Rinse, Wash and Repeat - The Endless Cycle

At this time in the cycle, we basically spend a lot of time repeating the same message - the market is expensive and you should be focused on the return of your capital not the return on your capital. A cliche to be sure, but that doesn't mean it is worthless. 

This can seem difficult after a 16 year bull market where every dip bought has led to future returns. But that is not unusual when you have a secular bull market. As we try to teach, all cycles generally follow the same pattern give or take a few issues. 

Those of us who retain the battle scars experienced from the previous cycles can get a little wearing in our preaching of caution when it seems like everyone is doing better than you, and you look foolish for rebalancing and being conservative (like Warren Buffett I might add) when there are dollars laying in the street. Try being the contrarian at your next dinner party and see how you fare. 

As we discussed on the podcast, over history when stocks are expensive, gold, real estate or bonds are relatively cheap. In other words, there has generally been an alternative asset class that can provide returns over the next decade. But what do you do when most asset classes are expensive. 

Today US stocks are extremely expensive and history again shows that when they crash, they take the rest of the world with them. Especially when many investors from outside the United States have their excess capital in the US markets. If you don’t believe me just go back and look at the emerging market returns in the GFC. I can save you a click and tell you it wasn’t pretty regardless of how cheap some of the other stock markets were.  

So with most asset classes on the expensive side, what can we do?

There are alternatives but first of all you have to be emotionally ready. By that I mean, if you panic sell into a bear market, then you are most likely not keen to be selling, say US stocks and jumping into emerging markets even if the CAPE is showing decent returns for the next decade. Sudden market volatility scares the unsuspecting and those that lack knowledge and experience the most. Even within emerging markets we need to be selective as there as some are more expensive than others. 

So given the sufficient warnings, what can the investor do to protect rather than grow their capital? TMM will be focussing on this over the coming 12 months as we believe there are ample and growing warning signs this market cycle is nearing its peak. We know we have no insider knowledge which allows us the ability to pick the top to the day. That doesn’t mean a crash tomorrow or the day after, but it does mean that we grow ever more cautious as the cycle extends. 

We have had a pretty good 2025, but that is not an excuse to say that 2026 will be the same. Next year, TMM will be repeating a familiar message and one of our beliefs that lies at the core of our investment philosophy - don’t lose money. Paradoxically, we will most likely outperform many investors who believe buy and hold is the way to succeed over the long time. 

We will be releasing to subscribers a series of papers which explain how to think about markets at these valuations and how to protect your capital over the whole market cycle.