Are stocks cheap yet? When I was a young Wall Street analyst visiting institutional investors in Boston, I sat in a money manager’s office noting his framed prints of horseback riders in red jackets on a fox hunt. He asked me what I thought about a particular tech stock. I walked him through my forecast for the company and said the stock was a buy. “Why?” he asked. I said, “Because the stock is cheap.”
Big mistake. He launched into a 10-minute tirade, screaming, “Who are you to know if a stock is cheap? Have you ever lived through a downturn?” He even told me my tie was too expensive before he threw me out of his office. Ah, the service business. But I never again said a stock was cheap and instead focused on fundamentals, emerging trends, expectations and market sentiment.
Cheap stocks can always get cheaper. Companies such as Peloton, Carvana and Robinhood are down 80% to 95% from their peaks. Buy the dip, right? Be careful—the biggest mistake is looking backward, not forward.
Later I worked as an investment banker until I found out you had to be nice to people. I discovered a graphics-software company with a $5 stock and $5 a share in cash. Intriguing. If they could turn around their business, it could be a bargain. I won’t ever say cheap! I kept an eye on it and visited a year later. Because of losses and restructuring charges, the company only had $4 a share in cash and, sure enough, the stock traded at $4. After another year, it had $3 a share in cash and the stock was worth $3. I stopped visiting. It eventually went out of business. No future, no upside.
Market bottoms form when everyone is negative. The International Monetary Fund says the world economy is headed for “stormy waters.” Ray Dalio, who founded the hedge fund Bridgewater Associates, thinks we’ll see five years of “negative or poor real returns.” JP Morgan CEO Jamie Dimon says stocks could fall another 20%. Is that negative enough? It’s a start, given that few said these words a year ago.
My sense is there is more ugly stuff coming.
