John Hussman used historical valuation models based upon FACTS to predict that the high flying internet companies would come crashing back to earth. Here was his prediction in January 2001.

“Even a return to median bull market valuations would be brutal for the most popular tech stocks. We’re not even talking about bear market valuations, and we’re making the leap of faith, contrary to the evidence, that the quality of current revenues is as high as those generated during the past decade. To illustrate the probable epilogue to the current bubble, we’ve calculated price targets for some of the glamour techs, based on current revenues per share, multiplied by the median price/revenue ratio over the bull market period 1991-1999.

Cisco Systems: $18 ¾ (52-week high: $82)
Sun Microsystems: $4 ½ (52-week high: $64)
EMC: $10 (52-week high: $105)
Oracle: $6 7/8 (52-week high: $46)

“Get used to those itty-bitty prices… And hey, we’re being optimistic.”

Hussman Investment Research & Insight, January 8, 2001

It seems he was too optimistic:

In the bear market that followed, those “four horsemen” of tech would fall about 50% below the price targets noted above, except for Oracle, which halted its decline about 3/8 of a point above that target.

He has been predicting dreadful long-term returns for the market based upon historical valuations and FACTS for the last couple years. He has thus far been scorned as a perma-bear despite the fact he is using the same valuation models that have been accurate for the last century of investing. It must be different this time. Right?

Here are some facts from his weekly letter:

The median price/revenue multiple for S&P 500 constituents is now significantly higher than at the 2000 market peak. The average price/revenue multiple across S&P 500 constituents is now above every point in that bubble except the first and third quarters of 2000.

For those who need visualization, based upon the median stock price to revenue measurement, the stock market is now 35% more overvalued than it was in 2000 and 25% more overvalued than it was in 2007. Think long and hard about those FACTS.

History teaches lessons to those willing to learn. Hussman cannot be any clearer:

The likelihood is poor that from current price levels, broad equity investments – even held for nearly a decade – will generate any positive investment return at all. Among the saddest notes I received in the 2000-2002 and 2007-2009 bear markets were from people who had short investment horizons (and were therefore “forced” sellers) and lamented “I wish I had listened.” Whatever market returns we missed in the anticipation of those market declines were easily lost by the market anyway once the bears gained control. Recall that the 2000-2002 decline wiped out the entire total return of the S&P 500 – in excess of Treasury bill returns – all the way back to May 1996. The 2007-2009 decline wiped out the entire total return of the S&P 500 – again in excess of Treasury bill returns – all the way back to June 1995. I doubt that much of the market’s gain since 2009 will be retained by investors over the completion of this cycle. The run-of-the-mill bear market retraces more than half of the preceding bull market gain. Those that begin from rich valuations wipe out far more.

The stock market will provide you a negative real return over the next 7 to 10 years, with the strong possibility of a crash when delusions meet reality in the near future. Anything can happen over the short-term, but valuations, cash flow, and fear win in the long run. If you are fully invested in the stock market today, you will look back and ask What Was I Thinking?

At present, the picture below is just a monthly chart of the S&P 500 since 1995. Not long from now, perhaps less than 2 or 3 years, many investors will look at the same chart with their head in their hands, asking “What was I thinking?” The central message to investors with unhedged equity positions and investment horizons shorter than about 7 years: Prospective returns have reached zero. The value you seek from selling in the future is already on the table today. The future is now.

Look out below!!!!

Read the whole article HERE.

2 thoughts on “WHAT WAS I THINKING?”

  1. “Can we say when it will end? No. Can we say that it will end? Yes. And when it ends and the trend reverses, here is what we can say for sure. Few will be ready. Few will be prepared.”

    Seth Klarman


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