Transcript

Mike:

Is the market overvalued. And if it is what are the secrets to making money over the next several years?

Mike:

I am going to go to a website. I’m sure you’ve heard of this guy named Warren Buffett, right? We’ve all heard of Warren buffet. Well, Warren has, maybe I should call him. Mr. Buffet has a relationship. If you will, that he loves to use to determine if the market is fairly valued, if it’s undervalued or if it’s overvalued. And this is really important because from his perspective, if the market is undervalued or fairly valued, it’s a good time to invest money. Alternatively, if it’s overvalued, he’s very careful about what he does. That’s why, you know, you may have seen in the news, he’s got a lot of money sitting in cash, and you’re about to see why. So let’s go ahead. We’re gonna go to a simple website. You can go to it if you want. It’s called right here, CurrentMarketValuation.com and they have, they track this indicator that Warren Buffet uses.

Mike:

It’s called the Buffet indicator. Just take the entire value of the US stock market, right? Take all the companies and take their market value and add it all up. And then you compare that to what’s called the gross domestic product or GDP of our economy. So how big is the stock market in relation to the economy? Now notice right at the top, what does it say currently? We are strongly overvalued and we’ll show you why. Now this goes back to 1950. So we’re talking now 70 years. I didn’t, I’m going to repeat that 70 years of data. And by the way, is it kind of weird to think that 1950 was 70 years ago? Right? Notice there’s a yellow line. So the fair value is right in here between this light green in this yellow line. That, that period right there would be fairly valued.

Mike:

Now to go down here, if you go past this light green line, we are now undervalued. If we go way down here, we are strongly undervalued. That means the market is priced really, really low it’s way lower than it should be. Now, if you go up here going up, the yellow line says, oh, we’re a little overvalued. This red line. It’s like, look out below. We are wildly overvalued. The markets are probably going to crash in the not too distant future. So let’s take a look at this and let’s, let’s have a little fun with the undervalued part first right now. Remember when was the greatest bull run in the stock market in the eighties and nineties? Notice what happened right down here around 1982, right here, the market is getting really close to being strongly undervalued. Meaning the market’s like way cheaper than it should be.

Mike:

Look at this one, 2008, drop the market way down here. Not all the way to strong, but pretty, pretty undervalued. Heck the last 13 years in the market, again, easy peasy to make money, like just up, up, up, up, up. Right. But we all know what goes up. Must come. Yeah, you’ve got it down. This is a period right here. We all remember 2000, right? 2000 the market was considered to be strongly overvalued, strongly overvalued. Also back right here in 1969, strongly overvalued. And where are we today? We are at a higher number than ever in history. What happened in the stock market for the ten-year period, following this high point in 2000, what happened in the stock market back here, following that high point, right in 1969, what did the markets do for the next 10 years? Because while past performance is no guarantee of future results, it might give you an indication of maybe what’s coming in front of us.

Mike:

So what I did just for fun, because I’m a bit of a nerd is I went back and I figured out, Hey, what did the stock market do for the 10 year period, 2000 to 2009? How to do, and I did the same thing here from 1970 to 1979. And I then asked the question, how could we have invested money during those periods of time where we would have been happy campers instead of maybe not so happy campers from the peak in 2000 that we looked at recently, remember what happened the market for the first three years down, down, down, we had the.com crash of 2000. We had nine 11 of all things and then a recession in 2002, the market lost almost half its value about half its value over a three-year period. But then it went up, up, up, up, up, up, and then what happened 2008.

Mike:

And then we had some recovery, but that 10 year period, look at this. If you started with a million dollars, January 1st, 2000, you just let it ride. You would have had about 882k. You would have lost a hundred grand. You would have been down about 1% a year. Now the secret to investing intelligently in periods like this, like you’re seeing on the screen right here. Believe it or not. It’s the same secret to investing in good times as well. And that secret is this. Don’t get greedy. Don’t get greedy. That’s a secret. Don’t get greedy. Now, what do I mean, what I mean is this what kills you in these periods of time are the bad market years. In this example, 2000, 2001, 2002, 2008, bad years in the market, especially, especially double digit losses. They kill you. They just kill you. And even though you have really good years, like you have yours in here, you’re making 20, 30%.

Mike:

They’re not enough because the bad years killed you. You’ve got to avoid the bad years now. How do you do that? You got to shrink your volatility. You got to take less risk with your investing or be more intelligent. So one of the things I did here just to compare now what I’m about to show you. There’s no investment out there that does this. Exactly. It’s just a mental exercise. Hypothetically, what if you could put money somewhere where you would never lose money or lose a little bit, alternatively, if the markets are doing well, you get a lot of the upside. So each year like, okay, the market’s down in 2008, 37%. What if you just didn’t lose 37? And what if you only lost like nothing or maybe 5%, but if you’re going to invest that way, guess what? In the good years. Yeah.

Mike:

You’re not going to get all the upside either. Are you? So what if you get like none of the losses, half of the upside, and by the way, there are tools that do something really similar to that today. I’m not going to go into details because that’s just beyond the scope of this discussion. What would that look like? Oh, it looks like this right here. If you had, if you were doing something like that, if you’re investing that way from 2000, 2009, even though the stock market lost money, you would have averaged about what four, four and a half percent a year. You, instead of being down a hundred grand, you would’ve been up 450k now, how did he get on that green line? Easy. What did I say earlier? Three words. Don’t get greedy. Hit singles and doubles, not home runs and strikeouts.

Mike:

If you will. Well, did that same approach of don’t get greedy work after 1970 in the seventies from 70 to 79. But let’s take a look. Well, there it is from 1970, 1979. If you were just buying, holding the stock market, you’ve been like, wow, I’m making money. Yay. Life is good. And then, oh, 73 to 74 hit. Remember the OPEC oil crisis and the lines to the gas station. Oh, up we go. And then down again and up we go, it’s just, you’re all over the place. And at the end of the decade, you’re up like 172 grand. That’s about one and a half percent of your compounded. Yay. Yippee. Right? Who cares? But look at this, taking the conservative approach of hitting singles and doubles, avoid the losses. Do okay. In the good years you end up with 1.5, 500,000 on the plus side about closer to 5% return.

Mike:

Right? All right. So why are we talking about this? Because remember we’re right here, right? We’re right up here. The last time we were up here back in 2000, the markets lost money for the next 10 years. The last time we were here, back here in 1969, the markets, oh, they made money, but it was such a small amount. It’s like I can’t have a successful retirement plan with those kinds of returns. Well, now we’re here. We’ve been here twice in the past. The same thing kind of happened in the last two times. Will it happened this time? Again? No guarantees past performance, no guarantee of future results, but statistically speaking odds are good. The next 10 years is going to be rough. Don’t get greedy. All right. If you have any questions, you can always reach out to us, but that’s our episode this week. Hope you found it. Interesting. We’ll talk to you again soon.