To The Moon

I thought it would be worth resurfacing this chart from the series of educational articles I wrote earlier last year on valuations for multi-asset investors — and how to use valuation signals to navigate the market cycle. The basic concept is that valuation signals when they reach an extreme have powerful contrarian information; they tell us about forward-looking risk and opportunity set using current information. Through-the-range however they present momentum information. Applying this to the above chart we can understand the journey from extreme cheap in 2009 —at the time a very contrarian outlook of high upside probability (high opportunity), all the way through to now (I would say an equally contrarian outlook); high downside probability (high risk). And there’s a key point: these are not certainties, this is about probabilities. When you deploy capital at cheap valuations you have probability on your side. When you deploy capital at expensive valuations it rests much more on faith, hope, momentum, and the existence of people willing and able to buy from you at even higher valuations. I’m simple, I like it when I can look at the data and go where the probabilities are in my favor. It makes me uncomfortable to invest later in the cycle, even if in hindsight that’s the right move. And in the end we all have to make up our own mind on what kind of strategy and process we are going to run with — both on its own objective merits and how it fits our temperament. $.SPX(.SPX)$ $.IXIC(.IXIC)$ $.DJI(.DJI)$ Image