As markets continue to take three steps forward and two steps back there has not been much to talk about. Of course all the financial television channels are still in operation, as are the web sites, tabloids, newspapers, etc. Today it seems they are really in the noise business, not the news business – I don’t mean that disparagingly, it’s just reality. Most days there is not enough actual news to fill the 24/7 news cycle, so they must share all the extraneous noise to fill air time.
Last week one such piece of noise was what Federal Reserve Chair Janet Yellen thinks about the stock market. She said, “I would highlight that equity market valuations at this point generally are quite high.” Her comments caused some short-term traders to hit the sell button and we have seen a few days of volatility.
Her comments reminded me of a conversation I once had with the CEO of what was then INVESCO Retirement Services. He had spent a lengthy, storied career in finance and related industries. Among other positions he had been a banker; he headed up the Office of the Comptroller of the Currency during the Carter administration; and he was formerly the CFO of INVESCO before moving to their retirement division. He asked me to design an investment education program for the non-investment professional employees because, in his words, “Everyone thinks they are an expert in investing, but they really know very little.”
He went on to explain how only after working with real investment professionals had he realized how little he knew about investing. The outside world thinks that anything financially related is investing-related. Allow me to let you in on a secret: Your CPA has no more training in investing than your plumber, and your friend at the bank knows no more about it than your friend at the florist. (And, by the way, I am neither a banker nor an accountant.)
In areas like law and medicine people seem to realize that their podiatrist is not the right person to ask about a heart condition. They don’t call their corporate lawyer on a criminal matter. They understand that we live in a specialized world and being knowledgeable in one field does not give one expertise in another. This is partly because there is a recognition of the education level required for those professions. The practitioners themselves are highly educated, and to paraphrase Albert Einstein, the more they know, the more they realize what they don’t know.
Investing is another story. Many people know a little about investing, and a little knowledge is a very dangerous thing. Many of the investment industry’s wounds are self-inflicted – we have allowed the sales clerk to be elevated to “financial adviser,” which leads many among the general public to think (often correctly) that they know just as much about investing as the average financial adviser. Dangerous indeed.
Back to Yellen. Ms. Yellen is undoubtedly a very bright economist, but there is nothing in her background that would suggest one should follow her investment advice. However, that does not answer the most important question: Is she correct about equity market valuations? Well, it depends. Are you invested in the stock of Chinese Internet company Alibaba, which is selling at a price which is 47.43 times greater than its earnings, or are you invested in offshore drilling company Atwood, which is selling at a price which is 6.09 times its earnings?
Prudent investors invest from the bottom-up. Knowing if the stock market as a whole is correctly valued is a nearly impossible task. Knowing if a specific company is correctly valued is much easier. There are plenty of good opportunities in the market today. One just has to look, and perhaps have more than just a little knowledge.
Chuck Osborne, CFA