Current Market Levels

I know this was covered a little bit in the podcast, but I wanted to ask about the current levels the S&P and the Dow are reflecting. With such high levels and such overvalue due to the partially the low interest rate environment and people's hopes that Trump-onomics results in a great economy (which is doubtful at best), do you believe that once rates start to increase and the reality sets in the people rushing into stocks will rush and pull their money out thus resulting in the market coming down to more realistic levels? Also if this is the case when would be a good time to enter in VXX ETF trade (Volatility ETF) or possibly a long gold trade?


  • I see other alternatives to taking a short position on the market. Shorting the market successfully usually requires timing and I know that even Buffet cannot do that. Per my reasoning shorts are never an option for an investor such as myself.

    With the market hitting its all time high I am hoarding cash, staying patient and dollar cost averaging purchases into the market cautiously and at a very conservative rate. Buffett is doing the same thing or rather I am doing the same thing as Buffett. :smile:
  • I took a short position in both the form of VIX and inverse ETFs early in the year and have since dropped them. A few things to note:

    If you look at the VIX etf based charts and compare them to the actual Chicago VIX they're not correlated whatsoever. This is because the VIX isn't a tangible asset but rather a derivative. Thus you're taking a derivative of derivative which drastically increases your VaR.

    I'd also not recommend an inverse ETF because of the above mentioned timing flaws. Jeremy Siegel has a more specific timing model for the Shiller CAPE which TIP tends to use. Siegel and Shiller are best friends, so the due diligence is (imo) more credible than your average critics.

    See more here:

    I haven't found a good site that captures up to date Siegel data unlike Shiller does for his CAPE so I created my own xcel and found Siegel believes it's fairly valued now. During the last episode Preston mentioned the current Shiller rate is approx 27 and he said it could drop or go to 35.

    Whenever I hear people say the market is too high I'd like to hear their reasoning, so please let me know where/why you see it dropping!

  • edited December 2016
    I'd avoid the VXX or similar. Given the negative contango, it is designed to lose value over time. Granted, you may pull off a nice profit if the market becomes volatile but when I looked at this/similar index I interpreted that this index will fall disproportionately more when there is low voliatility than will rise with high volatiliy. The correlation is not that great to the VIX (0.8 I think). Finally, this is recalc'd on a daily basis so hard to predict the actual return due to daily compounding.

    I have no idea when or where the market will drop. For all I know, the market may keep going up for the next year(s) that I start to think we are living in a land of unicorns. I do think we will/are having issues with consumers (i.e home sales, car sales, restaurants, ets) due to increased interest rates and the dollar crisis. Coupled with the historical trends after 2 term presidents and length of time since the last 20% drawdown (3x larger than historical ave), I would not be surprised if a drop of 20% or more hits home within 6 months, maybe 12.

    Although valuation may be an individual preference, I do think the market is overvalued. I base this not just on CAPE but also on Market Cap/GDP, the advisor perspectives group also had a piece in the last week where they gave 4 metrics (Q ratio, CAPE and 2 others modified CAPE ratios) that put the valuation at or close to 2 standard deviations above the mean. There are other valuation markers I have seen recently too and can be found by looking around. Most importantly, I have real issues with putting my money into something that currently gives at most an estimated 3% return (probably closer to 0%) over the long haul especially when it has had two 50%+ drawdowns in the last 15 years. I personally think that if the stars (mal)align and the market really tanks, we will talk about such a crash for decades to come, but that is just me and I'm trying to plan accordingly.
  • @str8crash the data that I have to support is with a Schiller Cape Ratio of 27.91, which is historically high shows me that market earning do not support such high valuations for stocks. Furthermore looking at the greed and fear index at 88 now also points to the overvaluation of this market. Also looking at the margin debt which is I feel like people are borrowing large to get some type of yield in the market due to the lack of return that bonds currently provide. I am still relatively new so my reasoning could be incorrect, however do you not believe that once tightening begins money will begin to flow out of the equity markets in large amounts?
  • It would be interesting to see how those measures plot along with interest rates and or adjusted for inflation to get a better perspective.
  • @rpuri I don't disagree with you and I"m very cautious of the market right now. I'd be curious to find a correlation between the Greed & Fear and Consumer Sentiment indexes as well.

    Shiller CAPE is a great metric (he actually runs a CAPE ETF which I own) however Shiller himself has said the metric shouldn't be used as a timing model and the more popular it becomes the less relevant it will be. If you're wary of the market I'd wait until end of year dump to buy an inverse ETF. But it also depends what kind of investor you're looking to be. What you're suggesting is macro strategy and someone like Soros would be someone to look into more. Buffett won't be of much help here.

    Soros's books are dense, but he has a lecture series he did in Europe which are phenomenal and basically outline the important topics.

  • @str8crash I will definitely look into Soros, maybe I will get a better idea to expand my horizons on this topic. Thanks for the insight!
  • I also like looking at more "alternative" indicators as markets are simply the sum total of the (mostly) humans who participate in them.

    To that end, there is a 5:1 ratio recently of senior corporate insiders in the U.S. selling : buying. Put another way, for every 1 purchase by an insider on the U.S. share market last week, there were 5 sales. A more normal ration is 2.5 : 1.

    Managers may not make totally rational decisions with corporate asset allocation, but in terms of their own hard earned cash, you can rely on the fallacies of human behavior to ensure that people will act in their own best interest. If you start looking for human indicators like this it is a good supplement to the more quantifiable ratios like the Shiller CAPE
  • I'd like to preface this by saying I'm far from an expert, but I do actively invest successfully.

    I never understand these conversations. While there's a lot of great information in this thread, trying to pinpoint the irrationality of the Market is a fools errand.

    There's one golden rule with lots of "but(s)." That rule is, the market is absolutely irrational.

    It'll keep going up when people are saying it should go down and will keep crashing when all the signals point to should be going up.

    Once I came to understand this, my investments took off, 10%+ a month, no matter the direction of the market. We trying to speculate our small money versus the big money (people who actually move needles and price/action) is very tough. For all the big money that wants to sell, there needs to be big money that wants to buy, one of them is wrong (to an extent).

    Because of this irrationality, all speculators are incorrect until correct, and correct until incorrect. When Soros can make a prediction and hold a large position which includes the premiums of being wrong, he'll eventually be right, then people will hail them as prognosticators, he'll make his billions back against the billions he lost being wrong. Investments are about hedging losses vs wins. I can be 50:50 and still have a profit.

    Markets always keep going up until a major event. They go up on an escalator and down on an elevator. AIG was the pin prick of the housing bubble, that would have kept going for months if AIG didn't go bankrupt.

    So what does this mean? Unless you have the time to study the macroeconomics of the world and are an expert, don't worry about it. Worry about the micro. There are plenty of undervalued good to great companies out there, because irrationality dropped their prices to far. Get into those companies with options to greatly increase a margin of safety, and let Mr. Market do the rest.

    Master a niche of investing, then look at another path. Master value investing and the emotions that comes with investing contrarian. I say contrarian because it is scary to invest money against the norm, even if an expert.

    I've actually lowered my interest in the speed of listening to the podcast to some extent because it started very awesome with the micro, and then has been on a macro run for a good amount of time, and while I grasp the information it does nothing but induce a level of fear and confusion of when it's a good time to invest. The market is bull until it's not, make money with it. Then use simple tools like a MACD, Stoch, and SMA to determine when big money is pulling out to get out before they can finish the move.

    I'd love to hear the podcast talk about what to do when they found a good company, how to get in and out. Options to reduce basis on entry (which is huge, I can't even touch on how big it is). Using options for continuous revenue stream monthly. While I know how to do all this, hearing someone else's take is a huge benefit in learning new things.
  • Hi everyone,

    I certainly am not an experienced investor I but wanted add my two cents. I have really enjoyed this podcast not just for learning about investing but also learning life lessons (for example. I really enjoyed the book review of Oprah's book). I've listened to every episode for the past 1.5 years now.

    Like the last post, I also feel the general mantra of everyone from podcast to website is that the market is overvalued and generally it seems that everyone is focusing on holding cash. I personally have followed suit and pulled out largely and am holding mostly cash. My concerns with this approach are the following

    1) Is there an element of confirmation Bias going on?
    - I work in the emergency room and this is a big problem in medicine. We are always trying to avoid confirmation bias as much as possible. I feel all the guests we have had agree with this same hypothesis and no one has challenged the general mantra. I would really love to hear from guests on the podcast who challenge the belief that the market is overvalued etc.

    2) Is trying to time the market the right approach?
    - many other investors believe the market cannot be timed so it not worth trying to time the market. Many believe to just keep investing in good companies that can weather a downtown.
    - the time frame of returns lost while just 'holding cash' also have to be weighed into the equation.
    - like the

    3) Macro is really hard to understand and learn. The vast majority of people including myself certainly cannot grasp the complex nature of macro and trying to use this to predict the market seems futile. I agree with the last post that I think talking more about micro would be more useful to the average investor.

    Interested to hear others thoughts

  • Just a short comment on some statements in the last two posts, namely
    "The market is irrational", and "Is there an element of confirmation bias? (with regard to the stock market being overvalued)?"

    I think we must be careful here. If fully agree that the market is irrational in the short term. Absolutely.
    But in the long term, it is quite rational. All that matters in the end are valuations. And these valuations point to a drastically overvalued stock market (e.g. the already mentioned Shiller P/E, but also many others).
    In ALL instances in history, markets have mean-reverted eventually. Overvalued stock markets go down. Undervalued stock markets go up. It might take a while, but in the end this has happened always.

    So: If you have counterexamples, where an overvalued stock market has NOT mean-reverted, please name them.
    If you disagree with the sentiment that the current market is vastly overvalued, please provide your reasoning.

    I am always willing to adapt my views in case of new evidence.
    But before I have seen convincing evidence, I can not agree that we have a confirmation bias.

    All historically proven indicatosr point to an overvalued market. This is not my gut feeling or any bias. These are hard numbers.


  • Good point. It really comes down to perspective and how we all choose to look at the markets including valuations We can all agree the market is overvalued based of the Shiller P/E as pointed out. And the market keeps going up. By that conclusion we can state, this is irrational.

    We all know the market is going to come down, we just don't know when (usually proceeds an event). Then we all know it will go up, we just don't know when. We will all have our own signals and signs for each one but they're never accurate. This is irrational.

    As far as Overvalued companies go, most companies on the market, based on my Valuations are currently overvalued. But I also don't prescribe to the EMT of the market, that all companies are priced accurately at all times. My formula is simple one which projects TTM EPS into the future at the companies growth rate divided by anticipated wanted rate of growth (little more to it but close). This gives me my cap when a stock has become overvalued based on the returns I want to get into the future, and then allows me to find my Margin of Safety. This is me though, and based on my calculations major companies right now are Overvalued.

    Some current companies that are overvalued, but I will throw money at when they reach my margin of safety because they have phenomenal ROIC & FCF growth: Google, Whole Foods & Chipotle Mexican Grill, and many others.

    When Apple dropped down into the $80's it was a steal in May, well within the margin of safety, great Company with ridiculous growth rate and returns, buying it with put options allowed me to get in at a much cheaper price and it's still paying off right now at about $115. It's nearing Overvalued and when it reaches that price level, I'll sell. Why did it drop? They had a bad quarter, and big money followed Icahn's lead, irrational panic and fear caused people to bail on a tremendous company.

    The drop from Apple caused another phenomenal company to drop, Taiwan Semiconductor Mfg (TSM). If you own anything electronic, you have their chips in it, talk about a Moat.

    In short, Irrationality of the market is because it's water and it will fill all cracks available and as soon as one is plugged, it will divert. Ask any person who has built trading algorithms. They only last for so long before the crack is plugged, then the algorithm needs to be adjusted because it now loses money.

    Not sure if this cleared anything up, sorry I got long winded. But the only rational conclusion is the market is irrational. Once I understood this my fear melted (some), and I was able to start investing, not speculating which is the theme I keep reading and hearing.
  • Great posts. A few comments/questions.

    I think TIP has tried to provide a balance of opinions. In fact, the last two podcasts to me provided a great difference in opinion. Grant Williams was much more bearish while Bill Miller was more bullish. But that's just me. I also think macro events (if they proceed along the current trajectory) will have major impacts on multiple investment classes next year so it's better to know about them upfront.

    I agree with Christoph. While I am always trying to avoid any behavioral biases (including confirmational), in the end, I have to accept that my analysis/hypothesis does introduce unrecognized bias and factor this in to my margin of safety.

    I have heard a lot of derision about "timing the market" approach. But, aren't we all timing the market or individual security (depending on the beta of the individual stock/index/ETF) to some extent in order to realize a profit? Unless you "buy and hold" forever, time is always a variable when someone buys or sells a security (or index for that matter). Now, there are many ways to approach "timing the market/security" using momentum/TA (which may predict short term moves) and valuation (that provide longer term expectations) etc. But at the end of the day, shouldn't we factor in a time component into our investment strategies and accept that we are timing the market? Graham did this for his cigar butt strategy by selling stocks that hadn't mean reverted within 3 years after the investment.

    Also "bringerofrain", I like your strategy using options. It sounds like your valuation approach of projected EPS that is similar to one described in Buffetology. I have thought about turbocharging valuation approaches using options. However, my biggest fear is that mean reversion of undervalued stocks may take longer than a typical option expiration date (i.e. ~3 months). Are you looking for companies with specific catalysts that would allow mean reversion within 3 months. Are you using longer dated options? Or is this strategy relying on variability in stock prices (i.e. buying calls on stocks with 52 week lows). How do you identify these stocks with options where price volalility hasn't already been factored in (the market's isn't efficient but there are many more people smarter than me who maybe doing this too and affect options price)? How much stock diversification do you need for this strategy to work? Not trying to be difficult but just seeing if the option approach would work with a value strategy that I would favor for the little individual stock picking that I do.
  • Hey Mspiotto

    So options are very easy on the surface level. I hear a lot of explanations with the description of options but I think I boiled it down to the very basics, to get started. Options are insurance policies, plain and simple (they're actually contracts, but if we think of it as a policy, learning options is much easier). I'll give you how I used it in a real world example later.

    With options we can either be the insurer (seller), or the insured (policy buyer). People buy insurance in case a stock price hits a certain level they can guarantee sell the stock at that price (think of it as hedging). We can sell these people policies because maybe we just want the premium or we also want the Stock at that price on top of the premium (see where I'm going). Expiration is part of the greeks as they call it and we start getting into deeper option handling with it. But if you want to own a stock then options are a tremendous way to get in.

    Couple things to know, Options do expire, they call it the Expirey date, but if you're the seller, you keep the premium paid to you by the insured when the days hit -1. If you're the buyer they expire worthless and you lose your money. Also 1 option means 100 underlying assets. So if you want to sell a option you'll have to have the cash on hand to buy 100 of the stock you insured at that price. These are not hard rules to an extent, options strategy is an awesome thing to learn but for just owning the stocks you want this is as simple as it gets. Also if you want to buy a stock with the intention of buffetolegy because you want the asset to rise, you're looking at PUT options.

    Now for the real world example. When apple crashed below $95, I wanted it at $90. I sold 1 PUT option at the strike of $90 (which means some one insured their Apple stock). The option had a price of $7 (I think may be another but close). I was paid a premium of $700 ($7 x 100). My brokerage also held $8300 of my cash. Because if the stock hit $90 I was obligated to pay out the insurance policy and buy the stock. In reality I was able to buy Apple at a premium for $83 a share instead of $90 because of the premium, thus increasing my margin of safety that much more.

    What if the stock never hit $90? I could just keep collecting premiums and chase the stock as it rose again, collecting premiums the whole way. BUT, and I say it with caps. I have to be ready to own the stock and want to own the stock.

    I could go into great details on options and how powerful they are. I believe I have even discovered Buffet's guaranteed 50% returns a year, and it's from options.
  • Bringerofrain, thanks for your explanation of options. I heard Toby Carlisle mention them in his strategy on the last podcast as well. This got me interested and I would like to learn how to implement them as well. do you know of any good resources to learn more about using options?
  • Hey TrevorD

    Options are a great thing to learn. They can go extremely deep as far as strategy goes. I could point you in the proper direction based on where you'd like your final goal to be.

    I was fortunate enough to attend a few investing seminars that taught the very basics. It was enough to create my thirst for content and the rest has been a self teaching process through Amazon books, Udemy courses and Hard-Knocks with paper trading and real world trading.

    Because this thread was based on Current Market Levels, I'd like to stay on that topic. I'd be glad to help if there was an option thread created, and people had a general interest.
Sign In or Register to comment.