The 'Everything Bubble' Just Got Bigger.
In the middle of last year, Seth Kimman gave an interview talking about the everything bubble. He spoke about how money was simply flooding into everything, from stocks to crypto to SPACs, and everything was getting seriously expensive. We've been in an everything bubble. I think that, um, a lot of money has flowed into virtually everything.
Seth is no media personality; he's not a stock market predictor. In fact, he is an incredibly quiet value investor that rarely talks to the media. You are, um, somebody who shies away from publicity. I've been trying to get you to come on the show for years. But interestingly, he is one of the few people that Warren Buffett himself has said could reliably beat the market over time. He's also the author of "Margin of Safety." He's worth about $1.3 billion. He knows what he's on about.
But the interesting thing is that in the last year, since he gave that interview, look at what's happened. The everything bubble has only gotten worse. The S&P, the Dow, the NASDAQ, mid-cap, small-cap, micro-cap, doesn't matter; you're up around 30% in some cases more. Literally all sectors, with the exception of energy, good. You're basically Warren Buffett world equities, emerging markets, the rest of the world excluding the US, developed markets, Europe, Australasia, and the Far East, all amazing. Silver, gold, platinum, good, good, good. Bitcoin and Ethereum, amazing. Bond yields, amazing. You get the point. Since Seth Kimman warned us about the everything bubble last year, the bubble has only gotten bigger.
There have been times in my life that I've been awash in so many opportunities that I could have invested everything by Nightfall. But now, we haven't seen anything that makes sense. So what do we do? Well, let's talk about it. Before we do, I just want to say a big thank you to Seeking Alpha for sponsoring this video. You're going to see it right the way through the video, but Seeking Alpha Premium is very overpowered for investors like myself. I use it all the time. If you want to try it for free for seven days and get a $30 discount on their annual premium subscription, please use my link in the description and the pinned comment. In my opinion, it is the subscription to get if you're into stocks, and yes, I would absolutely still be recommending it even if they were supporting the channel.
But to start this video, I want to show you guys exactly how expensive the market is getting, and you'll start to see the problems I'm running into as an investor at the moment. You guys know that I love looking into businesses from the Warren Buffett viewpoint, so solid businesses, fair prices. But have a look at this. I won't spend long on this because I've quoted it in a few recent videos now, but take a look at this number, which is the Shiller P/E Ratio. This is a big price-to-earnings ratio for the S&P 500, but it takes the average inflation-adjusted earnings over the past 10 years, so it's quite conservative.
Now, usually, the market sits at around 18 to 20ish; that's the long-term historical average. Investors will pay 18 to 20 times the earnings of the S&P 500 as a price. But today, however, we're looking at a monstrous Shiller P value of 37. Now, I want to be clear that doesn't mean the stock market is going to crash. It doesn't mean you should sell now. It isn't anything except a reference point to history. But yes, as you can see, the last few times it was this high was 2012, 1929, with each of those moments corresponding to periods of serious market overvaluation.
Looking to something like the fear and greed index, we can see that 12 months ago people were fearful, but now that has completely reversed. Not really bad just yet, but investors are feeling a little bit greedy, and that causes some problems for investors. So, I want to talk to you guys about a ratio that I use. It's called the enterprise value to free cash flow. Free cash flow is an easy one; it's simply the amount of cash a business makes in a certain time period minus the amount of cash the business spends on capital expenditures to keep the business humming. So, it's the cash flow left over at the end of the year.
Enterprise value is the market value of a company, so the market cap, but it also considers the fact that as the owner of the business, you would also inherit the cash on the books, and you'd inherit the debt the company has too. The formula is simply market cap plus net debt, with net debt being total debt minus cash. Enterprise value is kind of like a more comprehensive value of a business to use in your valuation.
Now, value investors love a low enterprise value to free cash flow multiple. If you can buy the company at a price that's say eight times the free cash flow, that means we've made back that investment in only eight years. A ratio in the 20s or the 30s, however, it kind of sucks because it means we're going to have to wait a long time before we've recouped our investment. Now, let's pick a notable high-quality business in the S&P 500, say Google. It's just a random one; they're super profitable, and they're even in my portfolio.
Now if I type in Google and go over to their enterprise value, we can see that their value is around $2 trillion. Now, if I go over to the cash flow statement, I can see that in the last 12 months they generated free cash flow of $44.2 billion. Yeah, they make a lot of cash, but as a ratio, it comes out to 44. So, investors need 44 years' worth of free cash flow before they can recoup their investment, and that kind of sucks.
But now take a look at this. This is the results for the 10 largest companies in the S&P 500, which at the time of recording hold 36% of the S&P 500 weight. Again, all this data came from Seeking Alpha; I've just gone the extra step to actually put it in this table. But have a look at the enterprise value to free cash flow ratios. The only one even remotely in the ballpark, as expected, is Warren Buffett's Berkshire Hathaway. The rest have just been bid up to the moon. Investors are willing to pay 30, 40, and in the case of Nvidia, nearly 100 times free cash flow just to own the shares.
Now, this is very abnormal. It's likely not as extreme as you get into the smaller, less scrutinized stocks of the S&P 500, but the point stands: the stock market is pretty darn expensive. So, what on Earth can investors do? How do you get around the everything bubble that just keeps getting bigger? Well, I think it comes down to two things. You either accept that active investing in the US is probably not going to work all that well at the current time, and instead, you just keep going with your passive investing into ETFs as per usual, and you just call it a day.
Or, if you feel compelled to continue that Warren Buffett investing strategy, you have to do what the great value investors of the world are doing right now, and you have to broaden your horizons. I was talking about this in a relatively recent video. If you look at the big long list of super investors, a lot of them have been making recent investments not in America, but instead in international markets. China has been a big one for investors like Monish Pabrai, Spear, Michael Burry, Howard Marks, and the late Charlie Munger. Probably the most debated stock out of the lot has been Alibaba, but you can't argue with the valuation.
Turning back to Seeking Alpha, they have an enterprise value of around $220 billion and free cash flow across the last 12 months of $20.3 billion. That's not an enterprise value to free cash flow ratio of 30 or 40 or 50; in fact, it's just 11. Alibaba, in my perspective, is one of the cheapest large companies that exist in the world. I went through this process again for each of the biggest Chinese tech stocks as well, so you know I'm not picking an outlier.
And have a look: Tencent at 22, Pinduoduo at 82, Xiaomi a little bit higher at 24, JD at 11, NetEase at 12, Bilibili at just 6. A2, that's more like it, right? Or we can look at Warren Buffett, for example. One of his largest investments across the last few years has not been in Microsoft or Nvidia or even Apple, but instead in five Japanese trading houses. I just thought these were big companies; they were companies that I generally understood what they did, and they were selling at what I thought was a ridiculous price.
I was confounded by the fact that we could buy into these companies and, in effect, have an earnings yield maybe 14% or something like that, with dividends that would grow. They actually grew 70% during that time, and people were investing their money at a quarter of a percent or nothing. That quarter percent, if they put it out for many years, wasn't going to grow, and the 14% was more likely to grow than that.
If that does look like something sensible to me, you know, that's as easy as G. Now he bought these companies back in 2020, and while I don't have the enterprise value to free cash flow data from around that time, even just looking back at their historical market caps to calculate a simple price-to-free cash flow, you can see a similar story. When he bought into these five companies, they weren't trading at multiples of 30, 40, 50, etc. They were max 21, with the others being 8, 10, and 14.
So, when you're talking about the everything bubble, yes, in America it very much is. But if you're game enough to venture out and look at other markets, I think there are still some opportunities. We know Monish Pabrai has been investing more and more in India and Turkey over the last few years. In fact, I'm actually going on an investment tour with Matt Peterson to scope out some Turkish businesses in a few weeks from now. I'm very excited about that.
So, definitely looking to other markets is one strategy. But I think another thing I wanted to talk about in this video is that it's okay to have a period of time where you're not investing so much. We spoke about Warren Buffett before. I just made a video the other week talking about how he is very open and honest about the fact that he's not really finding any good opportunities at the current time, and instead he feels comfortable increasing Berkshire Hathaway's cash position.
But I don't mind at all under current conditions building the cash position. I think when I look at the alternative of what's available in the equity markets and I look at the composition of what's going on, we find it quite attractive. And we know that's not a super punishing strategy at the moment because you can do as Warren does with Berkshire and simply hold short-term US Treasury bonds. The yield on 3-month Treasuries at the moment is around 4.5%, so you're being paid reasonably handsomely for doing nothing with your cash.
Would he put new money into that? It gets over that hurdle of 5%, 5.4%. Yeah, you got to get more than 5% than you can earn in Treasuries in a very safe environment. And while I don't want to make any sort of predictions, the global economy is pretty tense right now. So if something were to go bang, figuratively, hopefully not literally, well, if that's the case, then you're in a good position to take advantage if you do have a little bit of cash on the sidelines.
Remember Warren, in his 2016 shareholder letter, said, "Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it's imperative that we rush outdoors carrying wash tubs, not teaspoons." So a little bit of cash never hurts, right?
Also finally, I did just want to say thanks again to Seeking Alpha for sponsoring this video. As a reminder, you can try Seeking Alpha Premium for free for seven days and score $30 off an annual subscription, all by using the referral link. But guys, with that said, that is the everything bubble revisited plus what the world's best investors are currently doing about it.
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