The largest market bubble in more than 50 years – lazy man and money

I worked on an article all week, but I didn’t prepare it on time to publish. It can easily be a 20+ pages research papers or a longer book. Instead, you must experience an article that is actually relevant for what this website is about.

In the past 20 years I have written a number of times about Shiller P/E. It is a great way to know which way the market will go. Let me take a step back.

What is the Shiller P/E

The Shiller P/E ratio also known as the Cape Ratio (cyclically adapted price-to-win)-is a valuation measure for the stock market created by Nobelrijs-Winning Economist Robert Shiller. The Shiller p/e uses the current stock market price and the average real income of the previous 10 years, adapted for inflation. If you invest when the Shiller p/e is low, you pay a low price for high income. If you invest when the Shiller p/e is high, you pay a high price for low income. If you have ever heard of ‘Low, Sales High’, the use of the Shiller P/E is a great guide.

[Note: This is a VERY simplified explanation. I wouldn’t buy and sell all my stock holdings based on this. Stick with me until the end of the article, and I’ll explain what I do.]

This is what a graph of the Shiller p/e looks like in the last 100 years.

View the big spikes and you will see bubbles from the past. The bubbles and crashes from 1929 and 1999 seem the most obvious. You can also see the crash of the big recession of 2009. More recently, the Shiller p/e made a highlight of 39.43 at the beginning of November 2021. That is when I asked that the question is now the time to sell shares? The S&P 500 peak at about 4700 in November and December and dropped to around 3600 in October when the Shiller p/e dropped to around 28.

That is enough of the history lesson. Hopefully your eyes have now been driven to the right to see that the Shiller p/e is now older than 40. That is the highest that it was because it reached 44 during the DOT-Com Rage and the subsequent bomb.

That Shiller p/e is currently the second Highest of all time, behind one just over 25 years ago. However, I said it was the largest market bubble in 50 years. Nothing has been added there, right?

Let me introduce you …

The Buffett -Indicator

The Buffett indicator is another measure or the stock market as a whole appears to be overvalued, reasonably appreciated or undervalued. It was because of the best investor of all time, Warren Buffett. In particular, the Buffett indicator is the ratio of the total value of the stock market and the size of the economy. The total value of the stock market is measured by the Wilshire 5000 and the size of the economy is measured by the Gross Domestic Product (GDP).

Buffett has claimed that this number is the “single measure” of the value of the stock market. If this number is 100%, the market is reasonably appreciated. If it is lower, the market is cheaper. If it is higher, the market is more expensive. This is just like the Shiller p/e.

This is what the Buffett indicator looks like since 1970 (as far back if I could find a graph):

The Buffett indicator in the DOT-Com Bubble of 1999 reached ‘only’ 1.35. In the past five years it has lived more than 1.50 and is currently at 2.19. That is record area – far beyond the DOT COM indicator.

Managing the largest bubbling bubble in 50 years

Let’s summarize:

• The Shiller PE tells you whether investors pay too much for profit.
• The Buffett indicator tells you whether the market as a whole is too large compared to the economy.

Taken together, the The market is the highest ever compared to the profit and size of the US economy.

Does this mean that you have to sell all your shares? I am not a financial adviser, so I can’t tell you what to do. Making extreme movements of buying and selling while trying to time the stock market has become very bad historically.

Do you remember when I wrote the article in May 2021 and said that the Shiller p/e was high? It went higher for a few months. A high stock market can often remain higher. If you look at the two graphs above again, you will find that in recent years the “new normal” has generally been high numbers. With the advantage of retrospect, we know that being invested in the stock market has been ideal.

Need another reason to stay invested? View the S&P 500 from 1996 to today:

If you look at that graph, it doesn’t seem like a bad idea to have bought in the previous largest market bubble of 1999. Even if you bought at the worst moment, you would have about five times more money today. That is why you hear people say that the time you have your money on the market is much more important than the timing of the market.

I am a bit different from most people, and I like to follow these things. That is why I allow myself to make small movements with my activa spread. For example, when I took place in 2022, I bought many technical shares (especially the Nasdaq index, QQQ). Nobody wanted Meta because they throw tons of money in virtual worlds. A few years ahead and you could have achieved a return of 800%. Many people wondered where the innovation in technology would come from.

A few years ago I invented the Lazy Man rule of 20. That means that I deduct the shiller p/e to get the amount of bonds that I should have in my portfolio. So when the Shiller P/E 38 reaches, I should have 18% bonds and 82% shares. If the Shiller p/e is 22, I would only have 2% bonds and 98% shares. In this way I have always been invested, but when the inevitable crash of the Shiller p/e takes place, this will probably affect bonds less. Recently I added some Treasury accounts with the SPDR Bloomberg 1-3 month T-Bill ETF (Ticker: Bil). That is because I have read that bonds are not particularly safe in this market.

In addition to the stock/bond allocation, I also move my share possession to a less volatile index. Instead of retaining technical shares that have long increased, I have more dividend and consumer component shares. It is still the stock market, but those who survive a crash do much better. It is important to note that I only apply for changes to the allocation of assets in my pension accounts, so that I do not cause tax events.

There is a chance that I will miss a larger series of technical shares in the future, because artificial intelligence takes over the earth. However, I have no Fomo at all. I will still earn a lot of money if that happens. If that is not the case, the Shiller p/e has led me in the right direction because it is time and time again.

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