Greed, greed, and greed

weekly 26 2025 + market overview June

For the market overview below, I really struggled to put my gut feeling—based on more than 25 years of experience—into words without sounding like a doomsayer. That’s because I’m feeling quite conflicted myself.

I’m also repeating part of what I wrote last month, as this month’s message builds on that.

The stock market has always been driven by two emotions: greed and fear. And I’m convinced that will remain true over the long term. But if we look at shorter periods—which can still span multiple years—the market has clearly changed.

It used to be enough to buy stocks based on valuation. If something was cheap enough, it was only a matter of time before other investors noticed it, started buying, and the price rose back to a reasonable level. After a strong rise, greed (and sometimes outright euphoria) would take over, the price would overshoot intrinsic value, and then drop again, often restarting the cycle.

Today, buying purely on valuation is no longer enough. Valuation still remains the most important driver of your return. I know many claim that return on invested capital (ROIC) is what really matters, but I disagree. As the famous baseball coach Yogi Berra once said:
“In theory there is no difference between theory and practice—in practice, there is.”

There are fewer and fewer investors who actually think deeply, and those who do often focus more on growth, quality, and momentum. The market is increasingly driven by algorithms, with passive investing being the simplest form: “I have money, so I buy.”

We’re seeing outflows from active funds into passive ones. In other words: we’re shifting from investors making thoughtful decisions (with varying success) to investors who simply follow along.

On the one hand, I have full confidence in people, businesses, and the long-term future. On the other hand, the current state of the market makes me anxious in the short to medium term.

Let me be clear: I’m not worried about the companies in our portfolio. On the whole, they’re so cheap that I’m content with the returns they generate just through their operations. A revaluation isn’t even necessary, though of course it would be a nice bonus.

My unease today has more to do with the general mindset prevailing in the market. The U.S. got involved in the Middle East conflict by bombing Iran, and even that wasn’t enough to inject fear into the market. The reaction was surprisingly muted—perhaps rightfully so.

Have investors gotten smarter and become better at predicting the future? Of course not. No one can predict the future, though Nostradamus’s stories can be quite compelling. Are computers perhaps better at pattern recognition? And yet, in previous wars, markets reacted far more negatively—this is actually a break from past patterns.

I don’t think we need to overanalyze it. We just need to go back to the two basic emotions: fear is barely present, while greed is everywhere. Every dip or minor correction is quickly bought up. That works fine—until investors no longer have the money to buy the dip. For now, there still seems to be plenty of cash on the sidelines—or, as I mentioned last month, money is being pulled from active funds to fuel these buys.

The question I’m asking myself is: what kind of black swan event would it take to bring fear back and truly send markets lower for an extended period?

A correction, or even a crash now and then, is healthy. But what we’ve seen in recent years—with corrections or even the COVID crash being erased within weeks or months—doesn’t truly test the resilience of investors or companies. And that test is necessary, to curb the excesses we’re seeing now.

Today, there are analysts walking around with 16 or 17 years of experience who’ve never actually experienced a real crash or crisis, except from books or lectures. And that brings me back to Yogi Berra’s quote: “In theory there is no difference between theory and practice—in practice, there is.”

The emotions that get tested in those moments can’t be learned from a book.

That we’re in a period of market excess is clear to me from this example:

On various financial websites, you now see ads for products built around a single stock, where options are written and payouts are made monthly, or even weekly. Even Seeking Alpha is publishing more and more articles on these kinds of products.

This creates leverage and very risky situations. “Accidents waiting to happen,” in my view. The last time I saw such practices—though like everyone, I underestimated their impact—was in 2007–2008, with repackaged loans.

That things will end badly for these products is, in my view, a certainty. Whether they can cause a systemic crisis is another question. This time, it’s likely the losses will fall on investors, not the banks. Or am I being too optimistic?

Market Overview – June 2025

The decline in the ratio between total U.S. market capitalization and GDP has now almost fully reversed. I’ve set this month’s chart to a five-year range instead of the usual twenty, so you can clearly see how quickly the dip has been absorbed.

I’ve lost count of how many times I’ve read, “In the long run, markets always go up, so we should just buy and not worry about a drop.” That kind of thinking is mind-boggling. Most people seriously underestimate what “long-term” actually means.

The longest recovery period ever for the almighty S&P 500 was during the Great Depression—it took 25 years to recover from peak to peak. The dot-com bubble left investors without returns for 13 years. The oil crisis of the 1970s took 7.5 years. The financial crisis lasted 5.5 years.

So yes, the market always goes up—eventually—but try going three to five years with no returns, let alone more than ten. And no, DCA (dollar-cost averaging) is not the solution. In practice, we see people stop contributing as soon as the market goes through a prolonged downturn.

Now let’s compare that to the past five years. The January 2022 peak was reached again in July 2023—about a year and a half. The COVID crash took six months to recover, as did the 2023 correction. And while we haven’t hit a new high yet, the Trump-related correction is almost erased after about six months. Of course, things could still change. November 2024 might turn out to be the top, and we could be facing a real crash. Remember: the peak before the financial crisis was in October 2007—but the serious damage didn’t come until almost a year later, in September 2008.

Now do you understand why I struggled not to sound like a doomsayer? On one hand, I’m deeply convinced that many companies are priced far too high based on unrealistic expectations. On the other hand, I’m just as convinced that people and businesses have a bright future ahead of them.

That’s why my focus is increasingly on the question: “What can this company earn for me at this price?”

If we also get the bonus of multiple expansion, great—but let’s see how that plays out.

This week

On Tuesday, the second-to-last lesson—Lesson 18: What We Can Learn from Famous Value Investors—was published as part of our Introduction to Value Investing series.

It remains quiet in terms of company news that doesn't fit under the short updates summarized below.

This week, a brief news from: Stellantis, Keller and Cake Box.