Klarman Worried About Valuations

Seth Klarman, the conservative, value-focused hedge fund guru, is concerned about valuations.

“Any year in which the S&P 500 jumps 32 percent and the NASDAQ 40 percent while corporate earnings barely increase should be a cause for concern, not for further exuberance,” Klarman wrote in a letter to clients recently, the Financial Times reports. “On almost any metric, the US equity market is historically quite expensive. A sceptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix and Tesla Motors.”

Klarman said that investors were underplaying risk and not prepared for the end to ultra-loose central bank policies, the Times reports. He said he could not predict exactly when a significant market correction would happen, but did say that “When the markets reverse, everything investors thought they knew will be turned upside down and inside out. ‘Buy the dips’ will be replaced with ‘what was I thinking?’ . . .  Anyone who is poorly positioned and ill-prepared will find there’s a long way to fall. Few, if any, will escape unscathed.”

Validea’s Top Five Gurus portfolio is up 16.4% annualized since its mid-2003 inception vs. 6.1% for the S&P 500. Check out its holdings here.