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Investors seem to be forgetting that prices can go down

Asset values around the world are at extremely high prices. House prices in various countries are hitting all-time highs.

Paintings are smashing records left, right and centre.

Cryptocurrency values are shooting through the roof when they have virtually no intrinsic value.

Share markets around the world are hitting multi-year highs and all-time highs, even though there are things to be worried about.

Perhaps the entire world is finally learning some of the key investment lessons. The mottos of ‘invest for the long-term, ignore the noise and hold forever’ are being religiously followed. The passive income money pouring into ETFs seems unstoppable.

North Korea is coming to the table, global GDP is growing, unemployment around the world is at its lowest since the GFC and company tax rates are coming down. There’s a lot of reasons to be positive about the share markets in Australia and the US.

However, it’s in these positive times that investors need to be most careful. Share markets will grow in the long-term due to the ever-growing profits, but I believe asset values are higher than they should be.

This graph shows that S & P 500 is trading at virtually its highest ever price/earnings ratio excluding crash events.

Low interest rates explain a big part of the high asset prices. Interest rates act like gravity on asset prices, the lower the rate the higher the asset price.

However, things are starting to change. The Federal Reserve in the US has increased rates multiple times and expects to increase it as time goes on.

The RBA also acknowledges that the ‘normal’ rate should be a lot higher than it is, perhaps around 3% in the long-term.

Quantitative easing is slowing down and coming to an end, which has also been a big support for asset prices since the GFC.

Overall, asset prices could start heading downwards. Just like how Sydney’s property market is starting to turn downwards. Things do not always go up in value.

The ASX doesn’t have an overly expensive price/earnings ratio, but the amount of growth on offer makes it a lot worse than it appears. Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Telstra Corporation Ltd (ASX: TLS) are not going to double their profits any time soon.

As much as I dislike ‘market speak’, there is not much upside at the current prices.

Foolish takeaway

Who knows what the share market will do over the next month or six months? I certainly don’t know. Some people think that holding more cash is the answer, they could be right.

However, I do know that I need to be as picky as I can be about shares I buy today because good value opportunities are extremely limited at the moment.

These shares could be the opportunity that I'm looking for, which is why I'm actively looking to buy at a good price.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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