Welcome to Fear and Greed. Some are investing series brought to you by Vantask, specialists in compliance led growth. I'm Sean Aylmer. Last year the SMPASX two hundred hit multiple record highs, as did many of its biggest companies, led of course by Commonwealth Bank. It leads to the question is the market over valued and if it is, is the re correction on the way. As always, this is general information only and you should seek independent advice before making investment decisions. Roger Montgomery is the founder and chief investment officer of Montgomery Investment Management. Roger, welcome back to Fear and Greed.

Welcome to Fear and Greed. Some are investing series brought to you by Vantask, specialists in compliance led growth. I'm Sean Aylmer. Last year the SMPASX two hundred hit multiple record highs, as did many of its biggest companies, led of course by Commonwealth Bank. It leads to the question is the market over valued and if it is, is the re correction on the way. As always, this is general information only and you should seek independent advice before making investment decisions. Roger Montgomery is the founder and chief investment officer of Montgomery Investment Management. Roger, welcome back to Fear and Greed.

It's great to be with you again, Sawan. It's an exciting time to be an investor.

It's great to be with you again, Sawan. It's an exciting time to be an investor.

Is the market over valued? Roger, Well, I'll tell you what.

Is the market over valued? Roger, Well, I'll tell you what.

If you look at a lot of the traditional measures that commentators are using to expect to forecast a crash this year, then yes, you would say the market is overvalued. But when you drill down into some of those indicators, the market doesn't seem that expensive. Or it could be that there's a very good reason that those particular ratios are at very high levels. So one of them at the moment that investors are using, for example, on the S and P five hundred, is the price to book ratio. So this is where you compare the price to the if you like, the equity on the balance sheet on a per share basis for each company. So when you aggregate all of those for the S and P five hundred, the price to book value at the moment is about five point three times, which historically is a record, and so investors are using that and commentators are using that to say, well, you know, look at the market, it's crazy, it's so expensive at the moment. What you have to remember, companies today don't have a lot of tangible equity on their balance it. They don't have a lot of tangible assets. The most successful companies, the ones that are being elevated into the S and P five hundred, they tend to be technology companies. They tend to be companies with a lot of intangible assets rather than tangible assets. They're not acurately reflected. All the values of those intangible assets aren't typically reflected on the balance sheet, and so the price to book ratio could be very very high, not because the market is expensive, but because most of the companies that are succeeding don't have a lot of tangible assets. The other one that's being cited very very frequently as indicating the markets extremely expensive at the moment is Robert Schiller's CAPE ratio, or the cyclically adjusted price to earnings ratio. So this is where price is compared to earnings per share, and if the market's very popular, the price is going to be very high compared to the earnings because people are willing to pay higher multiples of that earnings. But with Robert Schiller's version of the index, it looks back over the last ten years, so it's looking at the average earnings over the last decade. But let's remember that in the last decade we had COVID and so for two years earnings were depressed, and so that's artificially brought down the average earnings over the last ten years, and that's influence that very high KPE PE or cyclically adjusted PE ratio. So I think when you look a bit deeper at some of these ratios that people are pointing to and saying, Haha, the market's really expensive, I think you can find that, you know what, there's a lot of companies growing very quickly. At the moment, earnings are going well. The economy in Australia and in the United States is robust, There's expected to be tax cuts, there's expected to be pro growth policies implemented, and that should be very good for another good year in market. So I don't particularly think the market is overpriced at the moment.

If you look at a lot of the traditional measures that commentators are using to expect to forecast a crash this year, then yes, you would say the market is overvalued. But when you drill down into some of those indicators, the market doesn't seem that expensive. Or it could be that there's a very good reason that those particular ratios are at very high levels. So one of them at the moment that investors are using, for example, on the S and P five hundred, is the price to book ratio. So this is where you compare the price to the if you like, the equity on the balance sheet on a per share basis for each company. So when you aggregate all of those for the S and P five hundred, the price to book value at the moment is about five point three times, which historically is a record, and so investors are using that and commentators are using that to say, well, you know, look at the market, it's crazy, it's so expensive at the moment. What you have to remember, companies today don't have a lot of tangible equity on their balance it. They don't have a lot of tangible assets. The most successful companies, the ones that are being elevated into the S and P five hundred, they tend to be technology companies. They tend to be companies with a lot of intangible assets rather than tangible assets. They're not acurately reflected. All the values of those intangible assets aren't typically reflected on the balance sheet, and so the price to book ratio could be very very high, not because the market is expensive, but because most of the companies that are succeeding don't have a lot of tangible assets. The other one that's being cited very very frequently as indicating the markets extremely expensive at the moment is Robert Schiller's CAPE ratio, or the cyclically adjusted price to earnings ratio. So this is where price is compared to earnings per share, and if the market's very popular, the price is going to be very high compared to the earnings because people are willing to pay higher multiples of that earnings. But with Robert Schiller's version of the index, it looks back over the last ten years, so it's looking at the average earnings over the last decade. But let's remember that in the last decade we had COVID and so for two years earnings were depressed, and so that's artificially brought down the average earnings over the last ten years, and that's influence that very high KPE PE or cyclically adjusted PE ratio. So I think when you look a bit deeper at some of these ratios that people are pointing to and saying, Haha, the market's really expensive, I think you can find that, you know what, there's a lot of companies growing very quickly. At the moment, earnings are going well. The economy in Australia and in the United States is robust, There's expected to be tax cuts, there's expected to be pro growth policies implemented, and that should be very good for another good year in market. So I don't particularly think the market is overpriced at the moment.

I'm trying to argue against you here, Roger, so you know, excuse me, but what about something like the Commonwealth Bank, which isn't necessarily an IP company. It hasn't changed that much. It is incredibly expensive. It's obviously been rerated generally. Is that too expensive?

I'm trying to argue against you here, Roger, so you know, excuse me, but what about something like the Commonwealth Bank, which isn't necessarily an IP company. It hasn't changed that much. It is incredibly expensive. It's obviously been rerated generally. Is that too expensive?

Yeah, Look, I think it's difficult to see the growth in the banks justifying you know, the common Bank's share price at the moment. But in the absence of big cap technology stocks in Australia, investors are gravitating to the things that they think are safe and that will give them some leverage or some participation to the market going up. But as I've said several times before, you know what the wires do, early fools do at the end, and so it is important to be very very careful and look, if you don't want to miss out and you feel that the Commonwealth Bank is the place to put your money, then your lever is the size of the position in your portfolio, and you can reduce the size of the position such that you still have some exposure but it's not going to blow you up if it goes badly.

Yeah, Look, I think it's difficult to see the growth in the banks justifying you know, the common Bank's share price at the moment. But in the absence of big cap technology stocks in Australia, investors are gravitating to the things that they think are safe and that will give them some leverage or some participation to the market going up. But as I've said several times before, you know what the wires do, early fools do at the end, and so it is important to be very very careful and look, if you don't want to miss out and you feel that the Commonwealth Bank is the place to put your money, then your lever is the size of the position in your portfolio, and you can reduce the size of the position such that you still have some exposure but it's not going to blow you up if it goes badly.

Okay, So just on that. As a retail investor, how do I play the next twelve months? Then based on what you've said in the last three or four minutes.

Okay, So just on that. As a retail investor, how do I play the next twelve months? Then based on what you've said in the last three or four minutes.

So what you need to think about is you need to think about where there's tailwinds in industries. And one of those, you know, the enterprise migration to the cloud, so very very large businesses moving to the cloud. You know that's still going. And where there's where stocks aren't super popular. As long as and I've said this before, but as long as we have disinflation combined with positive economic growth or at least the expectation of those things, then you're going to see high quality companies with growth and benefiting from those tailwinds do well. So even where the PE ratios might be a bit above average. So I'm not talking about those companies where they're well above average, but if they're a little bit above average, or the average for the market. Then I think this year is going to be a good year for those businesses, and in fact, let me suggest this, in the absence of any liquidity being drawn from the market, twenty twenty five could actually be one of the best, if not the best, of the last three years in markets.

So what you need to think about is you need to think about where there's tailwinds in industries. And one of those, you know, the enterprise migration to the cloud, so very very large businesses moving to the cloud. You know that's still going. And where there's where stocks aren't super popular. As long as and I've said this before, but as long as we have disinflation combined with positive economic growth or at least the expectation of those things, then you're going to see high quality companies with growth and benefiting from those tailwinds do well. So even where the PE ratios might be a bit above average. So I'm not talking about those companies where they're well above average, but if they're a little bit above average, or the average for the market. Then I think this year is going to be a good year for those businesses, and in fact, let me suggest this, in the absence of any liquidity being drawn from the market, twenty twenty five could actually be one of the best, if not the best, of the last three years in markets.

Roja, thanks for your time this morning.

Roja, thanks for your time this morning.

A pleasure saw.

A pleasure saw.

That was Roger Montgomery, Founder and Chief Investment Officer of Montgomery Investment Management. Remember to get your own independent advice before making investment decisions. Is Fear and Greed. Some are investing series brought to you by Vanter. Vanter automates compliance for frameworks like ISO twenty seven one, SoC two, CPS two three four, in Essential eight, saving time and money while building trust. Join over eight thousand companies like at Lassian, Dovetail and Fireant managing real time risk. Get one thousand dollars off Advance dot Com slash Fear and Greed. I'm Sean Elmer. Enjoy your day.

That was Roger Montgomery, Founder and Chief Investment Officer of Montgomery Investment Management. Remember to get your own independent advice before making investment decisions. Is Fear and Greed. Some are investing series brought to you by Vanter. Vanter automates compliance for frameworks like ISO twenty seven one, SoC two, CPS two three four, in Essential eight, saving time and money while building trust. Join over eight thousand companies like at Lassian, Dovetail and Fireant managing real time risk. Get one thousand dollars off Advance dot Com slash Fear and Greed. I'm Sean Elmer. Enjoy your day.