Rinse and Repeat

invest investing market market cylcles money patterns timing the market valuations May 03, 2024

One of the benefits of experience and the cyclical nature of markets is the ability to be able to say "I've seen this before".

We have sufficient data now to determine whether there are patterns that can assist us in the risk-return equation. These patterns show us there is a high correlation between valuation and returns. The really important part is knowing that while that don't exactly repeat, they do rhyme. 

The older I get the more I realise that these patterns are fairly stable and getting the big picture right means not having to worry too much about the smaller details.

For example, we know high valuations lead to low returns, but it is amazing how often many investors ignore this fundamental principle and ignore valuation believing this time is different. or even worse, not even knowing about the correlation between valuation and returns in the first place. 

If you look back in time, you will confirm the link between valuations and returns and pretty much everything else didn't matter. events come and go but they have little impact on stock market returns over the long term.

What we consistently see is valuation as the primary driver of future returns. What we consistently ignore is the fact that singular events don't predict returns. Yes, we can have a 9/11 terrorist event or a natural disaster like a tsunami, but in the long run these events fade from memory and valuation shines through as the best predictor of future returns. 

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