriously mind-blowing. The Wilshire GDP currently sits at 216. That is definitely the highest we've ever seen in history.

This is really uncharted territory. We do not know—we have not seen a time where the Wilshire GDP has been this high, where the Wilshire 5000 is so far detached from the underlying gross domestic product of the United States. Overall, there are two metrics which are freely available, which you can just log on and look at, which help you understand how the overall market is, whether it's overvalued or fairly valued or undervalued.

I think most people would agree, most investors would be in the same boat, and they would agree that yes, the market—most markets around the world—are very overvalued. But then the question is why? Why are they so overvalued?

There are really two main points, one which has more weight than the other, but we'll talk about both. The single biggest reason why the market is so expensive at the moment can be described by a term or a phrase which you might have been hearing tossed around at the moment, which is "money printer goes brr." What that's referencing is it's referencing central banks around the world that are printing a lot of money, virtually on the computer. They are printing, they're adding zeros, okay? They are printing money.

And why do they do this? Well, they do this for one main reason. The overarching reason why they print more money is because they want to lower interest rates. What that means is that me or you, we can go out and borrow money more easily. It is cheaper for us to borrow money.

Now, the idea here is that, you know, money is more accessible to people. People take on debt; they get access to this cash, they spend it, and that helps to stimulate the economy. There's also a secondary thing we need to think about with the lowering of the interest rates, which also kind of adds to the situation.

And that is that if you are just holding money in your bank account with a very low interest rate environment, you are not getting very much at all when it comes to bank interest. Okay? A lot of people which have fairly decent sums of money sitting in their bank account are seeing that, man, I'm really not getting anything from keeping my money in the bank.

So they go and they want to put their money somewhere else where it's going to give them a slightly better return. They want to put their money in the most effective place possible. So the fact, firstly, that the interest rates are low means that people are taking on more money because it's cheaper to do so. What do they do? They go out and buy a house, or they might buy some shares, or they might expand their business.

So that can inflate the prices of whatever they spend the money on. Then secondly, you've also got people which have the money in their bank accounts, which are moving their money somewhere else. And whether they move it, they move it into things like real estate or they move it into things like stocks, and that's another trigger for prices to be inflated.

So that's why a lot of people are saying that, oh, it's so weird, we've been printing all this money and we haven't really seen any inflation yet. That's actually not true. We have seen some inflation, not in the consumer price index, but we've seen inflation in asset prices.

People are shifting their money away from keeping it in the bank; they're shifting their money into stocks, into real estate, into other asset classes. And everybody doing this collectively inflates the prices, and that is exactly what we're seeing. A lot of the reason that the stock market overall has gone up so much, especially in the last 12 months or so, is because there's been a lot of money printed.

In 2020 alone, the U.S. or the U.S. central bank, the U.S. Federal Reserve, printed three trillion dollars. So that's a hell of a lot of cash. That's definitely the first reason why we're seeing such an overvalued market, because of this very low interest rate environment. That's like a macroeconomic thing that you can look at.

To be honest, I'm not particularly an expert when it comes to macroeconomics, so I'll leave that to people like Ray Dalio, who can talk about that much more. But then the second reason why stock prices are just so overvalued right now is because people are locked in a speculative frenzy, and this is what Charlie Munger was talking about during that talk.

You know, people are out there buying stocks simply because they're going up, and that is obviously a terrible reason to make an investment. You wouldn't make an investment in a house because the house prices are going up. That's not the reason that you buy it; that's not the reason that you buy shares of Facebook. You don't buy shares of Facebook because they're going up. But a lot of people are doing exactly that.

Their reasoning behind why they bought into a particular company, "Ah, this sucker's going up," in the words of Peter Lynch, right? I'm amazed how many people own stocks. They would not be able to tell you why they own it. They couldn't say in a minute or less why they own it. Actually, if you really pressed them down, they'd say the reason I own this is "the sucker is going up," and that's the only reason.

Munger probably calls it a period of euphoria where people are simply buying into the market because the market is rising. And you know, it's when you talk to the postman, and the postman is the one telling you about how he's buying Bitcoin, or you meet up with Jono from the cricket team down at the pub and he's just put half of his life savings into GameStop. That's when you know that things are getting hairy and that you are definitely in some sort of speculative bubble.

When people that really know nothing about cryptocurrency or stocks or real estate are telling you all of their moves that they're making right now, that's when you start to raise an eyebrow. You might say, you know, okay Brandon, that sounds reasonable. I have seen a little bit of that euphoria going on, but how can you prove this to me? You know, you were talking before about interest rates; they're hard numbers you can prove that.

How can you prove that there is this speculative frenzy going on? Well, for that, I want to draw your attention to an example of a New Jersey deli that myself and my good mate Hamish Huddle were just talking about on our most recent episode of the Young Investors Podcast. By the way, if you don't know about the Young Investors Podcast, then definitely get on board. That is the weekly podcast that I do with Hamish. We talk about all things stock market, investing, business, and so on.

But I'm going to insert a little bit of a clip here from that episode that we recorded live in Melbourne of this New Jersey deli, and this should prove without any question or shadow of a doubt why we are in a very big speculative frenzy in the stock market. So have a listen.

In this letter, he was talking about the kind of exuberance of the market, right? He drew to this example, which is kind of hard to believe when you go through it. So, he spoke about a company called Hometown International. Have you heard of it? Aerotyne? Aerodyne? Aerotine? They make next generation satellites or radar detectors. I don't know. I mean, huge military and civilian applications. I mean, you joke about that, but this is literally the real-life equivalent of that. I kid you not.

All right, hit me. It's kind of unbelievable. So, Hometown International is the—and I'll say this in a very invested way—it's the parent company of a New Jersey deli. Okay, all right, like a deli, like meats, cheeses? Correct, yes. And this, you know, this isn't a chain of delis across the United States or all the world, right? This is a single deli, right? So, this deli, this is the deli at the end of your street?

Yeah, so in your local shops? Correct, yes. Okay, it looks interesting from the front. You should go look this up on CNBC. Look up this story after you hear this. It is listed on the stock market, and it's a really great business. Revolutionary founder. Texas deli? Deli business? Pub? Public? Yes.

What happens next? So we took it public in 2019. And if you look at their annual reports over the past two years, yes, the deli has produced a total combined of $35,000 in revenue. The CEO is also the CFO, the CEO, the treasurer, and the sole director. I love this guy! What a legend!

On top of all of those responsibilities, so he, you know, he's managing a huge company, $35,000 in revenue over two years. He's listed on the U.S. stock market. On top of all of that, in his part-time, he's also the wrestling coach of the school next door to the deli. Oh, this just keeps getting better!

All right, so you got this macho guy that runs a deli that's made $35,000 in revenue, yeah? Part-time CEO of a massive corporation, massive global corporation, part-time wrestling coach, yeah, for the school next door to the secretary. All right, yeah, sure, it's got to be worth at least a couple bill, at least a couple couple bills, yeah? Yeah, you're not that far off.

This company, once again, $35,000 revenue, $600,000 in expenses is currently listed for $105 million. [Laughter] $105 million! $105 million! Pause for effect—$105 million! If that example doesn't prove that we are in some sort of speculative frenzy, I don't know what will.

$35,000 in revenue across two years, $600,000 of expenses, and a valuation on the stock market of over $100 million? That is just dumb! So overall, yes, we can see the stock market's overvalued right now. Why is it like that? Because of the macroeconomic environment we're seeing because of the speculative frenzy.

So lastly, what do we do about it? And unfortunately for us active investors, this is going to be an unpopular answer, but the best thing to do right now is just to wait it out. Okay? Stay patient. More particularly, don't get sucked into this speculative mindset. Don't get lured in by the fear of missing out as you see the stock market rise, because remember, we want to be—yes, we want to make money, we want to be rich, but we want to do so reliably.

We want to become rich while taking the least amount of risk in doing so. Okay? And investing heavily at times like right now, that is a very high-risk activity. Now, of course, there's a broad generalization. If you find a company that you really believe in, you’ve done the due diligence, and you find that it is undervalued, then by all means, okay? By all means, if it's undervalued and you're sure it's got a great moat, good management, then that's great. You've found, you know, a diamond in the rough. That's fantastic.

But generally speaking, we do need to just be cautious and mostly wait this one out. Be very patient. This is what Charlie Munger—this is actually pulled from that talk that I've been referencing throughout the video. This is what he said about what he's doing, how he tackles these periods of speculation.

"Well, these things do happen in the market economy; you get crazy booms. Remember the dot-com boom when every little building in Silicon Valley rented a huge price, and a few months later, about a third of them were vacant? There are these periods in capitalism. And I've been around for a long time and my policy has always been to just ride them out. And I think that's what shareholders do.

In fact, what shareholders actually do is a lot of them crowd in to buying stocks on frenzy, frequently on credit, because they see that they're going up. And of course, that's a very dangerous way to invest."

So overall, don't get sucked in. Don't feel the fear of missing out. Like Charlie says, we just have to wait it out. Be very patient, make smart investment decisions, because as the market goes up higher and higher and higher, okay, as that Schiller PE rises, as that Wilshire GDP rises, then it just gets riskier and riskier.

You would hate to end up being the modern-day equivalent of the new investor in 2008 before the crash. You would hate to be that investor that's investing in 1999 at the height of the market before everything goes horribly wrong. So we want to get reliably rich, and we want to take the least amount of risk while we do that.

So anyway, guys, that is a kind of mishmash of video, kind of why the market is where it is at the moment, the reasons why it's so overvalued and what we should be doing about it. So I hope you enjoyed the video. Leave a like on it if you did. If you found it useful, subscribe to the channel if you'd like to see more videos similar to this.

And if you are interested in my own personal investing approaches, modeled off of Charlie Munger, modeled off of Warren Buffett, and all of those Monash Prabha, Peter Lynch, all those great value investors, then do check out Profitful. That's my own business I started up, and that helps me do what I do here on YouTube.

So if you wanted to check that out, links are down in the description. Head over to Profitful, and maybe one of those courses might take your fancy. You might be interested in one of them. But overall, guys, that's it from me for today. Thank you very much for watching, and I'll see you guys in the next video.

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