Monthly Archives: February 2010

Is the S&P 500 Overvalued?

I have updated the general market indicators which you can find in the right sidebar. My general conclusion is that the S&P is not materially under or overvalued – it certainly does not appear “cheap”.

There is also grounds to be somewhat cautious given the fact that interest rates are so low. Any significant upward movement in interest rates would cause a downward revision in the intrinsic value of equities. Predicting if and when that will happen given the current economy, or at anytime, is probably not possible. On the flip side, earnings are only two thirds of their 2007 peak. There again, I obviously have no way of knowing how long it will take to get back to these levels.

For now, I think it continues to make sense to search for good businesses that can be purchased at a margin of safety. Stick to what you understand and don’t reach. Remember, Buffett’s understanding of what it means to “understand” a business goes beyond the common meaning of the word and includes the idea that you can make a reasonable estimate of what the business will look like in five to ten years, i.e. think Coke vs. a biotech company. Remember, the forces of creative destruction are real and powerful; don’t neglect this step.