Here's what you should be buying instead.
In the never-ending search for value, you have to be constantly on the look-out for overvalued investments, for speculative bubbles where prices have gone up and up, seemingly with unstoppable momentum.
But, of course, nothing is unstoppable. All bull runs end. All booms turn to bust. And when they do, inexperienced investors can get terribly burnt. Yet there seems to be something innate in human psychology which seems to draw us to bubbles like moths to a flame.
So here I will attempt to identify 5 current investments which are overvalued and which are potentially bubbles. And for each I will try to suggest more reasonably-priced alternatives.
1. India
India is a great investment story. The country has everything going for it: growth of 8% a year, good demographics, a host of emerging companies and a burgeoning middle class. And I have to admit I, personally, am kicking myself for not buying into this.
In 2006, and again in the depths of the credit crunch in 2009, India's Sensex 30 index stood at 9,000. At its peak in November 2010 it touched 21,000. Phew! That's an incredible 130% return in 18 months!
But if you've been keeping track of valuations, at the crest of this mighty bull run Indian stocks stood at a heady price/earnings ratio of 25. For comparison, the number for the Chinese stock market at the time was only 15.
Yep, it's true the Sensex has fallen back since then, but only to around 18,000 and a P/E ratio of 20. For me this is still way over-valued. I would steer clear of Indian shares until the P/E ratio is back down to the mid-teens.
The alternatives
Russia is currently at half the P/E ratio of India, and Brazil is only a little more expensive. If you want BRIC exposure, go for these markets instead.
2. Gold
You can't seem to pick up an investment magazine or the business section of a newspaper these days and not come across a tip for a hot gold mining stock, or an advert offering to buy your gold. Everyone wants to get a slice of the action. The euphoria over gold is a tell-tale sign of a bubble.
From my contrarian viewpoint, the time to buy gold was ten years ago, when it was priced at $250/oz, when everyone, including the UK government, was selling gold. Today the precious metal stands at over $1,400/oz, and everyone wants to buy gold. Would I buy at this price? Not in a million years.
The alternative
As the world economy continues to recover the demand for oil, a rather more useful commodity, will grow. As a holder of BP (LSE: BP) I am still a firm believer in this story.
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3. Mid cap stocks
Not much to say here except that in the last few years mid cap shares have outperformed both large caps and small caps. But this has resulted in relatively high valuations for mid caps.
The FTSE 250 Index is at a P/E ratio of 17.5, as opposed to 13.7 for the FTSE 100 Index. This is the reverse of the situation a decade ago.
The alternative
It is time to rotate into large caps which currently are at very attractive valuations, with juicy dividends on offer too.
4. Tech shares
Aren't those iPads and 3DS's just so cool?
Technology certainly is a wonderful thing. But, twelve years after the great tech bubble, which was followed by the horrific 'tech wreck', technology shares are heading towards bubble territory again.
And, in the UK, the company leading the tech charge is ARM Holdings (LSE: ARM), the microchip designer. It's a great British company which is growing fast, but as my fellow Fool Owain Bennallack has said, there's just one snag: the share price has already gone up six-fold in two years, and ARM is currently on a trailing P/E ratio of 55.
To me, that is unsustainable -- this is an impressive company, but it is over-valued.
The alternative
If you are interested in investing in companies that are driving growth through scientific research, then a better value play is pharma and biotech. This is an unloved sector which undoubtedly has its difficulties but is, in my view, oversold.
5. Property
However, arguably the biggest bubble in the recent past has not been in stocks or commodities but is instead in a completely different asset class: property. The bubble has been slowly deflating since 2007.
There was a rally in 2009-10, but don't be suckered into buying now. In my opinion, property is still over-valued, and the market will remain moribund for several years to come.
The alternative
Yep, you guessed it, shares! The good news is that, although there are areas of overvaluation, if you seek it out there is plenty of value to be found in many stocks and in many markets.
> Prabhat owns shares in BP.
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