Beware of Investment Models With MONSTER Returns

Robert Shiller’s CAPE ratio for projecting future returns is a great tool to be aware of. (Remember it’s a TOOL, though. Not a guarantee!)

CAPE stands for Cyclically Adjusted Price Earnings which ‘smooths’ out previous earnings and prices relative to inflation. The reason it’s important is that it doesn’t get too caught up in one specific year to gauge valuations.

For instance, in 2006 earnings were through the roof relative to prices. That would indicate that stocks were valued LOW and thus a great buying opportunity…right?

IN 2009 earnings dropped like a brick in water relative to prices and thus P/E ratios were through the roof, indicating stocks were WAY overvalued and should be sold, right?

WRONG! On both fronts.

And this is why the CAPE is such a good tool, but it takes away some of the year over year anomalies that transpire and instead levels things out over time.

The problem with CAPE though is that its been quite high, for going on a decade now, relative to historic norms. Thus, when Shiller revisits other times the CAPE has been this high, we get scary results.

.9% REAL returns for the next decade on average.

Will that come to frution? Anyone’s guess.

But what happens if we use one of the CAPE’s biggest crtic’s, Jeremy Siegal, numbers. Even then we get around a 3.5% Real return for the next decade.

Spit in the middle and we’re looking at 2%! YIKES!

Look, I’ve no clue what’s going to happen over the next 10 years. You don’t either. But I do know that you need to really be focused on things you can control.

1. EXPENSES -especially investment expenses. If we are going to get low returns, you simply can not afford 1% a year in investment fees. It’s simply not worth it.

2. Debt: Pay it off!

3. Social Security: DELAY, DELAY, DELAY!!! That’s 8% a year increase which you should not expect to get in the markets. Oh, Social Security also grows WITHOUT risk too!

4. Understand your cash flow. You need to know where your $ goes especially if you’re about to retire.


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If someone told you he was able to get his clients 18.7% a year over the last 20 years would you give him your money to manage?

I hope not! As in this video I show you how people use, “misuse?”, investment models as a way to show their investment performance.

The problem with models is EVERYONE and their mom has a model they can backtest to “prove” anything. As someone once said, if you torture the data enough it will confess to anything.

So tell me…how is YOUR investment model going to generate positive alpha over ALL the other models, algorithms, PhDs, AI, etc.? You think you’ve found the magic solution that NOONE else can exploit?

What happens with investment models is that when they work for a bit they generate excess cash flows. And thus the model loses its ability for future outperformance. And many a money manager is left on the streets without shoes wondering what went wrong. “it always worked before,” they’ll say.

Yup, always does. Until it doesn’t. Just hope you weren’t leveraged when the markets caught up to you, as it certainly will.

Models also never take taxes into consideration. For instance, the guy I hammer in this video he simply says the way to generate excess return is to get out before the markets drop and back in before they go up.

Whoa! Who knew??? But even if you were able to do that, what’s the tax consequence of all that selling?


Yeah, I’m cynical. Been around too long not to be.

Hopefully, my cynicism can rub out on you too so you can protect you assets.

What’s the best way to get good returns??? Shhh…don’t tell this to anyone.

It’s to stay in the market, good times AND bad. Historically, the good times have outweighed the bad and thus you made money. Will that continue? Anyone’s guess.

But the alternative is what??? A 2.84% 10 Year Treasury bond. Oh, and that’s BEFORE tax and inflation. Not going to make much return there.

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