It is pretty challenging to find attractive investments in the current market environment. Many equities are trading at or close to all-time highs. The yield on most credits is at depressed or even negative levels, and activity in the private equity market is also surging (as well as activity in the venture capital market).
Analysts commonly attribute quantitative easing and easy money as the key drivers behind rising asset valuations. Another tailwind could be passive investment flows, which have reached record levels over the past 12 months. Whichever metric we look at, the outcome is clear; asset prices are rising across the board, and there's no telling when they will stop.
Difficult market
This environment can be frustrating for investors, especially investors who want to buy an asset at a discount to its intrinsic value.
It is crucial to keep in mind the fact that we have been here before, and we will almost certainly face the same environment again. The challenge for investors is to remain focused and not become distracted by rising prices and a fear of missing out. If one does become distracted, it is easy to lose sight of one's investment goals and ambitions, which may result in bad investment decisions.
Warren Buffett (Trades, Portfolio) tried to remind investors of this at the 2005 annual meeting of Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) investors. A shareholder asked the Oracle of Omaha if he had any thoughts on the hedge fund industry and if increased competition in the industry would impact long-term returns.
Buffett answered that he believed elevated equity valuations would lead to problems in the hedge fund and private equity industry. He went on to add that he had seen a similar environment several other times during his career:
"There have been at least three times, maybe more, where it’s looked to me in my own career, where it looked like there was so much money sloshing around that it would be impossible to do intelligent things with money. And I actually terminated a partnership back at the end of 1969 because I felt that that the money was coming out, you know, of the woodwork. There were all kinds of people that wanted to use it and compete, and I just didn’t feel we could do intelligent things. Within four years, I saw the greatest opportunities that I’ve ever seen in my lifetime. And we’ve had several experiences like that."
Buffett's right-hand man, Charlie Munger (Trades, Portfolio), also added some comments on why he believed the Wall Street machine was always happy to pay a higher price:
"The investment manager will rationalize any price paid because he likes the extra fees for managing the extra assets. I have a friend that tried to buy warehouses with a lot of family money and he just stopped. Whatever he bid was always topped by some professional manager, managing other people’s money on a fee basis. So this is a very peculiar era where all these asset classes have been driven to very high valuations, by all historical standards."
These sorts of comments are the main reason why I think all investors should read and review Buffett's historical speeches and letters. Investors may not agree with the Oracle's investment strategy or some of his ideas, but his experience is indisputable. He has been managing money since the 1950s, and he has a vast amount of experience managing money in different sectors and managing money through different market environments.
As he said in 2005, there are always investors who are too focused on short-term prices and don't spend enough time looking at long-term cycles. Buffett does because he's been through enough of them to know another cycle is always just around the corner.
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