There’s been a lot of concern about the market’s valuation after last year’s runup and this year’s volatility, but top fund manager Bill Nygren isn’t buying it.
“I think the market, selling at a mid-teens multiple of expected earnings, is in line with historical averages,” Nygren tells Fortune. “Five years ago, when high-quality companies were available at single-digit P/Es, that was highly, highly unusual. I don’t think the fact that the market is more expensive than it was five years ago is troubling. I just think today’s average multiples mean we should set our sights on more average returns.”
Nygren says he’s surprised at how reasonably priced high-quality companies with “strong tailwinds” — like Google, Visa, or MasterCard — are right now. He also says that the ups and downs we’ve seen this year are normal. “Through long periods of history, we’ve seen 10% corrections about every year and a half on average. And something like half the 10% corrections turn into 20% corrections,” he says. “But it’s nothing to panic about. That ought to be viewed as normal. If we have that sort of correction, investors should be opportunistic and look to rebalance toward their target asset allocation. They shouldn’t be putting money in the market that they don’t expect to leave there for five years or more. And if you can’t handle a 10% loss on that capital, you really shouldn’t have it in stocks.”