A quick moments of investing insight from GMO's July Monthly Commentary via Wells Fargo Advantage Funds:
“I am definitely concerned. When was the CAPE [Cyclically adjusted price/earnings] ratio higher than it is now? I can tell you: 1929, 2000, and 2007.”
- Interview with Robert Shiller, June 25, 2014
Shiller’s body language said it all, as he squirmed and contorted in his chair during the interview. Nothing feels right about these new market highs. It’s the same squirming and discomfort we’ve been feeling for some time now. We confidently know the U.S. market is unusually expensive. We confidently know that allocating capital to expensive markets is a really bad idea. We confidently know that expensive markets usually lead to low—quite possibly negative—real returns over time. So, why the squirming? Because of what we most confidently do not know—the timing, path, potential triggers, etc., of the U.S. market correction in the short term. Yes, we have theories and coffee-room discussions, which we’ve written about in our quarterly letters. But they remain that. We truly have no blooming idea when an expensive market will break. It is the value investor’s omnipresent dilemma, with 2014 (and this quarter, in particular) testing our mettle yet again. And so, we continue to squirm and contort with the only solace that we are in good company.