If you’ve been following the share market lately, you’ll know that many of the world’s biggest and most recognisable companies are trading at record-high prices. From the major banks and miners here in Australia to global giants like the big tech names, the share prices look strong — but that doesn’t automatically mean they’re good value.
In fact, we’re now in one of the most expensive market environments in history for large, blue-chip companies. And for everyday Australian investors, this creates both a challenge and an opportunity.
Good Companies, Bad Prices
A simple analogy explains the situation perfectly.
Imagine you walk into Woolies and see a beautiful, fresh, bright-green head of broccoli. It’s crisp, firm and perfect. But then you see the price tag: $25 a kilo.
Is the broccoli good? Absolutely.
Is it good value? Not even close.
That’s what’s happening with many large, high-quality companies right now. The businesses themselves are strong — stable earnings, global brands, dominant market positions. But the price you’re being asked to pay for those qualities has gone far beyond what makes sense for long-term investors.
Valuation Dispersion at Record Highs
This leads us to something happening behind the scenes that many Australians might not be aware of: valuation dispersion.
This is just a fancy term for the gap between the most expensive shares in the market and the cheapest ones. Right now, this gap is close to record highs. In other words, big blue-chip companies are extremely expensive, while many smaller or less well-known companies are still trading at reasonable — even attractive — prices.
Historically, when valuation dispersion gets this extreme, it often signals a period where active investing can outperform passive index investing. Why? Because active fund managers aren’t forced to buy the most expensive stocks in the index — they can search for pockets of value elsewhere.
Why Expensive Markets Increase Risk
When everyone piles into the same popular stocks, the price gets pushed higher and higher. Eventually, even a good company can become a bad investment simply because the price leaves no room for disappointment.
If a company is already priced for perfection, then:
- Any earnings miss,
- Any economic slowdown, or
- Any change in sentiment
can cause the share price to fall sharply.
This is what we call valuation risk — the risk of paying too much upfront.
Where Active Managers Are Finding Opportunity
While the big end of town looks stretched, the rest of the market is far more balanced. Many companies:
- Have solid earnings,
- Are growing steadily,
- Have strong balance sheets, and
- Are trading nowhere near the lofty valuations of the giants.
This combination of reasonable prices and solid fundamentals creates far better long-term opportunities — and this is exactly where active managers are focusing their attention.
They’re deliberately reducing exposure to the “broccoli at $25/kg” end of the market and instead buying high-quality businesses that haven’t been bid up to unsustainable prices.
What This Means for Everyday Investors
For mum-and-dad investors, the message is simple:
- Big, famous companies are not automatically good investments.
- Great businesses can still be bad buys if the price is too high.
- There is more opportunity than ever for active managers to add value by being selective.
- Valuation matters — especially at this point in the cycle.
In short, the market is full of good companies… but not all of them are good buys. When valuations get stretched at the top, it pays to look beyond the obvious and let skilled active managers hunt for the areas where quality and price still line up.