Investors Made These 9 Costly Mistakes in 2024 | Larry Swedroe Explains How to Fix Them

PE ratios have been structurally higher since the 1880s baseline because risk in equity investing has declined due to: Federal Reserve capacity to control the economy (reducing economic volatility), FDIC insurance and Fed existence, GAAP accounting standards, and transaction costs declining from 5% commissions to near-zero, making stocks genuinely less risky and justifying higher valuations.

“I wrote about this in 2013 trying to show why I thought Grantham was likely dead wrong in his forecast because his logic was bad one reason that P Ros were higher is their risk in investing in stocks had gone way down from the average which he was looking at which went back to the 1880s now was there any sec in the 1880s was there any uh FDIC in the 1880s was there any Federal Reserve was there any generally accepted accounting principles what happened to transactions cost over that period PR they had come way down all of those things that made investing cheaper so you captured more of the returns you weren't paying 5% commissions for example and big bid offer spreads anymore but the fact that the Federal Reserve was better able to control the economy so the volatility in the economy had gone one way down so the PE Ratio should go up”

After the tech boom's end in 1999, growth stocks traded at PE of 40 while value stocks remained at PE of 12, creating the largest value premium (spread) in history; this extreme valuation spread then predicted the largest subsequent value outperformance over the next 8 years.

“well by the end of 99 the growth was trading at 40 and value was trading at roughly about the same 12 so while the market was vastly overvalued or highly valued at any rate predicting future low returns especially for growth stocks the spread between value and growth had widened so much that it was predicting the largest value premium in history and that's exactly what we got over the next eight years”

Confirmation bias causes investors to treat forecasts they agree with as brilliant and actionable, while dismissing contrary forecasts as uninformed; this cognitive bias makes listening to forecasts particularly dangerous when they align with preexisting worries.

“there's an all to human trait I know you guys are familiar with uh it's a human problem called confirmation bias what do we mean by that when we hear an idea that confirms our preconceived notions we think that's brilliant now I better act on it and we hear an idea that goes against our preconceived notions we tend to think that person doesn't know what they're talking about and they ignore it so when you hear forecast it becomes very dangerous when you hear somebody who is espousing say negatives and you're worried about those negatives for example of trump presidency for example the threat of terce or the war in Ukraine or whatever”

Using the S&P 500 as the benchmark for a diversified portfolio is inappropriate and leads to poor decision-making; investors should benchmark against an index of assets they have decided to own, or own the S&P 500 for 3 basis points and stop worrying about tracking variance.

“so I always tell people The Benchmark should be an index of assets that you have decided you want exposure to not the S&P 500 because if you want the S&P 500 just own it and you could do it for three basis points and then you could stop worrying about tracking Varian risk”

Ross Stevens of Stoneridge found that the average investor in their reinsurance fund underperformed the fund itself by over 5% annually by selling after bad periods and buying after good periods, demonstrating the behavioral drag of market timing.

“Ross Stevens who was the chairman of ston Ridge did a little study and he found the average investor in the fund that underperform the fund by over 5% a year simply by selling after periods of bad performance missing the great returns and buying after periods of good performance right”

Last year's best-performing asset class is likely to be this year's worst performer; momentum exists in the short term (4-6 months), but self-healing mechanisms and valuation compression create long-term reversion—meaning top performers get high valuations that predict future underperformance.

“there is some evidence from in the short term which tends to be an average somewhere in the four to six months there is Mo short-term momentum so you can see from one year to the next you may have an asset class outperform but remember we just discussed the other lesson that there's a self-healing mechanism and if you get spectacular returns which put you in the top one or two or three that means likely the PE ratios are now higher and eventually momentum reverses anyone who familiar with momentum knows there's short-term momentum and then there's long-term reversion”

The biggest behavioral mistake investors make is 'resulting'—judging the quality of a decision by its outcome rather than by the quality of the decision-making process; example: buying a lottery ticket can win (good outcome) despite being a terrible decision, while a sound trade can lose (bad outcome) despite being correct.

“the biggest problem that or one of the biggest problems that investors have they're right about in my book and Rich your future which is a behavioral Finance book teaching people all the behavioral errors one of the worst mistakes they made is engaging on what is called resulting uh for those aren't familiar with the term I'd urge you to read Annie Potter's book uh thinking in bets so what she points out is in poker you could make a dumb bet and draw it to the inside straight and think that's a great strategy going against the odds and if you keep repeating that eventually you will go broke playing poker on the other hand you could make good bets and lose because the RIS showed up it's not a certainty when you make that bet”

Expert radiologists shown an MRI and asked to diagnose problems while indicating confidence levels were right at 65% accuracy on average when claiming 90% confidence, while AI systems make fewer mistakes, demonstrating expert confidence miscalibration.

“the one of the biggest problems we have even experts say a doctor has been giving uh they showed them an x-ray or an MRI let's make it a more complex thing like an MRI and they're asked to diagnose the problem and then they ask them how confident you are in their actm when they were 90% confident they were right they were on on average maybe 65% AI does a much better job than the experts for example there because they don't make mistakes or far fewer anyway”

Any investor's time horizon must be at least 10 years for risk assets, because if stocks are guaranteed to outperform T-bills over 10 years, there is no risk in a 10-year holding period, making the present value of stocks higher and PE ratios higher than in uncertain scenarios.

“the likelihood is that 10 years is either noise a random outcome or risk showing up now what investors have to understand is your Ron better be at least 10 years should be longer or you shouldn't be investing in any risk asset because it's pretty simple let's say that you would guarantee that stocks would outperform one month T bills the riskless instrument over a 10-year [18:25] period Well now there's no risk or you have to do is wait 10 years and you're guaranteed for what happen What would the world look like Jack in that environment what would happen to the PE ratio of socks PE ratio would be much higher because there's no risk right”

When retirees say they don't have 15 years for value stocks to outperform, they're making a logical error—if they don't have 15 years to wait for the S&P 500 to outperform either, then diversification is even more important with shorter horizons, not less.

“this is something that drives me crazy when I talk to retirees Larry I don't have 15 years for Value to outperform you know right I said well then you don't have 15 years to wait for the S&P to outperform either so”

Even with perfect foresight (a 'clear crystal ball'), investors would not have bet the S&P 500 would go up 23% in 2024 because of numerous negative developments: ongoing Ukraine war with North Korean troops, Middle East escalation, manufacturing recession, exploding consumer delinquencies, office vacancy crises, and 6-7% budget deficits.

“what would you have seen and then ask yourself would you have bet the market would go up let alone 23% you would have seen that was no resolution to the war in Ukraine and even North Korea was going to be sending troops the conflict would go on approaching three years we'd have escalating conflicts in the Middle East Israel is going to end up directly attacking Iran Syria and Yemen... interest rates will remain much higher for longer as inflation proved stubborn the manufact ing sector nobody talks about this... the manufacturing sector has literally be in a in a recession throughout the year”

The self-healing mechanism exists in every single asset class and investors fail to understand this, leading them to abandon asset classes after poor performance and miss the recovery that follows as the mechanism rebalances supply and demand.

“the self feeling mechanism occurs but investors panic and sell subject to recency uh and all kinds of other biases failing to understand the self- feeling mechanism right okay uh and they miss out on those Returns”

Investors prefer single-point forecasts (like Merrill Lynch's annual S&P 500 target) despite zero accuracy, over probability distributions showing ranges of possible outcomes, because humans prefer certainty even when false certainty.

“people like to deal with certainty but investing is even uh is is not about uh odds we don't know the odds it's not like rolling the dice where we know what the odds are of rolling a 71 or a snake Eyes the best we could do is estimate future returns and think about a wide possible dispersion because there is so much uncertainty about what the future holds”

P/E ratios have legitimately risen from historical averages (1880s baseline) because several structural factors have reduced investment risk: the FDIC was created, the Federal Reserve was established, GAAP accounting standards were implemented, transaction costs dropped dramatically (from 5% commissions to near zero), and Fed policy reduced economic volatility.

“one reason that P Ros were higher is their risk in investing in stocks had gone way down from the average which he was looking at which went back to the 1880s now was there any sec in the 1980s was there any uh FDIC in the 1880s was there any Federal Reserve was there any generally accepted accounting principles what happened to transactions cost over that period PR they had come way down all of those things that made investing cheaper so you captured more of the returns you weren't paying 5% commissions for example and big bid offer spreads anymore but the fact that the Federal Reserve was better able to control the economy so the volatility in the economy had gone one way down”

You should judge investment strategies by the quality of the decision-making process before the fact, not by results after the fact, because good decisions can lead to bad outcomes and poor decisions can lead to good outcomes (due to randomness).

“you could make a dumb bet and draw it to the inside straight and think that's a great strategy going against the odds and if you keep repeating that eventually you will go broke playing poker on the other hand you could make good bets and lose because the RIS showed up it's not a certainty when you make that bet the best example of that which is to show you that a good strategy is is you know it before the fact not after the fact should never judge your strategy by the outcome but by the quality of your decision Mak”

Using the S&P 500 as a benchmark for diversified portfolios leads to poor decision-making because investors judge themselves against an inappropriate benchmark, when they should benchmark against their own chosen mix of assets.

“the S&P 500 is always the benchmark and a lot of times it's not the appropriate Benchmark and it leads to bad decision making because people are judging themselves against the S&P 500 and they end up making poor decisions with their portfolio because of it”

The appropriate benchmark should be an index of assets you have decided you want exposure to, not the S&P 500; if you want the S&P 500, you can own it for three basis points and avoid tracking variance concerns entirely.

“The Benchmark should be an index of assets that you have decided you want exposure to not the S&P 500 because if you want the S&P 500 just own it and you could do it for three basis points and then you could stop worrying about tracking Varian risk”

Valuations, measured by either current PE ratios or the Schiller Cape 10 (cyclically adjusted PE), show only 0.40 correlation to future returns over the next 10 years, and virtually zero correlation to next-year returns; therefore valuations cannot reliably time markets despite being the best predictor available.

“they will have about a 40% correlation to Future uh returns and even the current PE is pretty close to that as well so what it tells you is valuations are the best predictor we have but they literally the correlation whether using the current PD or the cape 5 or the cape 10 tell you nothing about next year return the correlations of virt zero”

The logic of sell-in-May fails on first principles: if you believe stocks should underperform from May through October (why you'd sell), you must logically believe they are less risky during that period (since risk and expected return are linked), which is absurd—T-bills cannot be riskier than stocks.

“here's the complete logic what's the most basic principle of Finance uh it's that risk and expected return not people get that wrong all the time they say risk and return are related that must be wrong right right it's risk and expected return are related well if you think you should be out of the market from September uh from May through September is because you think stocks should have lower returns it must be that you also think they're less risky I dare anyone to explain to me why t- bills are riskier than stocks for May through November”

The Seattle-New England Super Bowl play where Seattle threw an interception on third-and-goal with 1 minute left was the correct decision ex-ante: Russell Wilson had thrown zero interceptions in red zone all year while Marshawn Lynch had fumbled three times; the outcome was bad (interception) but the decision was sound.

“Seattle had the ball with about a minute to go first and goal on like the three three or four yard line I don't remember and they had the best running back in the league Maron Lynch big horse and a great offensive line and the announcers everyone oh they're just going to run the ball three four times if need be and they'll get their touchdown that was the logic there of course Russell Wilson dropped back the pass thre an interception guy made a great defensive play intercept the ball Seattle and everyone's criticizing so what happens the saber matician went to work and actually looked at the analysis of all the historical evidence then and here's what they found in the Red Zone there in that area Russell Wilson had not thrown an interception the entire year and Marshal ly has fumbled the ball three times clearly the right choice because no one should have been expecting the past except the one Defender from s guess right and jump it the right call”

Self-healing mechanisms exist in every asset class: when an asset class performs poorly and becomes cheap, valuations compress and expected returns increase, creating an opportunity that disciplined investors can exploit by buying when others are selling in panic.

“Warren Buffett tells people to buy when everyone else is panic selling because he recogniz as it I feel good I think I can't be 100% certain but I feel good I think I coined that phrase a selfhealing mechanism here”

Investors should use Monte Carlo simulations to test portfolio success across all possible outcomes (including left-tail scenarios), and should develop Plan B contingencies (reduced expenses, delayed retirement, downsizing) before a market crisis occurs, not after.

“what you should do number one is treat any forecast as a median of a wide dis potential dispersion of outcomes and make sure your portfolio can live through and withstand all of the possible outcomes including the left so that's really important uh number one and number two is to make sure you can stay the course you know uh with that because you know behavioral problems are the wor so when I tell people to do is because you can only treat it as a median what you want to do is run a monticolo simulation and then see what the odds of success are based upon all those possible outcomes so so in 2008 came the bottom 5% of the outcomes we ran for clients included this 2008 gr financial crisis so our clients at least should have been well prepared they were listening in our discussions and they sure their portfolios could handle it and we have discussions around what plan B you were prepared to execute if that worst case actually showed up might be cutting down your expenses plan on working a little longer getting rid of the second home whatever it might be”

Jeremy Grantham, despite becoming known as a guru for accurately forecasting the 2000 and 2008 market crashes, made numerous failed forecasts that were ignored in media coverage; in 2013 he warned the S&P was 75.5% overvalued and predicted losses of almost 1% annually over seven years, yet the market gained almost 11% annually, missing his forecast by 12 percentage points.

“Jeremy Grantham of GMO uh he became known as a guru because he did did accurately forecast the 2000 Bubble Burst and the 2008 crash in the market of course no one ever went back and looked at other forecast he made that may have been wrong pigs will fly before those you know uh happen and Wall Street likes to anoint or the media likes to anoint you know Heroes of the moment uh well in 2013 Grandam warned investors that the market was going to crash it was 75 5% overvalued he repeated that you know several years later of course the market went on to ignore him in fact grantham's GMO predicted over the seven years uh beginning in 2013 the S&P would earn uh sorry would lose almost 1% a year it actually gained almost 11”

After the California fires and hurricanes in 2023, reinsurance underwriting standards tightened dramatically (homeowners required to remove trees within 30 feet, roof/window upgrades for hurricane resistance to 140 mph), deductibles increased substantially, and California and Florida home insurance premiums rose approximately 60%, reducing underlying risk and raising expected returns.

“premiums went way up okay uh deductibles went way up and guess what also happened to underwriting standards did they get tougher or easier I would say they got tougher I they got a lot tougher with the fires yeah you want to buy reins you want to buy insurance in California on a home okay right you were not allowed if you were in a fire prone area you couldn't have a tree within 30 feet of your house no two trees within 30 feet of each other no brush for another 30 feet uh you know in in Florida if you want hurricane Insurance you your roof Hader and the windows header which stand 140 mph winds deductibles went way up”

'Sell in May and go away' is heard repeatedly on CNBC/Bloomberg every April-May despite consistent failure, being wrong 14 out of the last 14 years (last success in 2022, previous in 2011), demonstrating media bias toward repeating failed strategies.

“I'm willing to even I'm not sure i' bet whether you guys know but and you're in the markets but the manufacturing sector has literally be in a in a recession throughout the year we've never been above 50 uh in that index”

The manufacturing sector in 2024 had PMI (Purchasing Managers Index) never above 50 throughout the entire year despite broader market gains, indicating a structural sectoral weakness that contradicts the strong equity market performance.

“the manufacturing sector nobody [41:28] talks about this I I'm willing to even I'm not sure i' bet whether you guys know but and you're in the markets but the manufacturing sector has literally be in a in a recession throughout the year we've never been above 50 uh in that index”

Jeremy Grantham, despite being celebrated for forecasting the 2000 and 2008 crashes, warned in 2013 that the market was 75% overvalued and predicted the S&P would lose almost 1% annually for the next 7 years, but it actually gained almost 11% annually—an error of 12 percentage points—yet he remained influential.

“Jeremy Grantham of GMO uh he became known as a guru because he did did accurately forecast the 2000 Bubble Burst and the 2008 crash in the market of course no one ever went back and looked at other forecast he made that may have been wrong... in 2013 Grandam warned investors that the market was going to crash it was 75 5% overvalued... grantham's GMO predicted over the seven years uh beginning in 2013 the S&P would earn uh sorry would lose almost 1% a year it actually gained almost 11 so it was only off by 12 percentage points”

The proper approach to forecasting is to treat any forecast as the median of a wide dispersion of potential outcomes and run Monte Carlo simulations to test whether a portfolio can withstand all possible outcomes, including tail risks, rather than relying on a single median forecast.

“what you should do number one is treat any forecast as a median of a wide dis potential dispersion of outcomes and make sure your portfolio can live through and withstand all of the possible outcomes including the left so that's really important uh number one and number two is to make sure you can stay the course”

In 2008, a client's portfolio that included worst-case scenarios in its planning (such as a 2008-style financial crisis) allowed them to be well-prepared psychologically and to have discussed Plan B options (cutting expenses, working longer, selling the second home) before crisis hit, which is why Monte Carlo simulation planning is essential.

“so in 2008 came the bottom 5% of the outcomes we ran for clients included this 2008 gr financial crisis so our clients at least should have been well prepared they were listening in our discussions and they sure their portfolios could handle it and we have discussions around what plan B you were prepared to execute if that worst case actually showed up might be cutting down your expenses plan on working a little longer getting rid of the second home whatever it might be”

Ross Stevens (Stone Ridge chairman) found that the average investor in the reinsurance fund underperformed the fund itself by over 5% annually by selling after bad years and buying after good years, demonstrating that investor behavior rather than strategy selection is the primary driver of poor returns.

“Ross Stevens who was the chairman of ston Ridge did a little study and he found the average investor in the fund that underperform the fund by over 5% a year simply by selling after periods of bad performance missing the great returns and buying after periods of good performance right”

Active managers persistently underperform in both bull and bear markets, and never once in Swedroe's experience have Wall Street strategists said 'this is NOT an active investors' market' despite consistent underperformance year after year.

“I can say in my entire life I've probably heard tens of thousands of Market strategists on CNBC or Bloomberg and they're asked the question about is this going to be an indexes or investors or stock Pickers Market I have never once ever heard any one of them say this is not anything other than an active Investor's market and every year it doesn't matter what they underperform persistently especially over longer periods”

The S&P 500 experienced three periods of at least 13 years where it underperformed risk-free T-bills: 1929-1943 (15 years), 1966-1982 (17 years), and 2000-2012 (13 years); these three periods collectively represent 45% (or 47%) of the last 96 years, demonstrating that investors must be prepared to wait 13-17+ years for stocks to outperform bonds.

“there are three periods of at least 13 years where the S&P 500 underperformed totally riskless t- bills the 15 years from 29 to 43 the 17 years 17 years from 66 to 82 and near the end of that period I think it was Forbes ran an article the death of equities money was going end up in coin and stamp collections said the president of Solomon Brothers if my memory serves all right and of course the next decade was the best ever next two decades were the best ever uh and then just recently 2000 through 12 they underperformed t- bills now what's really important about this is people forget what the periods look like just before those three awful periods which constitute 45 of the last 96 years 95 that's 47%”

Investors should diversify broadly (across stocks, value, real estate, gold, reinsurance, and other uncorrelated assets) because any single risk asset goes through periods of severe underperformance, and the only way to smooth returns and maintain discipline is to own assets that don't correlate with the S&P 500.

“I can't run the risk of having all my ads in the wrong basket for 15 20 years so what should I do I should diversify but that means I have to stop looking at the market a benchmark that's quoted every day because if I want that Benchmark then I can own it but then I can never complain when a diversified portfolio protects you as it did in the 70s the international stocks far outperformed in the 2000s they outperformed value is far out formed in over very long periods every single asset we could point to has gone through both long periods of good performance and bad and the way you smooth out returns if you invest in one asset you're going to go like this big waves up and down if you diversify you make the waves much smaller”

In credit markets, recessions trigger credit losses and defaults, causing credit spreads to widen (higher compensation for risk) while covenants tighten, reducing underlying risk and creating self-healing mechanisms similar to equity and commodity cycles.

“think about the self-healing mechanism in credit you get a recession you get credit losses defaults what happens to credit spreads Jack they why not what happens to Covenants so they get looser or tighter they get tighter tighter they get tighter so the risk goes down you're getting paid more for that risk and what tends to happen that self feeling mechanism occurs but investors panic and sell subject to recency”

Over 15-year periods, 90%+ of active managers underperform passive indices; in a 2011 French and Fama study, once adjusted for common risk factors (size, value, quality), only 2% of active managers generated statistically significant alpha—less than random chance would predict.

“I've probably heard tens of thousands of Market strategists on CNBC or Bloomberg and they're asked the question about is this going to be an indexes or investors or stock Pickers Market I have never once ever heard any one of them say this is not anything other than an active Investor's market and every year it doesn't matter what they underperform persistently especially over longer periods once you look at 10 and 15year periods Morning Star in their data which un fortunately includes some survivorship bias because it only includes the funds that survived the whole period okay 90% plus of the active managers underperformed at the in 2011 Ken French and Jean farmer published the study which found that once you adjusted for these common risk factors size and value quality Etc only 2% of active managers were generating statistically significant Alphas Which is less than you would expect randomly throwing dots and picking active managers”

Dimensional Fund Advisors (DFA) funds (systematic, transparent, replicable, defined by academic factors) outperformed 85% of active funds over 15 years; Vanguard index funds outperformed 80% of active funds, even with survivorship bias favoring active managers and before tax-drag accounting.

“over 15 years Vanguard funds had outperformed domestic I think uh 80% of the active funds and dimensional had outperformed 85% of the active fund so and that's with two biases one I mentioned the Survivor part 7% of active funds disappear so obviously the ones who disappeared did because they had poor performance so vanguards and dfa's data would be even better and the other bias is this doesn't include taxes and we know for active managers for most of them the highest cost is not their expense ratio it's taxes”

If investors cannot stay disciplined through multi-year underperformance periods, they should not invest in any risk asset and should only hold cash equivalents; the alternative is accepting tracking variance but committing to the plan.

“the key if you can't stay the clost don't invest in the first place but then you're taking all the risk of putting all your EGS in one B you cannot run away from risk you can only diversify it so your choice you want to have better ons of success by diversifying and living with tracking variants or living with huge odds of failure but now you don't have to worry that you look different than the market”

Diversified portfolios with lower volatility (smaller waves) have higher odds of success in retirement than concentrated portfolios, especially for retirees, because diversification avoids sequence risk—the danger that poor returns early in retirement force permanent wealth destruction when you're drawing down principal.

“the one with the small waves has much higher odds of success especially for retirees because it avoids the sequence risks you face when you're in retirement and in withdrawal because you can't recover you're because you're drawing down your portfolio that's really critical diversification becomes more important the older you get”

Over any 20-year period, the outperformance of value over growth is probably only 5-6% total, meaning over one year the difference could be 20-30-40% in either direction, so longer horizons theoretically reduce the importance of benchmarking because all assets converge over time.

“over any 20e period probably relatively small maybe five % at the most maybe six in any one year it could be 20 30 or 40% different so the longer Your Horizon in theory it becomes less important from that perspective because all assets are going to tend to have similar risk adjustment return shortterm you can get much wider divergency”

Buying low (after underperformance) and selling high (after outperformance) through rebalancing is psychologically difficult but vastly superior to the common retail investor behavior of buying high after good performance and selling low after poor performance.

“it's just as hard to take chips off the table but selling High to rebalance and buying low to rebalance is a far superior strategy to what most retail investors do which is buy high after periods of good performance and sell low after peris of for perform that's why all the studies Morning Star does this often shows that the average investor underperforms the very funds they invest in by significant amount”

The market has only grown more efficient since Fama-French 2011, making it even harder for active managers to outperform, as information is more widely available and trading costs are lower.

“the market has only gotten more efficient over time since other Studies have C C You Know found the same answer”

No market forecaster has demonstrated consistent accuracy in predicting stock market returns; the 2023 consensus from 20 leading Wall Street firms predicted S&P 500 returns ranging from -12% to +13% with an average of 2%, yet the actual return was 25%, representing a 21 percentage point miss compared to consensus.

“we ended uh 2023 I think at roughly 4770 20 analysts looking at the following year from the leading Wall Street firms predicted anywhere from a down 12% to an up 13 the average was for a gain of two well we know the S&P itself went up 25 uh% 23% with the index when the average was two the average was only left by 21% which is more than double the historical return to the stock market”

Before the 1929-1943 bear market came the 1920s 'Roaring Twenties' where stocks were described as at an 'all-time permanent Plateau' by economist Irving Fisher, showing how investors justify expensive valuations before major crashes.

“think about what was before 1929 through 43 I was the Roaring 20s stocks were now at an alltime permanent Plateau said Irving fiser one was the you know the greatest Economist of that era”

Confirmation bias causes investors to embrace forecasts that confirm their preconceived notions as 'brilliant' while dismissing contrary forecasts as worthless, making forecast-driven investing particularly dangerous.

“there's an all to human trait I know you guys are familiar with uh it's a human problem called confirmation bias what do we mean by that when we hear an idea that confirms our preconceived notions we think that's brilliant now I better act on it and we hear an idea that goes against our preconceived notions we tend to think that person doesn't know what they're talking about and they ignore it”

The Schiller CAPE ratio was developed based on Benjamin Graham and David Dodd's principle that you shouldn't look at only one year of earnings because the economy is cyclical—you might be at the end of a boom (high earnings) or end of a recession (low earnings), so multi-year averaging is necessary.

“Robert Schiller one of the things he may have won a Nobel Prize for besides all of his work on the field of Behavioral Finance is he came up with what now is called the Schiller Cape 10 or the cyclically adjusted PE ratio uh the idea behind it goes back to Warren Buffett's mentors who said venger and Grant we shouldn't look at one year's earnings because you could be in the near the end of a boom in the economy earnings are going to be high and not sust”

In precious metals markets, when prices crash, mines shut down and supply drops, causing prices to recover; then high prices incentivize new mines to be opened and supply increases, completing a multi-year self-healing cycle.

“say in mining stuff what happens to Precious Metals prices they go way down m shut down no Supply guess what happens to prices go way up and then right but they're not there but now what happens price goes way up and guess what now you get people opening new mines investing and five years later you get extra Supply you get the selfhealing mechanism in every single asset class”

Following Buffett's advice to stay the course through all economic and geopolitical headwinds—war, inflation, conflicts, recession—is extremely psychologically difficult because the human brain wants to act and respond to threats, yet this discipline is what separates successful investors from those who panic.

“here's what really happened ask yourself would you have been able to ignore all of that and follow Buffett's advice just to stay the course”

Active management underperformance is worse when accounting for taxes, which are the largest cost to most active managers (not their expense ratio), because frequent trading generates taxable events; index/systematic approaches minimize this cost.

“and the other bias is this doesn't include taxes and we know for active managers for most of them the highest cost is not their expense ratio it's taxes and see the same thing you know internationally uh there so the data is there once we adjust for these factors as well”

Warren Buffett has stated he hasn't read an economic or market forecast in over 25 years because forecasts have no value and only serve to make forecasters look good.

“Buffett also said this he said recently I haven't looked at an economic or read a market forecast in over 25 years that's because he has said they have no value they only make with men look good”

Sell-in-May-and-go-away is a myth; historical data shows stocks actually earned an average of 10.5% annualized return from November through April compared to only 3.2-3.5% from May through October, but the May-October premium is still positive and not worth sacrificing through taxes and missing 3.2% annual return.

“there is this strategy to sell in May and go away and it's a mitt and all you have to do is look at the data now there's usually a reason for a myth because anecdotal evidence might support it and when I dug into the data I did find that yes stocks actually perform Better In the period from November through April than they do from May through October the annualized premium for stocks is about 7% toal total on average for a year over T bills but it's about 10 and a half annualized from um uh November through April and it's only about three and a half or so less than that from April through sorry May through October but there's still a 3.2% premium so if you sell not only especially if it's a taxable account you you have that but you gave away a premium of 3.2%”

Reinsurance companies (and Berkshire Hathaway's Warren Buffett) have sophisticated climate scientists and underwriters analyzing risk; when Buffett wrote significantly more reinsurance in recent years, it signaled the premiums had reached attractive levels and risk-adjusted returns justified the exposure.

“is there any reason to think insur reinsurance companies are dumb and idiots and they're going to lose money forever or do they have more scientists than anybody studying the climate and eventually they'll price the risk we have 150 the data Ren Buffett runs one of the largest reinsurers in the last two years he wrote more reinsurance than he ever did why because the premiums were met”

The strategy you must get right is diversification across many unique, persistent, pervasive, and implementable risk premiums that survive transaction costs, with logical reasons for persistence.

“you have to do is get the strategy right in the first place which is Diversified across many unique sources of risk that meet your criteria that there's a premium that's persistent over long periods of time pervasive around the globe and C asset classes robust to various definitions it survives transactions cost and it's and therefore is implementable and there are logical reasons why you think it should persist”

Buffett's advice to stay invested and ignore all information—just follow the course—is the correct strategy if you had perfect foresight about the future, because specific outcomes are unpredictable even when conditions are known.

“so that shows you here's what really happened ask yourself would you have been able to ignore all of that and follow Buffett's advice just to stay the course”

Wealthier countries have lower risk premiums on capital because capital becomes less scarce as wealth increases; therefore, the fact that the US was wealthier in 2013 than on average from 1880-2013 means capital was less scarce and should command lower returns and higher valuations.

“the US was a much wealthier country than it was on average over the period from 1880 to 2013 when he was ring and the fact is the wealthier a country is what happens capital is less scarce and when something's scarce it gets a bigger premium”

Large-cap growth stocks significantly underperformed 20-year treasury bonds (the riskless instrument for pension plans with nominal obligations) for 40 years from 1969 through 2008, yet this did not mean growth stocks were bad—investors who held through the period benefited from the 2008-2016 renaissance when growth outperformed spectacularly.

“there's a 40-year period from 1969 through 08 where large cap growth stocks and small cap gr stock growth stocks underperform 20-year long-term treasury bonds which is the riskless instrument for a pension plan with nominal obligations that's 40 years you if that doesn't tell you you need patience and discipline of course you would have missed the next eight period the best ever for large cap or grum stocks right”

Diversification becomes more critical for retirees in drawdown phase because sequence-of-returns risk is higher—a large loss early in retirement, when you're withdrawing funds, cannot be recovered because you're drawing down the portfolio, making smooth returns essential for success.

“especially for retirees because it avoids the sequence risks you face when you're in retirement and in withdrawal because you can't recover you're because you're drawing down your portfolio that's really critical diversification becomes more important the older you get”

A sound diversified investment strategy should be based on factors that demonstrate: (1) persistent premium over long periods, (2) pervasive across geographies, (3) robust to various definitions, (4) survive transaction costs and taxes, (5) implementable, and (6) logical mechanisms explaining persistence.

“what you have to do is get the strategy right in the first place which is Diversified across many unique sources of risk that meet your criteria that there's a premium that's persistent over long periods of time pervasive around the globe and C asset classes robust to various definitions it survives transactions cost and it's and therefore is implementable and there are logical reasons why you think it should persist”

The US was substantially wealthier in 2013 than on average from 1880 to 2013, and wealthier countries have less scarce capital, reducing the scarcity premium and justifying lower relative PE ratios—another reason Grantham's 2013 bearish valuation case was wrong.

“and the fact is the US was a much wealthier country than it was on average over the period from 1880 to 2013 when he was ring and the fact is the wealthier a country is what happens capital is less scarce and when something's scarce it gets a bigger premium so all these reasons were wrong”

Warren Buffett stated he has not read a market or economic forecast in over 25 years because forecasts have no predictive value and exist primarily to make forecasters appear credible.

“Buffett has told people that you shouldn't try to time the market but if you can't resist buy when everyone else's Panic selling uh and sell when everyone else is greedy but Buffett also said this he said recently I haven't looked at an economic or read a market forecast in over 25 years that's because he has said they have no value they only make with men look good”

Every single risk asset must go through extended periods of poor performance; this is not a reason to avoid the asset class but rather a reason to diversify risk assets with assets that are uncorrelated (like bonds when stocks are down), as this smooths overall portfolio volatility.

“you have to understand that every single risk asset must go through long periods of bad performance and that's not a reason to avoid the asset clim what is that a reason to do diversify with them when they're down assets that tend not to look like the stock market invested”

Active management is a loser's game in both bull and bear markets; over 90% of active managers underperform indices over 10-15 year periods, and only 2% were generating statistically significant alpha after adjusting for common risk factors (size, value, quality).

“I have probably heard tens of thousands of Market strategists on CNBC or Bloomberg and they're asked the question about is this going to be an indexes or investors or stock Pickers Market I have never once ever heard any one of them say this is not anything other than an active Investor's market and every year it doesn't matter what they underperform persistently especially over longer periods once you look at 10 and 15year periods Morning Star in their data which un fortunately includes some survivorship bias because it only includes the funds that survived the whole period okay 90% plus of the active managers underperformed at the in”

Passive investing does not cause concentration in large-cap stocks because flows are proportionally allocated according to market weights (1% inflow goes to 1% position), whereas active manager decisions (tilting away from index) cause concentration.

“no I don't think that drives up the price of the big stocks at all remember money's coming in proportionally so if a stock is 1% of the index 1% goes in and they buy the same stocks the pressure isn't there that's not what causes concentration what's causes concentration is after managers who are making debt right remember if you're passive you're just buying the pr routed share of the market that's what's there”

If an investor listened to Jeremy Grantham's 2013 warning about market overvaluation and became anxious due to confirmation bias about threats like high P/E ratios, they would have missed one of the greatest decades of stock returns in history.

“imagine the poor investor who was concerned in 2013 uh about the market and its high PE ratios maybe the K1 and listen to Grandam confirmation bias bails out and this is one of the great decades uh ever”

Valuations measured by current P/E or Shiller CAPE 10 ratios show only ~0.4 correlation with future 10-year returns, meaning valuations have nearly zero predictive power for one-year returns and cannot be used to time markets even over decades.

“the correlations of virt zero so you cannot use them to time markets uh even at 10 years”

At the end of 2023, 20 Wall Street analysts predicted S&P 500 returns ranging from -12% to +13% with an average of +2%, but the S&P 500 actually returned +23-25%, making the average forecast off by 21 percentage points—more than double historical average returns.

“we ended uh 2023 I think at roughly 4770 20 analysts looking at the following year from the leading Wall Street firms predicted anywhere from a down 12% to an up 13 the average was for a gain of two well we know the S&P itself went up 25 uh% 23% with the index when the average was two the average was only left by 21% which is more than double the historical return to the stock market”

In the last seven years, the consensus forecast for S&P 500 returns has been off by at least 14% every year, representing the minimum error across the entire spectrum.

“Vanguard created a chart uh which anyone can look on the article it's there in the last seven years the consensus forecast the least it was off was by 14% I think that pretty much covers uh you know the Spectrum there”

Experts making medical diagnoses based on MRI scans who report 90% confidence are correct only about 65% of the time on average, while AI makes far fewer mistakes in the same task, demonstrating that overconfidence is systematic.

“one of the biggest problems we have even experts say a doctor has been giving uh they showed them an x-ray or an MRI let's make it a more complex thing like an MRI and they're asked to diagnose the problem and then they ask them how confident you are in their actm when they were the know these are experts in their field when they were 90% confident they were right they were on on average maybe 65% AI does a much better job than the experts for example there because they don't make mistakes or far fewer anyway”

In the late 1990s, growth stock P/Es rose to 40 while value P/Es stayed at 12, creating a spread that was the largest value premium in history; the self-healing mechanism then worked as growth crashed and the premium reversed over the next 8 years.

“let's say the PE of growth stocks is normally say 16 and value was 12 oh let's say the market was 16 value 12 and growth might have been 18 well by the end of 99 the growth was trading at 40 and value was trading at roughly about the same 12 so while the market was vastly overvalued or highly valued at any rate predicting future low returns especially for growth stocks the spread between value and growth had widened so much that it was predicting the largest value premium in history and that's exactly what we got over the next eight years”

Passive investing does not cause concentration in large stocks; rather, passive flows are proportional—if a stock is 1% of the index, 1% of new money goes to it, so passive money creates no pressure. Concentration is caused by active managers making bets and overweighting certain stocks.

“remember money's coming in proportionally so if a stock is 1% of the index 1% goes in and they buy the same stocks the pressure isn't there that's not what causes concentration what's causes concentration is after managers who are making debt right remember if you're passive you're just buying the pr routed share of the market”

Elaine Garzarelli correctly forecasted the October 1987 crash, received a large promotion and money to manage funds, but subsequently performed terribly, was fired, moved to another fund that also performed poorly, and then disappeared from view—a pattern more common than sustained forecast success.

“probably the most famous one is Elaine garelli you guys may not be old enough to remember Elaine but she correctly forecasted the October 87 crash and she got a big promotion that gave her huge money to run few years later of course they fired her because her performance terrible she went on and found another fund that did terrible and then she disappear”

'Sell in May and go away' is pure superstition and equivalent to following astrology, with no logical foundation beyond pattern-matching historical data.

“you might as well follow astrology uh that's number one”

Reinsurance companies are not stupid; they employ many scientists studying climate risk and will eventually price that risk correctly, so the self-healing mechanism works in reinsurance as in all assets.

“is there any reason to think insur reinsurance companies are dumb and idiots and they're going to lose money forever or do they have more scientists than anybody studying the climate and eventually they'll price the risk”

In commodity markets, the self-healing mechanism occurs through supply: when prices fall, mining operations shut down, reducing supply; when prices then rise due to supply scarcity, new mining investment is encouraged; within five years, new supply appears and prices fall again—the cycle repeats automatically.

“say in mining stuff what happens to Precious Metals prices they go way down m shut down no Supply guess what happens to prices go way up and then right but they're not there but now what happens price goes way up and guess what now you get people opening new mines investing and five years later you get extra Supply you get the selfhealing mechanism”

The periods immediately preceding long equity underperformance stretches showed spectacular returns: the 1920s were the Roaring Twenties with record valuations, the 1950s-60s had the Nifty Fifty, and 1980s-1990s had deregulation and great returns, yet investors who couldn't tolerate underperformance missed the subsequent crashes and recoveries.

“think about what was before 1929 through 43 I was the Roaring 20s stocks were now at an alltime permanent Plateau said Irving fiser one was the you know the greatest Economist of that era and then you had the coming out of World War II you had the 50s and [22:39] early 60s and the nifty50 spectacular stock returns and then it crashed and then you had Ronald Reagan and the change in deregulation and you had the you know Doom era and we had another great period and we've had a a really bad bare Market from uh 2002 and then the market again recovered”

Your investment time horizon must be at least 10 years if you want to invest in risk assets, because only at that horizon can you be confident that stocks will outperform risk-free treasury bills; otherwise, you don't have certainty of positive returns and should not take equity risk.

“your Ron better be at least 10 years should be longer or you shouldn't be investing in any risk asset because it's pretty simple let's say that you would guarantee that stocks would outperform one month T bills the riskless instrument over a 10-year period Well now there's no risk or you have to do is wait 10 years and you're guaranteed for what happen”

There are three periods of at least 13 years when the S&P 500 underperformed risk-free Treasury bills: 1929-1943 (15 years), 1966-1982 (17 years), and 2000-2012 (13 years), totaling 45 years or 47% of the last 96 years—demonstrating that extreme patience is needed.

“there are three periods of at least 13 years where the S&P 500 underperformed totally riskless t- bills the 15 years from 29 to 43 the 17 years 17 years from 66 to 82 and near the end of that period I think it was Forbes ran an article the death of equities money was going end up in coin and stamp collections said the president of Solomon Brothers if my memory serves all right and of course the next decade was the best ever next two decades were the best ever uh and then just recently 2000 through 12”

Peter Lynch, despite being considered one of the greatest investors of all time, never tried to time the market and was 100% invested in stocks, yet investors ignore this fundamental principle despite its universal endorsement by the best investors.

“Peter ly said he never tried to time the market he was 100% invested in stocks”

If you have reinsurance at 5% of portfolio and it drops 30%, you lose only 1.5%; that's why diversification exists—to keep tail risk manageable so you can weather poor periods and capture self-healing mechanisms.

“if you had reinsurance or any other asset say you know it's 5% of your portfolio it's down 30% so you lost one in a half% it's not the end of the world that's why you diversify and don't put all your ex and one Bears”