The headline read “OECD warning on stock fever”. The OECD is the Organisation for Economic Co-operation and Development. The article went on to note that world share markets (at that time) were displaying worrisome aspects with a growing risk of speculative excesses.
While underlying improvements in company performance meant share markets are not obviously overvalued, the OECD said, there was a risk of share prices rising to unsustainable levels with many world share market indices at or close to record highs.
Much of the new money flowing into shares has had limited experience with share investment and may be unaccustomed to the periodic corrections that characterise share markets, the OECD said.
By implication the OECD are suggesting that there is a class of investor who invests merely because markets have, in the short term, had good returns and who have an expectation that the market will continue on upwards indefinitely. This type of investor lacks an understanding of the factors that drive the performance of individual shares and the market as a whole over time. All they see are the past returns.
When the OECD offer their thoughts, we should certainly take some notice. There is no doubt of course that share market investments have, over time, been subject to some quite violent gyrations as greed and hype take over from justifiable and real underlying value.
It occurs to me however that serious investors should not necessarily be concerned with the OECD’s thoughts. Success in share market investments inherently requires the ability to take a long-term view after all.
For that reason, it was interesting to see a second article quoting Warren Buffett, a legend of share market investing. Mr. Buffett is currently worth $110 billion or so.
He has just written to his investors and told them that “virtually all shares“ in the US are overvalued (at that time). But he says that his group has not been liquidating its $US679 billion portfolio.
He goes on to state that “inactivity strikes us as intelligent behaviour .... neither we nor most business managers would dream of feverishly trading highly profitable subsidiaries because some Wall Street pundit has reversed his views on the market.”
Our faith will occasionally be tested. But we should remind ourselves that superior longer-term returns are only achieved at the cost of greater short-term volatility. A bit like climbing a mountain. Progress on the way to the top is rarely consistently upward.
