The P/E Ratio Just Passed 33 For The Second Time Ever

Burgess asked, in front of our kids, if I wanted to take a Positive Parenting Class. Without much more than a second of silence both kids said, “yes daddy…take the class.”

Now that is immediate feedback…AND from the right source.

My kids, the humans on the receiving end of my parenting gave me immediate, high quality feedback. And it still took two days for me to say yes to the class.

Isn’t that interesting?

It took me two days to hear the feedback and take action even when the right source, in the right setting, at the right time was clearly saying “yes, do this.”

Why?

My ego didn’t like the feedback.

My ego went into its own world of, let me show you all the ways I’ve improved my parenting. And yet, right in front of me in no uncertain terms were two little people clearly and without confusion providing high-quality, direct, and immediate feedback.

My ego was hurt and was looking for validation to feel better and not be better.

And yet I (RC Peck and not my ego) had to step above my ego to receive the feedback.

My ego was mostly taking inventory of all the things I had done right up to that point. My ego was cataloging all my effort. Not my effectiveness (read: results) but my effort.

And yet, the feedback I was getting from my kids was based on effectiveness (read: results) only.

And I’m worried.

Not about my kids. I’m worried about people’s money and their investment choices.

You see most of what investors are doing and reading today is pointless.

They’ll spend hours consuming information, so much of it that they end up feeling worse off than when they started and yet, most can’t stop.

News consumes attention, which creates a poverty of choices

“What information consumes is rather obvious: it consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention, and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.”

— Herbert Simon

More information doesn’t solve problems.

If More Information Was the Answer Quote

So what does work?

Professor Benjamin Bloom figured out what works to create great performance. Unfortunately most people are not ready to hear what actually works.

Bloom figured out the single most important shortcut to what he calls ‘greatness.” This shortcut works exceptionally well with investing and money.

And investors can absolutely apply his findings to their own world of money.

In fact the world of investing is one of the best arenas to implement Professor Bloom’s finding.

Let me show you.

Investors want peak investment performance  

The problem. Most investors are focused on effort (gathering more information) or defending what they’re doing.

Professor Bloom’s discovery…?

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If you want the highest of performance, you must have quick, immediate, and effective feedback based on your behavior. Not feedback based on your effort but feedback based on the results of your effort.

You get it?

Quick and effective feedback on results is the difference between a person who puts in 10,000 hours of effort and gets nowhere and the person who puts in 100 hours of effort based on high quality, immediate and effective feedback.

When my kids gave me immediate high quality feedback. I was hurt. I was hurt that no one was noticing my effort, “look what all I am doing,” is what I thought. “Look at all my sacrifice.”

High IQ Didn’t Help.

Here’s what’s even crazier. Professor Bloom saw no evidence of high IQ and peak performance across chess, music and sports.

What Bloom did find was that high performers had teachers and coaches that provided high quality, immediate, and effective feedback.

In other words, the best created a high quality feedback loop that made them great with each additional hour.

Just like Bloom noticed that high IQ had no influence. I’ve noticed that in order for investors to be open to high quality feedback, they must make at least $100,000 a year.

I have my own theories as to why. But almost across the board this income threshold changes the way people listen to feedback.

Does this mean the $100k income threshold is true for every single person? Of course not. Have I ever had any exceptions? Of course I have. Will this observation trigger some people? Of course. And that is not my intention.

People Who Make $100,000 A Year Are…

This is going to step on some people’s toes.

What I’ve found is people who make over $100,000 a year are more open to feedback about their money, than people who make below $100,000. And the less people make (all things being equal) the less open that person is to hearing feedback about their money/wealth.

But what if you’re retired and not bringing in a six-figure income? As long as the person did make over $100k a year in their earnings life, then they are more open to receiving high quality feedback.

I’ve noticed that people with $300,000 or more at risk in the stock market are also much more open to feedback than those with less.

Are there exceptions to the $100k and the $300k number? Absolutely.

Some people might have picked careers that do not pay $100k or more, like teaching. Or some people might live in parts of the country or world where $75k can support a great life. $75k a year in Newton Massachusetts means you are on the poorer side of income. But $75k in Holmes County Mississippi means you are one of the richest people. So circumstances matter.

The specific number is not the most important part.

The most important part is that there’s a tipping point with income and money at risk, and all things being equal, the more people earn (up to a certain point) and the more people have at risk (up to a certain point) the more they are going to be open to receiving high quality feedback about their money.

Now is the exact number $100k for income and $300k for assets at risk in the market? Of course not. But what is interesting is people with more to lose are more open to receiving feedback and making changes from that feedback.

And the less people make and have at risk, the more likely they will defend their behaviors. In other words, the ego of the person making less than $100k was not as open to feedback.

Are You Defending Or Listening?

I just had this experience last week. I was talking to a very close friend of one of my clients and I gave him high-quality and immediate feedback about a position he had.

And you know what he did? He defended. He dug in his heels and attempted to convince me why he owned what he did.

He said, “It’s a great company. And it’s doing great. Their P/E ratio is 17, and they’re doing better than the S&P500.”

So I pulled up a price chart of the company divided by the S&P500.

When you look at company’s price chart and change the denominator to the S&P500, you can immediately see if that company is out performing the stock market (S&P500).

Below is the price chart I pulled up. It’s a price chart showing Company X divided by the S&P 500 with dividends reinvested.

Relative Price Charts Company X vs SPX with dividneds

If the black line is falling in the price chart above then Company X the subscriber was talking about is underperforming the S&P500 with dividends reinvested. As you can see over the past three years, there are periods when Company X was outperforming and underperforming.

Please understand, if an investor is going to take their money out of the most stable best growing company of all times (i.e. the United States via the S&P500 with dividends reinvested) and put it in a company that has only been around 1/10 the amount of time with 1/100th of the market-cap (read: much higher price fluctuation) then Company X better, at a bare minimum, be clearly outperforming. And. It. Wasn’t.

This is one of the reasons why I ask investors to look at price charts first when they hear scary stories about the imminent collapse of the market.

A Great Story Sells.

Of course the pick of the month newsletter industry doesn’t call their sales letters and newsletters stories, they call them “reports”. This is a sneaky trick “pick of the month” newsletters and money shows use to scare you into tuning in and coming back.

Are you tired of being abused yet?

Yes, the market’s P/E ratio is at or nearly at all time highs. Depending on how you measure your P/E ratio. And yes, the market will decline in the future as most are expecting. And yes, we will have extreme volatility in the coming years. BUT that could be in 18 months or even 27 months.

Below is a price chart of the S&P500 when it had the exact same P/E ratio as it does today. On January 1st 1998, the world had never seen an S&P500 with a P/E Ratio of 33. That must have felt scary.

And yet there it is below. The price chart starts at the beginning of 1989 with a P/E ratio of 12 and finishes nine years later up 354% with a P/E ratio of 33!

The world had never seen a P/E ratio of 33 on the S&P500. And the consensus back then was the market would crash. How could it not. It just went up 354% over the past nine years and it was being valued at its highest level ever.  

S&P500 with dividends reinvested from 1989 to 1998 (nine years of price).

S&P500 Price Chart with PE ratio of 32 and a 354% incease

But the S&P500 didn’t crash.

It moved higher for another 27 months and added an additional 84% gain. And now had the S&P had a P/E ratio of 44!!!

Understand this…Bull markets are designed to keep investors out of the market. And bear markets are designed to keep investors in.

This bull market is doing its job.

The market decline of 10% had people pulling tens of billions of dollars out of the market. But 10% declines are healthy and normal. And when this healthy 10% decline happened, people start calling for a 30% sell off immediately.

That must feel scary for investors when they hear for a 30% sell off from a “Money Show” just to get the P/E ratio back to some “average.”

The Average P/E Ratio

But average based on when? Since 1990? Since 1980? Since 1950? Since 1880? Since the Fed was created in 1913? Since the US$ went off the gold standard in 1971? Since the Fed started printing money in 2008?

I’m asking because “average” doesn’t exist. And yet the way people throw around the word, “average,” its like its a real number. It’s not.

Did you know the city with the best average weather in the United States is Dallas, Texas? Its’ true. It’s terribly hot and humid in the summer. And it’s horribly cold and freezing in the winter.

But the average…

Dallas has an average high temperature 78 degrees Fahrenheit during the day with an average low of 58 degrees Fahrenheit during the dead of night. And they get a very pleasant eight days of rain a month.  

Dallas Average Temperature

As of February 1st 2018 the Case/shiller P/E ratio was 33! That is way overvalued when compared with what it has been over the past 100 years. AND a P/E ratio can get even more overvalued.

On January 1st 1998 the Case/Shiller P/E ratio was at, wait for it, 33, that’s the same ratio it was on February 1st of this year. See the price chart below.

Shiller PE ratio historic price chart

I told you above that the S&P500 went up another 84% after the January 1998 P/E ratio of 33. But do you know what one of the leading sectors did? The Tech sector went up another 284%.

Read that again. That’s not a typo. The Tech sector went up another 284% when the S&P500 was starting with a P/E ratio of 33.

Yes, the Tech sector and almost every other sector hit a brick wall and fell anywhere from 40% to 80%. But it took another two plus years.

What is your strategy to capture both the uptrends and avoid the declines?

Please know my subscribers did not ride this market all the way down. My 2-Question Strategy got them out in November of 2000. The tech sector fell another 72% after that “get out of tech” alert in November 2000.

How could my Two-Question Strategy have gotten it right

Because the 2-Question Strategy only cares about high quality immediate feedback from price.

The Two-Question Strategy is a powerfully simple strategy that asks itself every single day, “Should I be IN or OUT of the stock market?” And it does that by looking at the prices of all four core assets on planet Earth.

Peak Performance is the result of high quality feedback.  

If someone wants to grow their wealth, they must have a high quality, feedback loop in place so they can adjust their behavior.

This high quality, feedback loop is what I call Training. It’s Training that I’ve been offering to people who’ve figured out how to make over $100k a year and have at least $300k at risk in the market.

Why only them? They are open to high quality feedback.

Apart from having high quality research without noise, it’s the Training that shifts their behavior. And Training is the key ingredient to why NASA is NASA. And why it got six missions to land on the moon.

And why it also got Apollo 13 back to Earth safely.

High Quality Immediate Feedback

When people look to have peak performance, they seek out high quality immediate feedback. And in my world, that’s called Training.

Not that inspiring, I know.

But it’s the difference between economic stability and knowing you are going to have enough and never quite being sure if “the next shoe is going to drop again.”

Another way of saying that is, people who want a future without anxiety around money get trained. So they can land six missions on the moon. And when things go wrong. They have the training to diagnose quickly and fix it. No hoping. Just diagnose and fix in a powerfully simple way.

The Positive Parenting Class was tough.

My ego would get beat up each Wednesday night. And then when I implemented what I learned, magic happened.

The kids would still have their breakdowns. But instead of them escalating their behaviors and lasting hours in breakdown, they’d be able to center themselves after about ten minutes.

And here’s the crazy part, I was being trained to do less. Fewer words. But the right words, which then allowed them to have their experience.

It’s not that comfortable, but its working.

Burgess and me just signed up for the Advanced Positive Parenting Class.

In Your Corner,

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RC Peck, CFP

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