Don’t Invest In Sugar Highs
The problem with sugar highs?
Sometimes the crash wasn’t worth the high.
For any parent who has ever had young children, you know what I’m talking about. In a way, the stock market is experiencing an extreme sugar high right now.
After falling more than 30% in March at the beginning of the COVID-19 pandemic, the Dow has since recovered and recently topped its previous high in February of this year before the crisis hit. But like a father watching his young children going through a sugar high, the godfather of the stock market, Warren Buffett, is sounding the alarms.
What are the signs that Warren Buffett thinks it’s a bad time to invest in the stock market?
He’s cashing out billions of Berkshire Hathaway’s (his public investment company) stock holdings and buying back Berkshire stock. In other words, he’s sidelining his cash.
Why does Warren Buffett think it’s a bad time to invest in the stock market? He thinks it’s overvalued.
He relies on one particular indicator to gauge market value. He calls it “The best single measure of where valuations stand at any given moment.”
“The gauge takes the combined market capitalizations of publicly traded stocks worldwide and divides it by global gross domestic product,” explains Markets Insider. “A reading of more than 100% suggests that the global stock market is overvalued relative to the world economy.” This indicator has recently soared towards an all-time high, for both the U.S. and the world.
Buffett’s indicator isn’t the only gauge telling us the stock market is on a sugar high and sure to come crashing down.
The Dow’s price/earnings (PE) ratio is also sounding the alarms. The PE ratio measures the average of the Dow company stock prices compared to their earnings.
A high ratio indicates stock prices out of touch with underlying economic fundamentals. So with the Dow currently trading at a PE ratio of around 28 – nearly double the historic average of 15 – stocks are overvalued and bound to come crashing back to earth.
Warren Buffett is re-allocating AWAY from the stock market, but he’s not rushing to another sugar high – gold – that investors fleeing the stock market are flocking to.
After recently hitting historic highs, history is bound to repeat itself when the price of gold comes crashing back to earth.
IF NOT THE STOCK MARKET AND IF NOT GOLD THEN WHERE?
FOLLOW THE SMART MONEY!
The smart money avoids sugar highs.
Instead, they prefer a nice, steady diet of cash flow and growth. That’s why they never have to worry about the next paycheck like everyone else. Their portfolio is allocated differently than their Main Street counterparts.
The smart money – aka the ultra-rich and institutional investors – were prepared for the current economic turmoil because they started pulling out of the stock market long ago.
They prefer assets that make it possible for them to not have to rely on their jobs for income.
The ultra-rich favor alternative assets – especially ones that produce consistent cash flow backed by tangible assets and which provide significant tax savings.
That’s why the smart money loathes gold. It just sits there, not producing any cash flow. Income-producing tangible assets are why the smart money was prepared for this new economy or any economy for that matter.
Don’t Buy Into The Latest Stock Market Hype!
Avoid investing in sugar highs and look to alternative investments that could provide a steady, enriching diet of cash flow and appreciation – all backed by a hard asset and offering significant tax benefits.
Michael Foley, president and CEO of Humabilt Capital, oversees the entitlement process, funding, and operations for Humabuilt Capital. Mr. Foley has been a full-time real estate investor since 1995 during which time he has developed hundreds of single-family homes, townhomes, condominiums, and apartments. Mr. Foley started his investment ventures in Long Beach, California, and has expanded to Apex and Durham North Carolina. Mr. Foley is a graduate of the University of California at San Diego.