Do you have the worry gene? Seth Klarman says he does and, since the billionaire founder of the Boston-based Baupost Group is also one of the professional investors we take most seriously here on The Value Perspective, we thought we would take a closer look at what he means by this. might more investors benefit were they to have the same condition?
Writing in Value investor insight, Klarman suggests that what investors now see in the market says more about them than anything else. “If you were born bullish,” he continues, “if you’ve never met a market you didn’t like, if you have a consistently short memory, then stocks probably look attractive, even compelling.”
Klarman notes the recovering US housing market, the move towards energy independence and other factors but clearly he is not convinced. “If you have the worry gene,” he goes on, “if you’re more focused on downside than upside, if you’re more interested in return of capital than return on capital and if you have any sense of market history, then there’s more than enough to be concerned about.”
For him, reasons to be fearful would include near-zero short-term interest rates and moves by the US Federal Reserve to taper quantitative easing. “Fiscal stimulus, in the form of sizable deficits, has propped up the consumer, thereby inflating corporate revenues and earnings,” he observes. “But what is the right multiple to pay on juiced corporate earnings?”
Now, if you believe corporate earnings are inflated, it stands to reason you will pay a lower multiple on them because they are more at risk. Yet, as Klarman points out, the US market’s cyclically-adjusted shiller price/earnings valuation stands above 25x, which is a level surpassed on just three other occasions – ahead of the 1929, 2000 and 2007 market crashes. So, is that worry gene kicking in yet?