He asked that same question that everyone asks: "Where is the market headed from here"?
I told him that I gave up trying to answer that question years ago, at which point he rattled off the investments that comprise his 401k, seemingly expecting an opinion as I paid for my groceries. I can't remember what they were, but it was certainly not a well-diversified portfolio, and I cringed when he told me this entire retirement portfolio was in six individual names. He seemed very excited about the market's prospects, and where we might be heading from here.
Now that was but one simple conversation, but it reminded me of what one well-respected colleague described as the "oscillation between greed and fear," which basically describes an expectation that markets will continue an uptrend. Investors get greedy, pay too much for securities, and are destroyed when there is a correction, or bear market. When "fear' takes over, they exit the markets, usually at the worst possible time, when stocks are punished well beyond what they deserve.
One of the worst parts of this is the psychological damage that can be done by buying and selling at the worst possible times; some investors feel burned enough not to return to the markets.
I still don't know where the market is heading from here; but I do know that I'm not finding a whole lot of names that interest me at this point, from a value perspective. But I am seeing some situations that appear downright frothy, squarely in "greed" country.
With a current market cap of $27.5 billion, Salesforce.com trades at nine times sales and more than 51 times tangible book value. I admit that as a value investor, I seldom understand the way that the market prices growth names such as Salesforce.com. But I do understand that especially in technology, competitive forces are always finding ways to drive down costs, and to offer better products and services.CRM Price / Sales Ratio TTM data by YCharts
CRM Price / Tangible Book Value data by YCharts
Back in my Bloomberg days, several years ago, I noticed a consultant wearing something around his neck. It was a thumb drive, and the first I'd ever seen. As I recall, this amazing device could store 1GB of data, and cost in the neighborhood of $200. Now, you can buy one that stores 16GB for less than $10.
I admit it; I don't understand why investors are willing to pay so much for companies like Salesforce.com, which is now trading at all-time highs. What am I missing?
At the time of publication the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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