One trait shared by many investors who fail is the inability to change perspective when the evidence demands it. This is often the result of an ideological or political bias, the belief that the other side has nothing useful to say or cannot do anything right.
The same thing happens in investing. I constantly see "it's time in the market, not timing the market" repeated regardless of evidence that shows it is not always correct. If counter-evidence is provided, the biased mind searches desperately for a counter-argument rather than accepting they may be wrong.
This is dangerous thinking. As I have mentioned, I think Trump is probably the worst person in the world on a moral basis, but that doesn't mean I disagree with all of his foreign policy. Nor does it mean I am right. I simply try to look at the evidence and weigh it against what I know. Most investors stay rigidly stuck to a belief even when evidence shows them to be wrong.
So for those still sold on "time in the market always works," here is what you are up against right now.
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Listing the expected returns should give you food for thought. The risk-free alternatives have not looked this attractive relative to equities in over two decades.
| US S&P 500 Dividend Yield (P/E 66) | 1.5% |
| US S&P 500 Earnings Yield (P/E 31) | 3.22% |
| US Cash | 3.5-4% |
| US 10-Year Government Bonds | 4-4.5% |
| Gold | Nothing |
| Bitcoin | Nothing |
| Australian Cash (net of fees) | 3.9-4.5% |
| Australian 10-Year Bonds | ~5% |
| ASX 300 (VAS) Dividend Yield | 3.2% |
| ASX 300 Earnings Yield (P/E 22) | 4.2% |
The US S&P 500 dividend yield is 1.5%. That is a P/E of 66. Sixty-six years to recover your money on dividends alone. The dividend yield is lower than inflation. The earnings yield (3.22%) is lower than bonds. When cash beats US equity earnings yield, the entire risk-reward calculation flips. The ASX is more attractive than the US on every measure.
War: Round 2 about to begin. Rate rises, and Albo gives you money. Rate rises, and Albo gives you money. I think I see a problem. The industrial rebuild has commenced.
Australia and Japan have agreed a critical minerals partnership covering rare earth production, gallium recovery, and high-purity magnesium. Six projects identified. The PM Albanese / PM Takaichi statement makes critical minerals "a core pillar" of the economic and national security relationship. This is the industrial rebuild in real time.
The RBA hiked the cash rate by 25 basis points to 4.35% on Tuesday. On the same day, the Albanese government continued rolling out new spending: more for housing, more for energy, more for the industrial rebuild. Rate rises designed to crush demand. Fiscal stimulus designed to stoke it. Anyone else see a problem?
Things are looking very shaky on the consumer confidence front. The latest reading is the lowest in many years. The long-term average sits around 100. We are well below that. People are not spending because they are scared, and they are scared because rates are rising into what NAB already says is a 45% chance of recession.
Rates are on the rise. I need to think about how a rate rise into a recession makes any sense. Crushing jobs at the altar of price stability. They ask nothing of business to explore productivity improvements but hit workers and consumers.
Brisbane property is on fire. Detached house yields have converged with Sydney and Melbourne. Apartment yields have compressed dramatically. Rising prices without a corresponding rise in rents means lower yields and a greater reliance on capital gains. That is the textbook definition of late-cycle property speculation.
The ASX continues to grind. The All Ordinaries sit just below 8,900. After eight straight down days last week, this week was a series of small moves rather than a clear direction. The market is waiting. Waiting on the war, waiting on the Fed, waiting on what the next budget reveals.
Billionaire Howard Marks recently spoke about the one number that guarantees you won't make money in the stock market. He referenced a JP Morgan scatter chart showing the relationship between the S&P 500's CAPE at purchase and its annualised return over the next 10 years.
The pattern is brutal: the more expensive stocks are when you buy them, the less money you make. Above CAPE 23, returns over the next decade collapse to zero.
That number is 23. It is now 31. When CAPE has been above this level historically, the only outcomes have been negative or near-zero returns over the following decade. Best of luck. You are going to need it.
"It's what you don't think of that does all the damage." Buffett's words come back into focus this week. The Buffett Indicator (total market cap to GDP) is the metric Buffett has called "probably the best single measure of where valuations stand at any given moment."
Right now, the US sits at 231% of GDP. Australia sits at ~96%. The gap could not be wider.
Buffett famously said a reasonable range is 75-90%. Above 120% suggests overvaluation. The US has more than doubled the level Buffett considers reasonable. Australia is sitting where you would actually want to deploy capital.
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One way to think about investing when a sector or country is cheap is to look at the wider picture. When a country is cheap on a CAPE basis, there are usually companies which are also cheap. Brazil has a CAPE of around 10. That is cheap.
The framework is simple: find a cheap country, then find a cheap sector within it (the hint is in the title), then a company that is large, pays a dividend, and you think will be there in 20 or 30 years. This is what Buffett means when he says he wants a stock with bond-like qualities. Safety, low risk, sustainable payout ratio, and cash flow in a long-term sector that won't change much over the next 10-30 years.
P/E of 7. Forward dividend yield of 6.69%. That is the kind of profile Buffett describes. Cash flow, low valuation, sustainable payout, in a sector that is not going away.
Just a reminder: this is not a recommendation, but an example for developing a hierarchy for how to think about investing from a top-down perspective. We declare we hold Petrobras on an individual basis.
"It's what you don't think of that does all the damage."
The danger in markets like this one is not the obvious risks. Everyone knows about the war. Everyone knows about inflation. Everyone knows about the Fed. The damage usually comes from the thing nobody is talking about: a credit event in a corner of the market, a counterparty failure, a sovereign that runs out of buyers for its bonds. When the CAPE is 31 and the Buffett Indicator is 231%, there is no margin for the unknown unknown.
Meeting in Canberra, Australian PM Anthony Albanese and Japanese PM Sanae Takaichi said the partnership would be a "core pillar" of the countries' economic security relationship. Japan and Australia have identified six critical mineral projects to cooperate on, involving rare earth production, gallium recovery, and production of high-purity magnesium.
The joint statement said the projects have the potential to "materially diversify the supply chains for critical minerals." This is the next step in the broader de-risking effort across Asia. China cut off rare-earth exports last year and forced auto factories in the US and Europe to stop production. Now allies are building parallel supply chains as fast as possible.
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