Stocks: A Discworld Dilemma?

by

The Disc of Finance, that ever-turning wheel of gold and ink, has once again reached new heights. Not because of any great wisdom, mind you, but because the Ankh-Meiburg stockbrokers have convinced themselves that squirrels* are the next big thing. The S&P 500, that ancient index of mortal and immortal enterprises, now trades near its highest price since the last time a wizard tried to sell a “perpetual dividend engine.” The Nasdaq Composite, home to the Magnificent Seven-a cabal of technomancers who speak in code and wear too many socks-has risen 44% since April. The Dow Jones, that lumbering old sage, has climbed enough to surpass its December peak, up 23% from its April low. 1

But let us not be deceived by these numbers. The Magnificent Seven, in their infinite hubris, have become the Disc’s version of the Guild of Alchemists: powerful, overpaid, and slightly obsessed with their own reflections. Nvidia, the first to breach the $4 trillion mark, has doubled in price since April. The rest of the Seven have followed suit, their earnings multiples as inflated as a wizard’s ego after a particularly successful spell. 2

Enter Howard Marks, the grumpy but wise sage of Oaktree Capital, who has declared the market “worrisome.” Not because of tariffs or inflation-though those are certainly on the Disc’s horizon-but because of something far more insidious: the average P/E ratio of the S&P 493. These are the forgotten souls of the index, the ones who don’t code in Python or own a pet AI. Their valuations, he argues, are as justified as a troll’s claim to a bridge. 3

Historically High Valuations for the S&P 500

The S&P 500 trades at a forward P/E of 22.5, a number that makes the Disc’s wizards blush. The Magnificent Seven, those digital sorcerers, have an average forward P/E of 29.8. One might argue that these multiples are deserved, given their 26% earnings growth. But let us not forget: the S&P 493, the ones who don’t own a single GPU, have managed only 1% growth. 4

Marks, ever the realist, admits the Seven deserve their premium. “Their products are exceptional,” he wrote, “their market shares significant, their profit margins as high as a troll’s standards for hygiene.” But when you factor in the 493, the picture becomes less rosy. “The average P/E of 22 on these companies,” he noted, “is a number that makes me want to consult a seer-or at least a better accountant.” 5

Loading widget...

And yet, the Disc’s investors press on, as if guided by the ghost of Peter Lynch, who once said, “Far more money has been lost in preparing for corrections than in the corrections themselves.” A truism, but one that ignores the Disc’s tendency to invent new ways to lose money. For example: investing in squirrel-themed ETFs. 6

How to Invest in a “Worrisome” Stock Market?

Marks suggests a simple strategy: “Stop buying new stocks. Let cash accumulate like a wizard’s hoard of copper coins.” Cash, he argues, is the only asset that doesn’t require a ritual to be valued. Meanwhile, the Disc’s more aggressive investors might do well to seek out companies with “wide competitive moats”-a term that, in Discworld, usually refers to the ability to fend off goblins with a well-timed spell. 7

Some of the Magnificent Seven, despite their inflated multiples, qualify as moat-worthy. But many of the S&P 493 and smaller companies are also hiding in plain sight. The trick, as always, is to find the ones that can grow earnings without needing a subscription to a cloud-based spreadsheet. 8

The current environment, while “worrisome,” is also a gift for the Disc’s most skilled stock pickers. If the market takes a downturn, quality stocks will hold up better than a poorly written spell. If it doesn’t, they’ll ride the tide like a dragon on a thermal. The only thing more certain than this is that the Disc’s wizards will eventually try to sell us a “perpetual dividend engine.” Again. 9

Read More

2025-08-27 03:27