Let me get this out first: I'm an optimist and a long-term share market bull.
Both of those sentiments are backed by over a century of economic and share market history.
Economies grow. Companies make more money. Share markets rise.
There's no immutable law of physics that says it must be so, of course, and — as the legal eagles remind us — past performance is no guarantee.
But my firm conviction is that share markets will continue to deliver great long-term compound returns for the careful and patient investor.
Not in a straight line, of course.
We'll have booms and busts. Bubbles and pops. Exuberance and despair.
Regardless, over time, I think the inexorable direction will be up.
But… that doesn't mean we can, or should, abandon common sense.
It doesn't give us licence to pay any old price for any old dross.
Just because markets rise, over time, doesn't mean individual businesses don't go broke.
They do.
It doesn't mean some companies don't trade for silly prices.
They do.
It doesn't mean investors can't lose money if they buy the wrong shares at the wrong prices.
They do.
Remember the 'house prices don't go down' brigade? They've been a little quiet in the last year or so.
They were the heirs apparent to the 'stronger for longer' mining investors from 2011.
To the 'this time it's different' crowd of 1999.
To the bitcoin true believers of 2017.
To the gold bugs of… well, almost any time, such is their unwavering devotion.
But let's get back to today.
You've probably heard of the 'WAAAX' stocks.
They're (apparently) the Australian version of the famed US 'FANGs' — Facebook, Amazon, Netflix and Google.
Here, WAAAX is WiseTech, Appen, Altium, Afterpay and Xero.
That group has actually outperformed the FANGs recently. Yes, outperformed some of the truly great companies (let alone tech companies) of our time.
Now, to be fair, the FANGs are bigger and older than the WAAAXs. They have less 'blue sky' left. So, arguably, the next generation of tech success stories should grow faster.
Assuming they truly are the next tech success stories.
To be fair, my beef isn't only with the WAAAX stocks, though.
I'd be prepared to bet that at least one of them — maybe more — will go on to post impressive long-term gains, even from their current sky-high prices.
But which one? How many?
We can never know the future, of course, but with P/Es in the 100-times-plus range for some of them, are the odds in our favour?
Again, though, it's not just those stocks.
It's Australian tech, writ large.
We can't seem to get enough of them. Is Afterpay really worth one-fifteenth of American Express, given the latter's global reach?
Maybe.
Then add in the expectations of investors in its competitors, Zip and Splitit.
Will they all be right?
It's not just buy-now-pay-later stocks, either.
We can't get enough of fintech, either. Or medtech. Or anytech.
True, not every company has been caught up in the rush…
But I ask you: If you add up the hopes and dreams of investors in all of these companies — many of which actually compete with each other — and the effort, skill and luck to overcome the incumbents they're trying to topple…
What are the odds that — at these high, high prices — this group will deliver a market-beating return?
Now, to be clear, the chance isn't zero.
It's never zero.
But it also stands to reason that the higher they go — especially those gains based on little more than increasing optimism — the less is left for those just now coming to the party.
Remember this, too: As my boss, Bruce, likes to say, bubbles can go higher and last longer than most people expect.
Are we in a bubble? I don't know. We can only ever know these things for sure with hindsight.
What I do know is that investors in triple-digit PE stocks and double-digit price-to-revenue stocks (that aren't even making a profit yet) need to be very, very careful.
Again, I think some of those companies will likely succeed — just as Amazon and eBay emerged from the tech wreck of 1999 and 2000.
But the rest?
Let me reiterate: the higher the price, the greater the risk and the less room there is for error.
My prediction: I don't have one. I'm not silly enough to play that game.
Instead, my job as The Motley Fool's Australian chief investment officer is to help our team — and you — prepare for what might come. To help you think through the range of outcomes, and ensure your portfolio (and your emotions) are prepared, should there be rough waters ahead.
And, by the way, many of our services are still investing in tech. Our analysts and advisors are doing the work to truly understand the risks and potential rewards. They're thinking about when to buy, when to sell, what prices to pay, and how to be adequately diversified.
Frankly, some are more bullish on this part of the market than I am. We have no enforced 'house view' at The Motley Fool. As long as our team remain focussed on both the businesses (not the squiggly lines on share charts) and resolutely looking to the long term, we give them free rein.
Some of our services are structured precisely to seek out more risk, with the hope of higher future return. Others seek a different balance, while some are tilted toward income.
It is, in a word, Motley. But all with a business-focussed, long-term approach.
Overall, though, we're not getting carried away. We know the market can give, and it can take away. More importantly, you won't see us give in to reckless greed or, in the lexicon of the day, embracing FOMO, the fear of missing out.
We'll recommend our members buy only when we think the opportunity presents itself.
We aim to emulate — in behaviour if not always in style — the approach of Warren Buffett in 1997, 1998 and 1999.
While all about were losing their collective minds, contorting logic to be almost unrecognisable in the service of keeping up with the Jones', Buffett went about investing the only way he knew — resolutely unwilling to bend to the will of the crowd who labelled him old-fashioned, past it, and a dinosaur.
You know how that ended, right?
Keep your heads, Fools.
