Although many investors are delighted with the returns they have been getting on stocks and other financial assets, there could be a brutal correction across financial markets, says billionaire hedge fund manager Seth Klarman, founder of the Baupost Group.
Market gains were overblown in 2013, he said. "Any year in which the S&P 500 jumps 32 percent and the Nasdaq 40 percent, while corporate earnings barely increase, should be a cause for concern, not for further exuberance," Klarman said in a recent letter to clients that was obtained by the Financial Times.
"On almost any metric, the U.S. equity market is historically quite expensive," he noted, pointing specifically to Netflix and Tesla Motors.
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But it's not just stocks, according to Klarman. "A skeptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality and yields," he said.
Although Klarman said he doesn't know when correction will come, he maintained that when it does arrive it could be devastating.
"When the markets reverse, everything investors thought they knew will be turned upside down and inside out. 'Buy the dips' will be replaced with 'what was I thinking?'…Anyone who is poorly positioned and ill-prepared will find there's a long way to fall," Klarman warned.
Klarman founded his Boston-based private investment partnership in 1983. He is also the author of a book on value investing titled Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor.
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