Stay On Board. The Real Melt Up is Coming.

All my friends were getting rich… And I was the fool stuck on the sidelines.

I told myself, “This can’t possibly go on.”

The thing is, it DID go on… for years.

Don’t be the fool that I was back then. Please, learn this lesson.

I will share what I learned with you up front. But I urge you to read the rest of this letter as well. It could be the difference between making a lot of money… and missing out.

  1. Just because stocks are expensive, it doesn’t mean they can’t go much higher.
  2. High valuations are a symptom of a stock market peak… but they are never the cause of a stock market peak.
    Let me share my personal experience with this…

By the end of 1994, stock prices had gone up for 12 out of the previous 13 years.

Said another way, stocks had lost money in only one calendar year since 1981.

As you might guess, after that 13-year boom in stock prices, stock valuations were getting expensive.

Any rational person would think stock prices couldn’t go much higher.

And then, they did go higher… Stocks soared 38% in 1995.

That drove stock valuations to crazy heights…

Stocks had only been so expensive two times in history – in 1929, and in the late 1960s.

You can see this by looking at the cyclically adjusted price-to-earnings (or CAPE) ratio, one of the best ways to measure value in the markets.

Take a look…

Those two previous peaks were significant. The Great Depression followed the 1929 peak. And stocks lost a fortune in the 1970s after the late 1960s peak… shedding nearly half their value from 1973 to 1974, adjusted for inflation.

So in 1994 and 1995, any rational person would have said again that valuations were extreme – hitting levels that had preceded the two greatest stock market busts in the 20th century.

But after soaring 38% in 1995, stocks jumped 23% in 1996.

Astonishingly, that STILL wasn’t the end of it… Stocks soared another 33% in 1997.

By the end of that year, stocks had become more expensive than at any time in history. Take a look…

That was a sure “sell” signal – right?

No. Instead, what happened next shocked all rational people…

Stocks went up – again – in 1998. And once again, it was a BIG gain. The S&P 500 Index went up 29%. And tech stocks went up even more – the Nasdaq soared 40%.

From there, it got even crazier…

In the late 1990s, many of my buddies were leaving their “real” jobs and joining dot-com companies. They got stock options for changing jobs. On paper, they were worth more than I could imagine.

And I started to feel like the fool – for staying on the sidelines, instead of joining them.

Stocks just kept going higher… The Nasdaq soared a ridiculous 86% in 1999. Take a look at what happened to valuations before the boom was finally over. They went up further than any rational person would have thought possible…

If you were smart enough to know that valuations alone don’t kill bull markets… and if you were bold enough to simply stay on board as the stock market “melted up”… then you would have made an absolute fortune.

To be honest with you, I was neither smart enough nor bold enough to do those things…

I personally missed out on most of the upside in the late 1990s. And I missed out on basically all of the upside of the dot-com boom in 1999.

I didn’t believe in it. It didn’t make rational sense. Stocks were record-expensive, and people were acting completely irrationally.

Now, I am older and wiser. (Certainly older… hopefully wiser!)

I have stayed on board today’s bull market longer than any other analyst I know. My experience taught me two important lessons…

  • Valuations are high today – but not absolutely crazy based on history.
  • Valuations alone don’t kill bull markets.

People are not acting completely irrationally – not yet. And as we saw in 1999, that is the hallmark of a true market top.

In short, stocks have been going up for a long time. But we’re not there yet.

Stay on board. The real Melt Up is coming…

Good investing,

Steve

Source: Daily Wealth