A few weeks back, I mentioned that it was a difficult time to be an investor; stocks just seemed to go up and up, with little or no relationship to technical or fundamental data.

Several readers took exception to my statement, and wanted to know why I was so negative on stocks. I replied that I wasn’t trying to be negative. There just weren’t many stocks that met my criteria.

After reading this year’s annual letter from Berkshire Hathaway, I see that I’m not alone in my thoughts on the current state of the market. Page 4 of the letter states (emphasis added):

“In our search for new standalone businesses, the key qualities we seek are durable competitive strengths, able and high grade management, good returns on the net tangible assets required to operate the business, opportunities for integral growth at attractive returns, and a sensible purchase price.

The last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all time high. Indeed, price seemed almost irrelevant to an army of purchasers.”

Think about it. Warren Buffett had a hard time finding investments that met his investing criteria, and he’s one of the most positive people around when it comes to investing U.S. stock markets. Even prices for “decent” companies were too high!

For growth investing, I can relate this statement to criteria like sales, earnings per share, and institutional support.  Between stock buybacks and the search for yield, that army of purchasers went after everything, including companies with sales and earnings per share that were just “okay” by historical standards. In essence there was high pay for minimal performance…definitely not sensible.  You can even see this from a technical perspective, as prices were extended from proper bases and entry points when looking at the charts.

On the income side (particularly dividend investing), I can see things like competitive strengths, high grade management, and internal growth manifesting in a company’s ability to maintain dividend growth without expanding the payout ratio. Most of the stocks on my screen have no problem here. As with growth investing, the issue occurs when adding the requirement for a “sensible purchase price”. The P/E ratio is one way to evaluate whether stocks are priced sensibly, verses long-term historical norms.  Since almost all stocks that met my criteria also had P/E’s above 20, history says they won’t provide much cushion for riding out the next downturn (this was still true even after the February sell off!).

One thing is certain. The best time to buy stocks is when they are oversold; like after a bear market or some other disconnect between fundamentals and technicals (i.e. market crash). That is when the best stocks can be acquired for peanuts…and Berkshire will have a LOT of peanuts.