Speaker 1: Twenty. We had one of the sharpest and quickest market crashes that we’ve ever seen. Stocks fell by 33 percent in just one month and investors were panicking big time, that is.
And so the Federal Reserve made the decision to print a lot of money, give it to the big businesses and to the people which helped bail out the stock markets. Right now, stocks are sitting around all time highs at prices we’ve never seen before. This has left a lot of investors and myself included asking the question, is there going to be another stock market crash coming around the corner? And if so, what do we do about this? That’s two very good questions that we’re going to delve a bit deeper into. The first thing you need to realize is that just because market prices are at all time highs, it does not necessarily mean that they are overpriced. Go to work out if they’re overpriced. You need to be looking at more than just one factor. Now, one of the best ways to get a gauge for if things are overpriced is to look at the Shiller P e ratio, the Shiller p e ratio as a valuation measure applied to the S&P 500. It is defined as price divided by the average of 10 years of earnings adjusted for inflation. Simply put, it’s a great way of measuring valuations for United States companies as a whole. I’ve seen a lot of smart investors who rave on about this metric. So let’s take a look at where it stands currently at the moment. The Shiller P e ratio rates thirty one point four seven. So that’s a lot higher than the all time historical average, which is seventeen point one.
That’s almost double. Now, I don’t know if you guys remember Black Tuesday, which of course, you don’t you weren’t alive then, but the Shiller P e currently is around that level that it was on that very dark day where the market crashed. And in fact, the only time that the Shiller P e ratio was higher than it is today was back in the technology crash in 2000. Apart from that, the Shilpi has never been higher. Basically, at least according to this ratio, the market has not been this pricey ever before. Apart from the 2000 dotcom crash. So that is one indicator that points towards stocks being expensive. Another indicator that I’ve already mentioned before on this channel is the Buffet Indicator, which tells a similar story. The Buffet Indicator is currently sitting at one hundred thirty one point four percent. Anything above 134 percent is considered significantly overvalued. So we’re getting close to that stage in the markets. OK, so prices are high. I think it’s pretty fair to say that’s another consideration that should come into the equation is the national debt that we’re currently in. As of right now, the USA has twenty six point seven trillion dollars of debt on their balance sheets. So you need to ask yourself how much more debt can they afford to have? Can they continue to keep paying stimulus checks and bailing out businesses if they’ve already got so much debt on their hands? It’s just something to think about. Also, corporate debt is at its all time highs as well as currently sitting at sixteen point eight trillion dollars. So I remember a stock is a corporation. So it’s the stock market that holds most of this debt. Now, can those companies in the stock market afford those high debt levels while at the moment it appears that they can, but that’s because interest rates are at close to the lowest we’ve ever seen, zero point two five percent right now. They can’t really go any lower. But if they do go higher, which is basically the only direction that can go well, I think there will be a few stocks out there that will be struggling. So that brings us on to the question. What should we do now to prepare ourselves for a potential market crash that may come in the future? And you guys know me.
I like to look at what the best investors are doing with their portfolio and the stocks that they’re buying to prepare. The first thing that I noticed was that there’s been a decent amount of selling of stocks, especially those that were considered overpriced this recent quarter. Warren Buffett, May 22 stock moves, 17 of those were stock sales. As I’m sure a lot of you know, he sold a lot of his bank stocks. Wells Fargo, JP Morgan and Goldman Sachs all had a significant amount of shares reduced. Of course, they completely sold out of his airline stocks, Delta, Southwest, United and American Airlines. He no longer holds one share and he sold other stocks, including MasterCard, Visa and Occidental Petroleum. As Benjamin Graham once quoted by Wisely When Prices Fall Sharply and. So wisely, when they advance a great deal, it’s hard to argue that stocks have not advanced a great deal as of the past 10 or so years. So that’s something that you might want to think of when looking at your own portfolio while other stocks there seem to be overpriced, while other stocks that actually don’t have the best business models during these current times. And then you might want to consider selling that and being a bit conservative in cash and other assets. One of those assets that we know Buffet has gone into is gold. Technically, it’s a gold mining company called Barrick Gold Corporation. This makes Buffett directly rely on the price of gold and is in some sense betting that the price of gold will go up. Taleo he’s doing something similar when it comes to gold. He’s made some huge gold purchases recently. He bought 260 million dollars worth of the SPDR Gold Trust and then he put a further 75 million. And the iShares Gold Trust, that’s over 330 million dollars placed recently directly in gold. Again, it’s something to consider with your own portfolio if you’re looking for security, because as I’m sure you know, gold is often used as a stock market hedge and has a tendency to increase with inflation and frequently holds and increases its value in a crash. That’s why I personally hold gold anyway. I just use it as a portfolio hedge. So that’s two suggestions to consider selling overpriced stocks and looking more deeper into gold. The other thing I would recommend you think about when it comes to your portfolio is diversifying into other countries. That’s one thing that Dalio has been focusing on recently, and that’s his Chinese investments. He purchased about 10 different Chinese stocks, including Alibaba, JD.com, buy do Nettie’s as well as a couple of Chinese ETFs.
You see, the way I personally think of it is I don’t want to just rely on one country for my wealth. Don’t get me wrong, I think USA is a fantastic country, of course, with some faults as well. But if the USA goes into financial troubles, I want stocks elsewhere to rely upon and I don’t think China is the worst country to be in. They’re growing at a high rate of clips when it comes to their economy. The poor class is getting lifted out into the middle class and thus China’s becoming more developed. Dalio knows this and that’s why he’s put a focus on China when it comes to his investments. So China’s one country, but also look elsewhere, United Kingdom, not shabby, Australasia, other places throughout Europe are some examples of countries and areas that you might want to consider looking in. The last thing I have to talk about when talking about preparing for a market crash is the tactic that Michael Buhriz using. He’s the guy from the movie The Big Short. By the way, his tactic is one of the most interesting and smartest ones that I’ve seen after analyzing a bunch of billionaires portfolios. What he’s done is he’s gone and basically sold most of his stocks, 75 percent of them he sold in this recent quarter. He then went and bought a whole bunch of cool options and a bunch of different stocks, including Google, Facebook and booking holdings. So if you guys don’t know what to call option does, it gives you the right, but not the obligation to buy a stock at a fixed price. Essentially, if your stock increases in price, you just exercise your call option and you buy it at the cheaper price. And if it decreases in price, you simply don’t buy the stock. So what this does is it dramatically decreases your risk when it comes to investing. As you all know, we are in volatile times where the market has both crashed and then shot up again in a matter of months. If the market keeps going up, we’re still going to make a lot of money. And if it goes down, well, Burri doesn’t really have that downside risk. Go research, call options a bit deeper so that you get your head around them and then consider adding them to your portfolio. Just consider it. So the one thing that I can say is that we’re in volatile conditions. The market has proven this year that we cannot exactly predict what’s going to happen over the short term. Yes, there could be a crash because stocks are at all time highs. Different indicators are pointing towards the market being well overvalued. On top of this, there’s a lot of debt in the system, so. Crash is possible, on the other hand. Interest rates are at all time lows, and that means bonds in the bank don’t give us a great place to put our money. This helps balance the overpricing of the markets and may mean no crash comes within the next year or two.
That’s why we have to make sure that our portfolio is balanced for a range of market conditions and we should be looking deeper into the likes of gold, other countries and all options in order to make our portfolio stronger for both good times and the potential bad ones. That’s what the billionaire investors are doing anyway, and I don’t profess to be any better than them.