What I Think, Believe & How I Behave

Key Concepts

• Think, Believe, Behave: The distinction between personal opinions, convictions, and practical investment actions.
• Market Rationality: The idea that market sentiment and behavior are more important than individual predictions.
• Valuation & Risk: The assessment of market valuations (e.g., dividend yield) as indicators of potential risk.
• Historical Precedents: Drawing parallels to past market bubbles and crashes (Japan 1980s, US 1920s, 1960s, 1990s).
• Margin of Safety: A core investment principle focused on minimizing downside risk.
• Compounding: The process of generating returns on returns over time.

Market Sentiment, Valuation, and Investment Behavior

The speaker begins by acknowledging the polarized views prevalent in the investment community – ranging from extreme bullishness to outright bearish predictions of market collapse. However, he emphasizes a crucial distinction: what one thinks or believes is irrelevant compared to how the market behaves. He asserts that individual opinions hold little weight against the collective sentiment driving market movements.

Historical Valuation Comparisons & Risk Assessment

The speaker points to current market valuations, specifically the S&P 500’s dividend yield, as being at historical peaks, comparable to the .com bubble. He references a “Starling commercial” (likely a reference to Starlink) as an example of the current environment where even questionable ventures attract investment. He characterizes the potential return as low (around 1%) given the high level of risk, drawing parallels to the Japanese asset bubble of the 1980s and three previous US market crashes – the 1920s, 1960s, and 1990s. These historical crashes resulted in a 60% decline in real terms. He notes that periods of extremely low yields (1970s, 1930s, 1990s) were historically followed by a decade of poor performance.

“What matters is what the market thinks and what the market believes,” the speaker states, highlighting the primacy of market sentiment. He observes that the market currently anticipates continued growth of 10% (ranging from 5% for bearish expectations to 17% for bullish ones), a trend supported by the last decade’s performance.

The Impossibility of Prediction & Behavioral Response

Despite recognizing high valuations and potential risks, the speaker explicitly states his inability to predict a market crash. He acknowledges that the market can remain “more rational than I can remain liquid” or maintain a conviction. Instead of attempting to time the market, he focuses on his behavior as an investor. He believes that a correction, when it comes, will be significant given the current unsustainable conditions. “The higher it goes, the uglier it will be when the trend eventually reverts,” he predicts.

Portfolio Strategy & Risk Mitigation

Contrary to what one might expect given his assessment of market risk, the speaker reveals he is 92% invested, holding only 8% in cash. This cash position was increased slightly last week by trimming a profitable position. He maintains this high allocation to capitalize on opportunities and generate dividend income. He anticipates his portfolio will perform well, potentially even benefit, during a market downturn.

He explicitly states he is not shorting the market, meaning he is not betting against it. His strategy centers on “compounding no matter what,” seeking investments that offer a 10% owner’s yield, coupled with growth, a catalyst for improvement, and a margin of safety. He finds these opportunities primarily in European and US markets.

Long-Term Wealth Creation & Final Assessment

The speaker concludes that while the market is not necessarily “overvalued,” it is “highly risky” given the limited potential reward (1%). He advises investors to seek alternative “vehicles for long-term wealth creation” outside of the current market environment. He doesn’t believe the current market conditions are conducive to building substantial long-term wealth.