Top Performing Value Investor Explains Why the Market Isn’t Overvalued and Hasn’t Hit the Blowoff Top Phase | Charles Lemonides | ValueWorks LLC

Charles Lemonides (0:00)

This market has gone up and to the right without more than a 25% correction for 18 years. It's sort of silly to think it's gonna be 18 years in two weeks instead of 18 years in six months, or 19 years in two months, or 22 years in seven months.

And the important thing to consider there is that the best returns are earned in the final years of a bull market. Bull markets have massive blowups to the upside before the downside happens. And I don't think we've seen that liftoff quite yet in this cycle.

Max Wheatley (0:31)

This episode is brought to you by Sarmaya Partners, who manages a Return to Tangibles ETF LENS, ticker L-E-N-S, the Sarmaya Thematic ETF built for a Return to Tangibles. Learn more at sarmayaetf.com and see the show notes for disclosures. Let's get into it. Welcome to Other People's Money. I'm your host, Max Wheatley, and I am joined today by Charles Lemonides, CIO and founder of ValueWorks LLC.

Charles, thank you for joining me today.

Charles Lemonides (0:58)

Thank you ever so much for having me, Max.

Max Wheatley (1:00)

Let's just start with the big picture. I mean, S&P 500 forward earnings at 18, let's call it, historically elevated, but not elevated to what we've seen in other periods of time, other tech bubbles. Are we in a tech bubble? Is the market overvalued?

Charles Lemonides (1:16)

The market is not necessarily overvalued, but it is an awful lot more fully valued than it once was.

I think we can talk about the PE and it's okay, it's a little on the high side, but I think the bigger picture is that we're in an 18-year bull market. This market has gone up and to the right without more than a 25% correction for 18 years and it's starting to show in what is working and where investors are paying attention.

Max Wheatley (1:47)

When you see 18-year run like that, everybody naturally wants to call the top, call the end, get positioned for a crash. Do you think about it that way?

Charles Lemonides (1:58)

It's sort of silly to think it's going to be 18 years in two weeks instead of 18 years in six months or 19 years in two months or 22 years in seven months.

Yeah, we're far in, but there's no reason to believe that the clock has struck. And the important thing to consider there is that the best returns are earned in the final years of a bull market. You know, bull markets have massive blow ups to the upside before the downside happens. And I don't think we've seen that lift off quite yet in this cycle. So I think you have to, on the one hand, be prepared for the market turn whenever it happens. And on the other hand, be prepared to participate because it could last another two, four years, five years, who knows?

Max Wheatley (2:47)

Well, I think one of the other things that makes this most recent surge interesting, a lot of the bull market has been multiple expansion. We've actually seen multiples contract over the last year or so because earnings growth has been just so strong. Does that correspond with what you would see in a sort of blow off environment to actually see multiples coming down while prices go up?

Charles Lemonides (3:10)

No, that's a very good point. There are a lot of reasons to believe that from a fundamental perspective, this economic cycle can continue and this market cycle can continue. Look, our concern on the interest rate front is that we're growing too fast, right? We're trying to raise rates to curtail growth.

That's not the beginning of the end typically. It takes a while for higher rates to slow down growth and we're not seeing that growth having slowed down yet. There's nothing to indicate the growth will slow down six months out from now either. That's more important than what we're seeing today because, look, markets are discounting mechanisms. We're going to price today for events six months from now.

There's no reason to believe those. Listen, policymakers are doing everything they can to keep this expansion going. Valuations are totally not overblown. There are a handful of companies that trade at excessive prices, and at this moment, they're big.

Max Wheatley (4:14)

Well, I want to talk about the raising of rates as you put it, that you think it's because of strong growth, that rates are going up. A lot of people have talked about rising yields. Obviously, there's the monetary policy component, which has to do with fighting inflation, but the long end of the curve, people have said, is being driven by debasement, fears about rising government debt. You're positioning it more about just the strength of the economy and that we're seeing such strong growth, despite the inflation forces that we're seeing, that rates deserve to be higher, yields deserve to be higher.