Investing in a Vacuum

2017 has been easy…really really easy.

Saul is up 65% at Sept month-end and most of us have truly amazing returns in a short period time with several stock doubles this year alone, a 4 multiple in SHOP and numerous stocks over 50%…sure has been easy…almost the “dart board” analogy of years’ gone by.

But we should not invest in a vacuum and be unaware of our surroundings…lest one’s hubris upends humility…resulting in investment expectations becoming unrealistic and perhaps weighted towards higher and higher risk.

This has been a truly amazing year and assuming Predident Trump gets his middle class and corporate tax reform through Congress, we will hopefully see the GDP return to historical norms that could help fuel this market further.

Since Saul is the leader here, it was interesting to look back to his biggest year returns and see what transpired the year after:

1999 - 115%…we know what happened the next year ;(
2003 - 124%…the market lagged the following year with wild tumultuous year of radical fluctuations
2009 - 111%…the market rose 17% the following year.

What can one conclude from this? First of all, Saul has a lot of work to do this year to catch those three amazing year returns :). But second, the year after such amazing returns might be a bit rough (2010 being the exception) from an investment return perspective.

Now for those who have already clocked substantial gains on paper, sitting and holding on those stocks can be easier than making a new decision of where to deploy “new” money given the probablities of follow-on years’ returns above. So for those who continue to invest new money, there may be additional considerations to ponder when dealing with stocks with P/S of 20 and beyond.

Quite honestly, we havent had to be that great at stock picking this year to have amazing returns. But the next 12 months will likely be different if history is to be repeated. Even barring some Black Swan event like the Trump tax reform not getting passed (I personally believe the market already assumes it goes through), we have near every indicator saying this market is overvalued.

Let’s look at just a few recognizing that they are NOT “timing” indicators, but rather an indication of what future returns might be from a probability perspective:

  1. The Schiller PE is at the second highest in its history (second to 2000):

  1. Inflation adjusted PE is at the upper end (but not close to the nosebleed 2000 and 2008/9 levels):

  1. The BMW chart of S&P and NAS are at near 1 SD above mean:^IXIC.html

  1. The Tobin Q is 43% higher than its norm:

  1. The Buffet Indicator is at high levels closing in on 2000:…

  1. As a measure of market complacency, the VIX is at all time lows:

While these indicators are NOT a timing methodology, they do point to a richly valued complacent market and the “Saul Indicator” above could be also construed to be consistent with that thesis.

New money entering the market at this time, likely will need much more skill than dart boards. 2017 has been easy…maybe too easy…I really doubt 2018 will be as lax.

Humility is a real asset in the stock market…hubris over the long haul can be a real detriment…we cannot consistently and successful invest in a vacuum and be unaware of our surroundings.

These above indicators are our “surroundings” IMO.

So sharpen your pencils and skills…adjust expectations for risk…be discerning where to deploy your hard earned cash…be critical of higher risk margin/options trading…there is still money to be made…but it won’t be this easy IMO…what a great year!


Your chart for the S&P is the 16 year for the S&P 600, i.e., small cap. 16 years is a bit tricky as a baseline considering some of what has happened just before and during that period. I’m not sure why you would focus on small cap. If we look instead at the S&P 500 and a 40 year interval, we are actually below the average CAGR at present.

Likewise, if we look at the NASDAQ over 40 years, we are but the slightest smidge above the average CAGR at present.


I have no idea where that first link came from. Sorry.

2017 has been easy…really really easy.
agree. Which should be a big warning. If getting rich ( and even harder staying rich) was easy everybody would be doing it.and everybody would be rich.

duma is entirely right when he stresses that valuation does not tell you when to sell. A 2% total return over the next decade may encompass lots of ups and downs, offering rewards and risks. It’s just that B&H from this point may not even keep you up with inflation. And there are those taxes when you sell.

Famous last words - “this time it is different” could actually apply .
There are storms of innovation sweeping the world at a rate that has never been seen before. Governments have suppressed the rate of return of the main competition ,bonds, and flooded the markets with easy to get credit.
The result is a boom in the stock market, and in many areas a re-ignition of the housing boom. The difference this time being that you may have to have at least a hope of paying the loan back to get a mortgage.

Re housing boom, it seems more localized this time, and may be in part due to supply shortage related to hangover from the 2009 bust. Which is a better basis than a purely speculative Liar Loan bubble.

In my town we are seeing lots of larger lots being split into smaller lots, homes more like condos, with tiny yards being built . A shift away from the old suburb type home.
Have others noticed this where they live?


Hi Duma,
That is a very apt warning. It just shows how difficult it is to guess how you will do from year to year. I don’t think any of us would have guessed we would do so well in a year with a paralyzed government, threats of nuclear war, and all the rest, but we have so far.

As far as 100% years, I don’t see this one as a 100% year for me. I’ve been expecting a pullback all year and I’m sure a scary one will come. Nothing keeps going up all the time. (But I certainly didn’t expect to be up as much as I am either. I was pretty resigned to being happy if I could get a 20% year when the year started.)

To flesh out your examples,

After the 115% in 1999, I did 19% in 2000. (I really don’t think you ever get two big ones in a row).

After the massive 124% in 2003, I was up 17% in 2004.

And after the 111% in 2009 (which was really just a partial rebound from the shellacking I took in 2008), I was just up 0.3% in 2010.

Years like those big ones, and this one, are far apart.

Now, as far as all that complacency you are seeing, all I see is warnings everywhere that the market is overvalued, a collapse has to be coming, the Vix is at all time lows, PE’s are too high, there hasn’t been a correction in ages, the bull market is too old. I just don’t see the complacency. I see the market climbing a wall of worry. I don’t get even a whiff of general euphoria. Although people on our board are pleased with their results, that doesn’t translate to euphoria to me.

On the other hand, I do know a correction is coming. They always come. Bear markets too. There are lots of potential triggers. What? Just off the top of my hat, an interest rate hawk gets appointed the new head of the Fed, starts raising interest rates rapidly and kills the economy. Wow! That would do it. Or hydrogen bombs going off somewhere? But there’s nothing we can do about those one way or another. We just have to invest in good stocks and keep alert, I guess.

But we need to remember to not expect years as easy as this every year! Just appreciate this year!!! (so far, anyway) :wink:



In my town we are seeing lots of larger lots being split into smaller lots, homes more like condos, with tiny yards being built . A shift away from the old suburb type home.
Have others noticed this where they live?

I live in Des Moines, Iowa. We are a small metro city of about 500,000. Our suburban areas seem to still be thriving on 1/3 acre lots and 2500 sq ft homes. However our city core is absolutely explosive with new downtown condo growth.


Great post. But…

The DJIA is up “only” 16.88% this year, INCLUDING dividend reinvestments. And if you look at , you’ll see that the DJIA was up more than 32% for 2014, and yet in 2015 it was up another 15%. So, if you thought 2014 was an outlier (and so far that’s a better year than 2017 is showing), you may have sold out and then missed another 15% the following year.

It seems clear that Mr. Market isn’t seeing the kinds of returns this year that many of us are seeing.

But, that doesn’t mean we’re no vulnerable. It would be that growth companies are, well, growing really well, but that may not continue. We could see a flat or down year in 2018 while Mr. Market continues a steadier pace.

But, Saul’s right that trying to time the market, especially in macro-economic terms, is virtually impossible. Premature selling to avoid a 25% “correction” (I hate that word) may make you miss out on an upcoming 15% gain, which would more than cover that.


The problem is that all the things that are cited as legitimate probable causes of a market collapse (a full recovery and resumed advance, it is assumed, is a given afterwards) do not even appear on my radar as risks at all. On CNBC, they whoop about ‘a unique time of synchronized global growth!’ which is appreciated only by those ‘who really get it!’.

Such fun. But I am not so sure they really do get it. They seem oblivious to what the synchronized global growth is based on.

Debt. Unbelievable, unprecedented debt. Global debt in relation to GDP that makes you gasp.

It’s all good fun a momentum market and the world emulating the last extravagant party of a profligate about to go spectacularly bust and then to prison - but let’s keep focused on the real risk: the bill when the band goes home. Our teenage wasters (aka ‘central bankers’) have now asked for the bill and are actually going to try to pay it. As Gideon Gono (one of that elite corps.) discovered, that is when you discover an awkward fact. You can’t. None of them can! Too many promises to the future, popularity being the main motivator of career pols.

Oh well.


The market is a funny animal. We don’t know when the top will be but if we knew then it would happen sooner. Why? Think of the run on a bank. If we knew that the crash will come on the 15th then we would sell on the 14th. Some more cautions people would sell maybe a week earlier, on the 8th. This is why they call the market a discounting machine, it brings known or presumed events forward.

I’m resigned to the fact that a crash or correction will come, I’ve been through a couple of them. I don’t see anticipatory selling as the solution. What really hurts are the stocks that don’t bounce back which is what killed me back in 2000. In 2008 I had a much sturdier portfolio and the damage was much less. This time I have what I think is a still sturdier portfolio and zero debt or margin or the possibility of a margin call (beware cash secured puts).

I don’t think I’ll see the end of the world, more likely is that the world will see the end of me. LOL What this means is that investing at the bottom of a crash is a good thing but you don’t want to raise cash now for it because the bull can last a lot longer. That’s what living on the right edge of the chart feels like. :wink:

Denny Schlesinger


I see is warnings everywhere that the market is overvalued, a collapse has to be coming,
of course a collapse is coming , but when? Tomorrow, 5 years from now?
As has been pointed out numerous times valuation has nothing to do with the nearer or mid term term stock market performance , so anybody using it as such is probably market naive.
General euphoria? To get that I suppose you would have to hang out with people not ordinarily interested in the stock market. Probably MF boards are not representative unless larger numbers of newcomers show up.

Assuming average performance of your holdings ,you may be just as well off at the bottom of a bear whether you hold good stocks or have substantial cash. The cash is usually easier to handle psychologically. And may make it easier to evaluate possible purchases since most of us suffer from some ownership bias.

Bull market too old? In fact there is no hard evidence that age matters. What matters is the aging and dissipation of the factors that brought the bull market on. So far I see no real evidence of that in today’s market. Interest rate tightening only matters if it gets extreme and does bad things to the yield curve.

laissez le bon temps rouler

but even in good times there are corrections.


Good post, mauser!

I’m going to save it for future reference.

He is no fool who gives what he cannot keep to gain what he cannot lose.


Such offers are back! However, interest payments do not come due until 2019. If one follows the timing when creditors get so desperate to loan money that they first extend and reduce the terms, and then extend and reduce the credit worthiness of those they lend to, we are still 2-3 years away from such practices starting to lead to real problems again.

I find this one way to follow the trends. Easy money, easy credit, and stocks becoming like sports teams that you can buy logos for on a hat or t-shirt or polo. We are not there yet, but the above illustrates the destination will arrive, but it is still a ways out there.



Let’s look at just a few recognizing that they are NOT “timing” indicators

But the timing part is all that matters. I don’t think anybody here will argue with you that a correction will happen. Eventually. The question is will the market just drop 15% from the point it is at now? Or will it first rise 20% and then drop 15% (say, after a year from now)? What if the market drop is 3 years out (remember, the Shiller ratio is now comparable to what it was in 1997)? You would be sitting on cash for no good reason for three years!

I believe you are better off staying invested - you chances are better that way historically.


Hey there !

My point of view =

When most are concerned that “the top is in” or close to it or has been, then we have quite a ways to go yet. And when the “top is in” crowd can prove it so disjointedly, then I’m sure that we have a ways to go yet. And as long as they can keep proving it as we continue going up, then I continue to hold/add. It’s the black swan that is seen by only a few that will eventually come gliding in … someday when we’re not looking.

Rich (haywool) continuously long since 1982


and does bad things to the yield curve.

laissez le bon temps rouler

but even in good times there are corrections.

10y-2yr keeps getting flatter, fwiw…

10y-2yr keeps getting flatter, fwiw…

Good point and yes it is…nice visual in the animation here:

Start at 2008 with the animation and let it run to present…clearly has flattened.

That said…it is not inverted as yet…but something to watch for sure.

more on P/E….

Since 1873, New Year’s Day’s, basic P/E topped today’s P/E 21 times. Stocks rose 13 of those years and fell eight. Not what P/E bears expect. Subsequent three-year annual returns were positive 16 times. Five-year returns? Positive 14 times.
All of this is consistent with stocks’ tendency to rise roughly two-thirds of history. It’s also fully useless for timing the stock market.

The only right time to fear valuations is when virtually no one does. With so many hanging hard to the notion that “expensive” stocks won’t rise — it makes rising stocks the most likely possibility. Bet on it. The bull market is firmly intact.


The bull market is firmly intact.

Famous last words. Heard those a lot in early 2000.

I used the following metaphor below and I think it is still good to repeat it in this discussion about the market.

The market is like a flock of birds that rest on the ground. The birds rest and find food where they lay. It s a big big flock and they cover a large terrain. Currently most find this a nice place to find food. Some are in better spots. Some are in worst. Some may have gotten separated from the flock to their benefit or detriment. But they are not that far off really.

Now, one little nervous bird get spooked for whatever reason valid or not, the entire flock takes to the sky.

That’s the market if in the shorter term. Who knows who is going to get spooked or what is going to spook it.
Storms do come and kill many of them but ‘apres la pluie, le beau temps’ (sorry no accent).
For the longer term most in the flock survive and do well perpetuating capitalism (or so we believe). Some still manage to get eaten of course but there should be numerous plump little birds content about how good they did in this dangerous dangerous world.



Since 1873, New Year’s Day’s basic P/E topped today’s P/E 21 times.

Of the subsequent 21 years:

Stocks rose 13 of them, and fell 8.
Subsequent three-year annual returns were positive 16 times and negative 5.
Five-year returns? Positive 14 times, negative 7.

Not what P/E bears expect.

All I can say is “Wow!” It sure doesn’t look as if Tech Analysis for timing the market has a silver bullet (or at least PE sure isn’t it).