One of the greatest risks for an investor is an outright stock market crash. Most, if not all, share prices would decline and it would leave my portfolio looking pretty miserable. It was only back in March 2020, at the onset of the pandemic, that the stock markets last crashed.
But stock markets have recovered considerably since then. So much so that Michael Burry of ‘The Big Short’ fame says there’s more speculation and overvaluation today compared to other times the stock market crashed.
It’s not just Michael Burry now though. Charlie Munger, who’s Warren Buffett’s long-standing business partner at Berkshire Hathaway, has had his say recently. Here’s what Munger said, and what I’m going to do.
Charlie Munger: madder than the dotcom boom
Munger was being interviewed at the Sohn Conference in Sydney when he gave his assessment of the current financial markets. He said: “I consider this era even crazier than the dotcom era.”
This is a strong statement considering how very mad the dotcom era was. And of course, markets did crash back in 2000, and didn’t recover for years afterwards. If Charlie Munger is right, then we may be about to see another stock market crash like we did when the dotcom bubble burst.
Stock market crash: here’s what I’m doing
I agree with Charlie Munger in some ways. I wrote about Rivian recently, and described how it reminded me of the dotcom bubble. It’s a pre-revenue company with a market value of close to $100bn. This, to me, seems crazy, even if it may one day go on to great things.
We’ve also seen some US growth stocks crash this year that looked richly valued. Docusign is an example I’ve written about. But there have been others, such as Peloton and Zoom, that have fallen by double-digits yet still look highly valued to me. That said, there are some good businesses here, and I might be interested in buying the shares if they become cheaper.
Charlie Munger did say one other thing in his assessment of today’s stock markets: “You have to pay a great deal for good companies and that reduces your future returns.”
I think this is generally true in the US. But the UK market is cheap right now in comparison. For example, the FTSE 100 index is valued on a forward price-to-earnings (P/E) of only 12 as I write. The US equivalent index, the S&P 500, is valued much higher on a forward P/E of 21.6. There are many good companies in the S&P 500 index, but Charlie Munger may be right in that I’d have to pay a great deal for them. This would certainly reduce my future returns.
So, I’m going to carry on looking for quality UK shares, and always consider the price I pay for the companies I buy. If the stock market does crash, I’ll consider it an opportunity to load up on shares that might be too expensive today.