It's Not A Bubble

 | Oct 02, 2013 | 1:18 PM EDT
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I nearly drove off the road a moment ago listening to CNBC in my car. Someone -- I don't know who -- who identified himself as a "value investor" was on railing against the current market, saying it was overvalued, due for a correction and getting to silly levels.

"We've seen this movie before," he said. "Trees don't grow to the sky forever. All these companies playing this game with 50x P/E ratios. That's not what we do. We're not going to chase."

It's been a while since I last heard people talking about a bubble, but here we are again. I guess some people were caught off guard that the market didn't take in September -- "as is the historical norm," according to them.

In fact, the last time I heard that we were in a bubble was in 2010 and 2011. Of course, we had a couple of brief worries about Cypress, or Greece, or Portugal. However, if you look at the charts over the long term since then, we've steadily moved up.

Following the dot-com bubble bursting 13 years ago and then the housing bubble collapse in 2008, we have become a nation obsessed with spotting the next bubble before it happens, so we can smugly tell our friends later that we knew it all along. But it wasn't a bubble in 2010, and it's not a bubble now.

If I had to plot where we are today in relation to the dot-com bubble, I'd say we're somewhere in mid-1998. Except you shouldn't think a year from back then equals a year today. In other words, I'm not saying we have two more years to party before everything blows up.

In fact, I would say we probably have four more years before we see a severe pullback in the markets. That would mean it took almost a decade between the collapse of late 2007 until the next one. I think that's about right given the long, slow recovery we've been in and the support from the central banks.

We have a lot more normal growth to get through before we get to the really silly investing we saw in late 1999 with daytrading and in 2005/06 with flipping houses.

Former Citigroup (C) CEO Chuck Prince once said that, when the music's playing, you've got to get up and dance. He was derided for that comment later because people said he should have seen the end coming and been better prepared for it.

However, what if we're four (or more) years away from a big pullback? If you manage money for outside investors and you sit in cash or defensive stocks for the next four years, you aren't going to have outside money for long.

You have to make money in the environment you're in -- not the one you want or expect. If you're a value investor, you've got to learn to make money in an environment where people are desperate for growth instead of complaining about it.

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