Black Monday happened in 1987, the year before I went to college…
The stock market fell 23% in one day. It was the worst one-day fall in stock market history.[ad#Google Adsense 336×280-IA]”Overvaluation” was one of the causes, according to my finance professors at the University of Florida.
Today, stocks are about as expensive as they were on Black Monday in 1987…
Is it time to be afraid the next Black Monday might be around the corner?
Is it time to batten down the hatches?
If you’d asked me when I was in college, I would have said, “yes.” Today – after a few decades of experience – I say, “no.”
Let me explain, starting back in college…
From 1900 through 1987, stocks had traded at an average of 13 times earnings. But stocks were trading near 20 times earnings at the peak in 1987 – nearly 50% more expensive than average. One lesson from Black Monday was, don’t buy stocks when they’re expensive.
But was that the right lesson to learn?
When I started out in in the 1990s, the stock market was never “cheap.” It never traded below average (below 13 times earnings).
Stocks were always “expensive” in the 1990s, based on the old yardsticks. However, stocks performed incredibly well through the 1990s – it was one of the greatest decades in stock market history.
If you’d never bought stocks in the 1990s because you thought they were expensive, you would have missed out on some of the greatest wealth creation in stock market history.
I learned two important lessons from the 1990s stock market boom…
1) Overvaluation alone doesn’t kill a stock market boom.
Overvaluation is a bit like obesity… Obesity by itself won’t kill you. Of course, it’s a sign that you’re unhealthy, and that you probably won’t live as long as a regular guy. But being above average in weight doesn’t mean you’ll die tomorrow… You have a higher risk, of course… But the actual day of reckoning is unknowable.
Another thing I learned is this:
2) Age alone doesn’t kill a stock market boom.
In markets, and in life, there’s a difference between growing older and aging… The boom of the 1990s grew older in years – but somehow it aged gracefully (until the dot-com boom arrived). Because it aged gracefully, it lived more years than any boom before it.
In my opinion, the stock market boom that we’re in today falls into the same category as the 1990s boom… The current boom has grown older in years, but it has aged pretty darn gracefully…
What I mean is, we don’t yet see the classic warning signs that are typical before the end of a stock market boom.
So it is true, we can’t call stocks cheap anymore… And it is true that this stock market boom has lasted for many years.
It’s fair to call this current stock market boom FAT and OLD at this point. Typically, those aren’t good things – but they don’t mean the boom will end soon.
Age and overvaluation don’t kill stock market booms. I am not battening down the hatches, waiting on the next Black Monday.
I am staying in stocks… The current stock market boom has aged gracefully… and in my opinion, has a lot more life left in it…
Source: Daily Wealth