A Pragmatic Approach in an Overvalued Market

The Conundrum of the Gloom and Doom Prediction: A Pragmatic Approach

As some of you know, I also serve as CEO of Wealthion, a sister company of Hard Assets Alliance. The Wealthion YouTube Channel has been accused of featuring too many “gloom and doom” guests (yet these “G&D” videos typically get more views than their rosier counterparts). The fact is that G&D predictions had a terrible year in 2023, with stock markets reaching all-time highs and down and out sectors such as commercial real estate enjoying a massive year end rebound. Because of these highs, even more well-respected pundits have joined the G&D chorus in early 2024.

I have always been intrigued by how G&D predictions have been conflated with pessimism, or worse yet — that these pundits (and the investors heeding their advice) are “betting against America.” So, to be clear, investing has zero to do with optimism or pessimism and the best long-term investors are pragmatists who manage risk. Not merely the risk adjusted return of an investment portfolio, but the risk associated with one’s own personal situation as it relates to income, age, and expenses.

Let us go back to the Oracle of Omaha, who I have mentioned more than once in these letters. Obviously, Berkshire Hathaway is not your average American investor. Berkshire Hathaway is a perpetual cash rich entity that can easily wait out a significant market drawdown. As importantly, it holds enough cash to take advantage of those draw downs (I was personally grateful for that excess cash when he invested in my alma mater during the financial crisis). Finally, if the price of Berkshire Hathaway’s share is below its intrinsic value, he can create value by buying them back.

Contrast that model to the average investor, even a high-net-worth investor. Large drawdowns at the wrong moment of your life can have catastrophic consequences. If you were long stocks in 1929 you got back to even twenty years later. For today’s Boomer generation, that would mean a lot of belts tightening in retirement. I am certainly NOT saying that 2024 is 1929, but I am also not saying it is not. Because how could I say that? But here is what I can say. Valuations seem extremely high in most asset classes and the ability to respond to any crisis could be hamstrung by $34T of debt and a divided government. And I could also say this – if the pundit class said, “expect a gentle pull back in 2024” nobody would hear it. They ring the alarm bell which triggers some fear and some prudent action.

The Expert Predictions

In case you missed it, let me share a smattering of the G&D predictions from the respected pundit class.

Jeremy Grantham, the renowned investment guru, has repeatedly flagged the possibility of a “superbubble” in various market segments, predicting a fallout potentially greater than the dot-com bust. This “everything bubble” encompasses real estate, bonds, and equities.

Harry Dent, the expert market analysis, suggests that 2024 might witness one of the most significant market crashes in history. He attributes this to rampant government spending and an inflated asset bubble, drawing parallels with the devastating crash of 1929-32.

Steve Eisman, a figure well-known for foreseeing the 2008 financial crisis, along with analysts like Gary Shilling and David Rosenberg, echo these concerns while highlighting speculative trends, worrying economic signals, and the likelihood of substantial market corrections.

My Own G&D Story for Apple

Compared to the afore-mentioned esteemed group of pundits, I am a mere amateur who wants to share some pragmatic math on Apple. Since 2020, Apple has added $2T in market cap and sits at a current market cap of $3T. If an investor wants a modest 7.5% return for the next four years, Apple will need to add an additional $1 trillion in market cap. Just that last $1T (forget about the previous $2T) would be the equivalent of adding the market caps of both JPMorgan and Walmart. Alternatively, it would be equivalent to adding the aggregate market caps of Nike, Boeing, IBM, Caterpillar, Amex, Honeywell, Goldman Sachs, 3M, Travelers, Dow, Walgreens, plus a fleet of Bezos-level luxury yachts.

Is it pessimistic to say this seems to be a stretch? At a minimum, there is a significant disconnection between market expectations and economic fundamentals. Or it is the case that what is really happening here is that flows into the market weighted S&P 500 have been so large that they have found their way into Apple shares. Either way, a stumble in earnings or a change of flows are not out of the question and with it can come an exceptionally large correction in the price of the shares.

Strategies for Today’s Investor

What is a pragmatic investor to do? Well, I can share what this pragmatic investor is doing:

Defensive Investing: Holding cash in preparation for emerging opportunities. Cash has the benefit of earning some return plus the option value of seizing opportunistic investments.

Value-Oriented Stocks: Leaning toward value stocks with low P/E’s and high ROE’s and/or have a public valuation in line with its private market comparable.

Precious Metals: (You knew this was coming, as I am the CEO of Hard Assets Alliance). In a landscape fraught with uncertainty and potential overvaluation, precious metals can act as a buffer, offering both a safeguard against market fluctuations and prospects for long-term gains. It is also liquid so if I do need to sell to seize other opportunities I can.

Selective Put Options: I am willing to invest a small amount to protect larger positions with embedded taxable gains (otherwise I would sell).

Conclusion

I want to thank the G&D pundits for reminding investors that optimism is not a strategy, but an emotion. Given the prevailing investment environment, characterized by expert cautions and high valuations, we should forget about optimism or pessimism and embrace pragmatism. I urge our readers to do the fundamental work, acknowledge signs of overvaluation, and position themselves considering the increased risk and their personal situation.

Steven Feldman
CEO, Hard Asset Alliance

RELATED ARTICLES:

  • Year in Review: Navigating Challenges with Wisdom and Gratitude

    Year in Review: Navigating Challenges with Wisdom and Gratitude

    As we close the book on 2023, it is important to reflect on the year’s considerable challenges. We began the year with a continuation of 2022’s economic uncertainty, soaring inflation, rising interest rates, as well as war, dysfunctional government, societal divisiveness, and climate volatility. Throughout 2023, not a single issue on this list has meaningfully…

    Read more…

  • Gold’s Inevitable Rise in Today’s Multipolar World: A Must-Read Analysis

    Gold’s Inevitable Rise in Today’s Multipolar World: A Must-Read Analysis

    I recently attended a major pension fund conference where a number of highly decorated speakers shared their perspectives about the present global geopolitical and economic terrain. Although gold was not the centerpiece of these discussions, the synthesis of insights from these renowned thought-leaders bolstered a simple yet profound case for gold. The Inexorable Case for…

    Read more…

  • Why the Next Gold Cycle Could Be the Biggest

    Why the Next Gold Cycle Could Be the Biggest

    The ebb and flow of gold cycles have the power to create large fortunes…  And today, we stand on the cusp of an extraordinary opportunity, one that history may remember as the dawn of the most lucrative gold cycle yet.  At least, that’s what Tavi Costa believes. Tavi has worked as a Partner and Macro…

    Read more…