"Every bull market has its own rationale for why stocks should stay at a permanently high level and arguments against any revision to a historical mean. The bull market of the late 1990s was driven by the excitement of the internet and mobile communications and what appeared to be
permanently higher economic growth levels. This rationale did not prevent a massive correction that saw the NASDAQ Composite index drop 80% from peak‐to‐trough over the next three years, and as of this writing the index remains below the all‐time high price set in March of 2000. Similarly, the strong stock market performance leading up to the 2008 credit crisis was driven by excess debt that ultimately could not be supported by underlying asset value. While the S&P500 Index has now recovered its losses from the March 2009 lows and has established a series of new all‐time highs here in late 2014, many investors suffered during the crisis and those that did not or could not stay invested may have experienced permanent losses.
The rationale for today’s high stock prices is that they are a natural function of a permanently low level of interest rates and that future macro‐economic challenges will continue to be successfully managed by enlightened global central bank policy. With bond yields extremely low, we
believe that many investors feel no choice but to move further down the risk spectrum in search of better returns, driving a certain amount of incremental demand for stocks perceived to offer attractive dividends and stable earnings. We also believe that many investors value stocks relative to the yields on bonds, which theoretically justifies considerably higher prices for stocks in an environment of low interest rates. For many international investors, the US stock market may also represent a safe haven or a way to gain exposure to the relative resilience of the American economy, which has been performing better than those of most other developed markets.
We don’t have enough confidence to make a prediction that future interest rates will always be at today’s low levels, and we believe that our strategy dictates that we not accept excessive risk on that basis. We have chosen not to vary our historical valuation criteria to be more in line with current thinking, having learned that being enticed into buying expensive securities for whatever reason tends to lead ultimately to loss of capital. We understand that our emphasis on protecting capital first and foremost puts us at risk of short‐term underperformance, and we accept that as an occasional and unpleasant reality of the business that we are in. As another value investor once said, “We’d rather lose our clients than lose our client’s money.”" (Zeke Ashton, Centaur mutual funds annual report 2014)