This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stock Under $10 that he thinks could potentially double or triple in the next 6 to 12-months. See what he's trading today with a 14-day FREE pass.

Kass: Fair Market Value Update

Stocks in this article: SPYBRK.ABRK.B

Whether one is gazing at charts or incorporating fundamentally based discount models, all too often technical and fundamental analysts proclaim precision of market forecast. Frankly, I view those pronouncements as laughable.

There is no special sauce, fractal or system to beat the market and to forecast its future with consistent accuracy -- if there was, Steve Cohen, George Soros or Paul Tudor Jones would have purchased the recipe.

I use this morning's exercise as a guide to portfolio management. Again, it is certainly not meant to be an exercise in precision, but I have found this calculation, over time, to be a generally good discipline that keeps me honest.

The Market Is Moderately Overvalued

The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities -- that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future -- will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands.

-- Warren Buffet's letter to Berkshire Hathaway shareholders, 2000

I continue to see the stock market as being moderately overvalued -- the higher we go from here, the line between speculation and investment seems likely to be increasingly blurred.

In the past, I have suggested that in a 5% overvalued market, a conservative investor should not be more than 50% long -- and I still stand behind that.

So, if I believe (as I currently do) that the market is slightly more than 5% overvalued, why have any investments in equities?

The answer is obvious.

At any given time (regardless of where the market is selling), individual stocks are overvalued and undervalued. This is particularly true today since there is so much uncertainty in fiscal (and monetary) policy, in political/economic outcomes and with regard to business and consumer reaction to policy.

Don't take my word for the fair market value calculation. Again, I strongly encourage you to input your own earnings/economic/multiple expectations and create your own fair market value calculation.

This allows investors and traders to pick sides on the issues and make their bets a bit more intelligently, particularly on the broader market.

I hope you find this exercise to be helpful as a guideline.


This column originally appeared on Real Money Pro at 8:24 a.m. EDT on Oct. 21.

At the time of publication, Kass and/or his funds were short SPY and BRK.B, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV

Markets

DOW 18,030.21 +6.04 0.03%
S&P 500 2,081.88 -0.29 -0.01%
NASDAQ 4,773.4720 +8.0480 0.17%

Our Tweets

Brokerage Partners

Top Rated Stocks Top Rated Funds Top Rated ETFs