‘This is insanity!’

I quote from a US venture capital specialist whose words I read this morning, commenting on the stampede of investment funds into new businesses, the vast majority of which are not making profits and in some cases not even making products!

His main reason for making the exclamation is that new ventures are able to secure new capital funding, on notionally higher equity valuations, as often as every 6 months. That used to be something that happened every 2 or 3 years. It is said that there is so much money available to invest that investors are actually queueing up.

That can hardly encourage the target companies to use the cash prudently – there are now anecdotes of fantasy order books and family members getting huge salaries to do nothing obviously useful.

A more sober fact came my way last week. Premier Miton presented data giving the CAPE (cyclically adjusted price earnings ratio) ranges for global markets as measured by the MCSI World index for various past time periods.

Naturally this ratio is highest when markets are expensive and has been highest of all ahead of major market setbacks, like in 1999/2000. The current data point is right at the extreme of the range, just where it usually is ahead of a sudden return to reality.

Of course, no-one can say when a crash will happen and it usually happens so fast that one knows about it too late to protect ones profits.

As I have written consistently, timing markets is very difficult and the battle with human psychological biases is tricky. Crashes are always reversed over time anyway. So staying in the market is logical and in the long run gets rewarded.

However, I do think it might be wise to note the frequency of warnings from objective commentators that the runaway train might be about to come off the rails.

I am taking profits from my best performing holdings constantly now and only buying anything new that is great value, has not made much money for ages and comprises companies with cash flows generated by actually delivering goods and services at a steady profit.

And I am still retaining plenty of cash – I would much rather miss out on some of the ‘opportunities’ that are soaking up the tsunami of cash let loose by central banks.

As a lesson, I have excellent memories of people buying over-priced spec built houses in the early 1980s with 100% mortgages – the mass of repossessions that followed the collapse of the boom cycle was such that individuals who had cash on hand were able to buy multiple properties at knock down auction prices (at times 60% below the original purchase price) and they then set up property rental portfolios that made them millionaires in a decade or so.

As someone famous (probably Mr Buffett) said, the foremost mantra of investing successfully is ‘buy low, sell high’. I am attempting a bit of both. I still have a core portfolio in the markets, of course, but as I have said before, tinkering at the edges can be profitable. That means being active, taking profits often and if those profits are to be re-invested, buying with utmost care.