They cannot look out far.
They cannot look in deep.
But when was that ever a bar
To any watch they keep?
– Robert Frost
I once made the mistake of asking Martin Whitman, late manager of Third Avenue Value, what he thought about the stock market’s current valuation. “That’s for amateurs,” he snapped. We went on to discuss individual stocks that he did feel were undervalued.
Whitman was known for cantankerousness but was also known for his love of teaching and his record at Third Avenue Management (more on that later). Nevertheless, it’s reasonable to look at stock valuations in the 11th year of a bull market.
Howard Silverblatt, the kindly authority on the Standard & Poor’s 500 stock index, puts out monthly stats on the blue-chip index. At the moment, the S&P 500 looks moderately overvalued:
12-month price-earnings ratio: 21.75
2019 estimated PE ratio: 20.19
Average from 1936: 17.23
But that’s only if you measure from 1936, which includes a long period of very moderate stock prices, relative to earnings. The S&P500 has averaged a 24.07 PE since 1988, which not only reflects modern industry, but also includes two bond-jarring bear markets.
![](https://johnmwaggoner.wordpress.com/wp-content/uploads/2019/10/lighthouse.jpg?w=677)
We see a similar pattern when we look at the S&P 500’s dividend yield, currently 1.922%. The yield since 1936 has averaged 3.586% and 1.99% the past 10 years. Undervalued? Overvalued? Hard to tell. But it is getting increasingly difficult to find bargains in this market. Even health-care stocks, which have been generally unloved throughout the bull market, are looking expensive, according to Sam Stovall, S&P’s chief investment strategist at CFRA. (He does think that Abbott Labs (ABT), CVS Health (CVS) and Merck (MRK) are worth a look).
The problem with bargain-hunting at the end of a long bull market – the S&P 500 has gained an average 17.49% a year since March 2009, compared to an average 10.3% since 1926 – is that there aren’t many bargains to be found. Stocks that look like bargains often deserve the low prices they get, and can be further punished in a downturn. It’s often not until Wall Street’s wrecking ball has run through the market that there are real values to be found.
Whitman’s Third Avenue Value fund gained an average annual 11.1% since its founding in 1990 until 2012, when he stepped aside from day-to-day management. Ironically, it was a bond fund – the Focused Credit Fund – that was his downfall. The high-yield fund shut down in 2015, one of the biggest mutual fund collapses since the Great Recession.
That doesn’t make the Whitman Way – his name for deep-value investing – obsolete. It does mean that there aren’t many Martin Whitmans around, and that if you want to dabble in value now, you need to be especially careful. Whitman had the advantage of a long career on Wall Street and, more importantly, access to information that the average investor didn’t have. Most amateur investors can look neither far out nor in deep when it comes to individual stocks.