Looking at the markets these days, I can't help but see the [unfounded] enthusiasm return to the market. Greed and complacency is back, producing almost frothy behaviour on Wall Street. Just look at securities such as Netflix (NFLX) and OPENTABLE (OPEN) selling at PE ratios of 67 and 154, respectively.
This behaviour makes me quite fearful.
Consequently, I have started to sell my fully priced investments. I may miss the top of the market, i.e. the local maxima; but I sleep better at nights knowing that I am only owning undervalued securities with a reasonable margin of safety. There is certainly nothing wrong in sitting on a pile of cash either. If the "animal spirits" in the market go for long, I am prepared to miss it and earn non-existent yield on my cash balance. Historically speaking, current exorbitant PE ratios have produced negative to mediocre yields in the long term. With history on my side, I don't mind sitting on some cash.
The S&P 500 index is currently available at 10 year average PE ratio of 23.22. This is a 42.4% premium to the long term average PE10 of 16.3.
Mean reversion is bound to follow.
I just don't know when it would happen. I am not going to bother predicting-- I happen to be very bad at that.
