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The current stock market shows characteristics of a significant bubble, one that has been growing since 1980. Many people might not realize the full extent: the S&P 500 has risen by 43% in just the past year and nearly 100% over the past five years. Historically, this kind of rapid increase would be astonishing, yet it's seen as normal today.

Value investing

It seems that many investors today have lost sight of value investing—the approach of seeking undervalued stocks based on their fundamentals rather than relying on high-growth or speculative trends. With markets soaring on valuations rather than earnings or tangible assets, the traditional principles of buying companies with solid intrinsic value are often overshadowed.

Value investing is rooted in analyzing a company’s fundamentals, like earnings, cash flow, and assets, and buying when the stock trades below its intrinsic worth. But in an era of prolonged low interest rates, easy credit, and investor exuberance, even companies with minimal profits can achieve sky-high valuations. For long-time value investors, this environment seems detached from the cautious, patient strategy that was central to figures like Benjamin Graham and Warren Buffett.

When markets are fueled primarily by optimism and speculative growth, there’s a risk that basic value metrics—like P/E ratios, dividend yields, and book values—are ignored. This can make it seem like classic value investing is outdated or less attractive. But history shows that markets eventually correct, and when they do, investors who remain focused on value often find themselves in a strong position to withstand volatility and capitalize on new opportunities.

In the current cycle, remembering the value investing principles could serve as a safeguard. It's a reminder to focus on the actual worth of businesses rather than simply following market momentum.

Speculation is “Growth”

Looking at data from Yardeni Research, past S&P 500 bull markets since 1928 saw percentage gains like 70%, 46%, 100%, and even 267% in extraordinary periods. However, in the last 40 years, we've seen gains of 200%, 500%, 100%, and 400%. This suggests an unusually long bull market stretching back to 1980.

Examining the inflation-adjusted stock market in a logarithmic view, we see that since around 1982, when the market was at a level of about 7, it has increased by over 60 times with dividends, making this period one of the longest and strongest bull markets in history. Since 1982, the S&P has delivered about 12% yearly returns, while previous cycles provided around 8-11% annually.

A major factor has been the expansion in price-to-earnings (P/E) ratios. The current P/E ratio for the S&P 500 is around 30, double the historical average of 15, and significantly higher than past bull markets like the 1970s and the 1929 boom. This high valuation accounts for much of the gains seen over the past 40 years, as the P/E ratio has quadrupled since the late '70s.

Interest rates have been on a steady decline from nearly 20% to almost zero since the bull market began, contributing to market growth. Now, however, there are assumptions that rates will remain low, inflation at 4%, and borrowing high—a scenario that might not hold forever.

 The Risk

History teaches that market cycles eventually reverse, with periods of excessive borrowing and valuation expansion typically ending in corrections. Analysts, including Goldman Sachs, project modest growth next year but warn of a potentially "lost decade" for investors, predicting a 3% annual return over the next ten years. Other estimates, such as those from GMO, suggest US stocks could deliver negative real returns, with losses as high as 5% per year. If a significant correction occurs, we could see declines similar to the 75% real loss in stock values during the 1970s.

This situation represents an unprecedented era of market growth. Still, if history is any guide, markets could revert to lower valuations, driven by underlying fundamentals.

Do People Need Failures to Learn Investing?

Yes, failures can be essential for learning to invest effectively. In many cases, experience with losses, mistakes, or missed opportunities teaches lessons that books or courses simply can’t convey. Investing is inherently risky, and facing that risk firsthand often brings insights into managing emotions, understanding market cycles, and appreciating the importance of fundamentals.

Here are some ways failures help investors grow:

1. Emotional Resilience: Realizing losses can teach an investor about the emotions involved—fear, greed, and the instinct to panic or double down. Learning to navigate these feelings is crucial, as emotional discipline is a cornerstone of successful investing.

2. Risk Awareness: After a loss, investors typically become more aware of the importance of risk management, such as diversification, setting limits, or reassessing overly optimistic assumptions. Failures reveal the reality of potential downside and motivate caution in future decisions.

3. Understanding Market Cycles: Experiencing a market downturn often highlights the cyclicality of markets. Investors who experience a bear market firsthand are more likely to remember that markets move in cycles and to prepare for periods of volatility or extended downturns.

4. Sharpening Strategy: Mistakes help refine strategies. A failed investment can prompt an investor to look more deeply into a company's fundamentals, reevaluate entry and exit strategies, or reconsider the influence of market sentiment versus value.

5. Recognizing Overconfidence: In bull markets, it’s easy to think every investment will succeed. A painful loss can check this overconfidence, teaching humility and the need for diligent analysis.

Failure isn’t just about losing money; it’s about internalizing lessons that make one a better, more thoughtful investor. While not every lesson requires a loss to learn, real experience brings a depth of understanding that theory alone can’t. It’s a form of "tuition" in the markets—often unavoidable, but valuable.

Conclusion

Today, People think over-borrowing have serious consequences, both for individuals and for larger entities like corporations or governments. The Best Example USA government think they can continue with unlimit money printing without consequences. When debt levels become unsustainable, it often leads to financial strain and a range of negative effects.

Over-borrowing often brings a false sense of security and can fuel temporary growth, but it also creates long-term vulnerabilities. Maintaining sustainable debt levels and responsible borrowing practices can help avoid these consequences, ensuring financial stability and resilience for individuals, corporations, and governments alike.