The most important thing for an investor to do is find value when they invest. Finding value is getting quite difficult with individual shares and whole indexes trading expensively.
Commentators are right to point to the typical market price/earnings ratio and say it's high. Analysts are right to say that the cyclically adjusted price earnings ratio (CAPE ratio) doesn't get much more worrisome than its current level.
However, I think it could be argued that today's prices aren't as bad as they first appear when you take into account the following two factors:
Interest rates
'This time is different' is a dangerous phrase. However, when compared against historical interest rates then this era is indeed unique.
If interest rates were to stay around these ultra-low levels forever, then today's prices are actually quite good value.
It really depends on what interest rates do in the future. If interest rates keep going up then share investors will likely head for the exits.
Different companies form the index
In previous stock market crashes a key problem was that all the shares were trading at earnings multiples beyond sane levels.
Shares like Woolworths Limited (ASX: WOW), Commonwealth Bank of Australia (ASX: CBA), Telstra Corporation Ltd (ASX: TLS), BHP Billiton Limited (ASX: BHP), Proctor & Gamble, McDonald's, Exxon Mobil and Chevron aren't businesses that should be trading at huge multiples.
However, these days the indexes that people think are expensive are different compared to previous times. Apple, Alphabet, Facebook and Microsoft are all worthy of the higher multiple because they are growing quickly and have high margins. These businesses are now the biggest in the world and have a large impact on US indexes.
Our Australian index is still dominated by the banks, but growing technology and healthcare businesses like REA Group Limited (ASX: REA), CSL Limited (ASX: CSL), Cochlear Limited (ASX: COH) and Seek Limited (ASX: SEK) all play their part in making the index a little more expensive.
It could be argued that the indexes reflect the higher growth that its constituents are likely to deliver in the near future.
Foolish takeaway
I think the best thing to do in this situation is to keep investing in quality shares that will grow no matter what the index does.
