Melvin: An Utterly Frightening Market

OK, kids -- it is time to have the talk. Last night, during a discussion of markets, I gave my usual mantra of "I am more of a bottom-up guy and try not to pay too much attention to the stock market." But my friends were a little pushier than usual, and they got me to talk about the current state of the broad market. I have hinted at this before, with talks of portfolio-pruning and caution, but here's the reality: This is the scariest stock market I have seen in my career. I worry more about the market now that I did in the late 1990s. At least that market had a story and life-changing technology to fuel the excess. This one has nothing but blind faith in the Federal Reserve.

One of the biggest lessons I have learned in the past three decades is that fortunes are made buying into a stock-market collapse. If you look at some of the most successful investors of all time, that's how they made their money. John Templeton talked about buying at the point of maximum pessimism. Walter Schloss liked to buy stocks trading at four- or five-year lows. Warren Buffet has a knack for getting into companies like Goldman Sachs ( GS) when things went bad. Sam Zell made a fortune buying real estate when no one else had been interested and when prices had collapsed. Wilbur Ross buys stuff that would freeze the innards of a less disciplined or patient investor.

U.S. stocks are nowhere near a point of maximum pessimism. For the most part, they are at four-to-five-year highs -- not lows. The market has gone straight up since the 2009 nadir and, at Monday's close, the S&P 500 was at more than 2.5x that level.

The only driver for these gains has been the zero interest rate. Earnings have not been fantastic. Revenues of late have been flat. Much of the profit gain has been driven by cost-cutting, and by financial engineering in such things as share buybacks. The U.S. economy is just drifting along in a "better but no good" mode. It has been a great run, and I have benefited enormously. But the overriding question has to be: How long can money-printing and financial shenanigans support stock prices?

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