Historical price-earnings ratios for common stocks have averaged 15. At the peak of the late 1990s bubble, P/E ratios reached 42.
Interestingly, the P/E ratio of the S&P 500 right now is 40.30.
Interestingly, the P/E ratio of the S&P 500 right now is 40.30.
This metric is awful as well. I'm out of stocks and will be for quite some time.
https://assets.bwbx.io/images/users/iqjWHBFdfxIU/iDFYG8plPsz...
That graph says it all.
(Genuine interest: I also debated exiting but then remembered the thing risk takers say about careful deliberation followed by fearless execution and I now have net negative equity exposure.)
1. Any time you make a risky investment (and this includes low-cost index funds) you should make it based on a falsifiable trading hypothesis specified in advance. E.g. "if Microsoft gets valued over $25, I should realise that I got either the direction or the timing of this one wrong and close the position, profit or loss."
2. Again, in advance, formulate a more general drawdown policy to gradually decrease the size of your losing positions.
3. Not ever make risky investments with anything that approaches your entire wealth.
My bearish position is not going to throw me into debt even in the worst case. And the EMH, in a sense, guarantees that less commissions, this bet (as would any bet) is on average going to get me my wager back.
So the question that remains is why I think the long-term average return is an unusually bad approximation for the near future. I could argue fundamentals, I could argue technical analysis, but it'd all be bunk.
I can list other reasons, too. Many big investors are short the market. My employment is long the market, so my capital being short it is sort of a hedge.
I can also list reasons it might be a bad idea. They don't weigh as much in my mind, of course.
In the end, I just don't know. I'm fully aware that I might have either direction or timing fully wrong. Most likely I do. But it seems to me like a low risk bet with potentially fairly good payoff.
The money being printed has got to go somewhere and a 1% return in the stock market (with high PE) is still worth more than a negative real rate accounting for inflation.
[0] https://fortune.com/2021/01/25/stock-market-value-metric-rob...