Valuations in stock markets around the world are now approaching obscene levels, at least for those with a very long-term investment time horizon. Some of the greatest investors of all time such as Warren Buffett have warned against such sentiment in the past. The Oracle of Omaha’s warning to be “fearful when others are greedy” is more pertinent perhaps now than ever.
In this regard, the idea of being a contrarian and betting against the market, or at least hedging a very large percentage of one’s portfolio is starting to take hold with some fund managers. I think we’re about to see a bull market in commodities and specifically U.S. dollar-denominated assets with the amount of stimulus we’re seeing now.
Of course, the commodities sector has been one of the worst performing sectors of this past decade, so betting on this sector takes a significant amount of guts right now.
Of course, momentum trading, and following the crowds in terms of where to invest, has vastly outperformed contrarian investing of late. The fact that so much money has flowed into equity markets with nowhere else meaningful to go has meant asset prices have become inflated to a degree I’ve never seen in my investing career.
If and when this bubble does pop, it could get messy out there. Being prepared for a drop, either via ramping up one’s cash position or focusing on balance sheet and earnings quality, is the way to go right now in my view. Finding good hedges and sticking with them through this bull run could prove to be very beneficial if sentiment turns around in the other direction.
Invest wisely, my friends.
