SMI on the Radio: In a Hot Market, Focus on Risk First and Returns Second (audio and transcript)

Feb 22, 2021
Listen to Article:

With the stock market rocketing higher and higher, it’s tempting to throw investing caution to the wind.

But as SMI executive editor Mark Biller explained on Moody Radio’s MoneyWise Live, it is far better to have "the wisdom to show restraint."

To listen, click the play button below. Scroll down for the transcript.

(And for more radio appearances by members of the SMI team, visit our Resources page.)

MoneyWise Live, with hosts Rob West and Steve Moore, airs daily at 4:00 p.m. ET/3:00 CT.


Steve Moore: "Do not wear yourself out to get rich, have the wisdom to show restraint, to not trust your own cleverness. Cast but a glance at riches, and they are gone."

Those are some wise words to guide us with our investments from Proverbs 23. Anyone can have a long-range plan for their retirement savings, but sticking to it — ah, that’s the hard part today. Host Rob West welcomes investing expert, Mark Biller to talk about that and more on Moneywise Live.

Well, Rob, our friend Mark Biller is executive editor at Sound Mind Investing, where they’re always the calming voice of reason when folks are fearful or tempted to throw caution to the wind looking for a quick profit.

Rob West: Well, that’s exactly right. And Mark always great to have you back on the program with us.

Mark Biller: Thanks, guys. Glad to be back.

Rob West: So today, Mark, we’re talking about a great article. You have posted on the SMI website. It’s entitled The Wisdom to Show Restraint — and I guess that’s in short supply right now, isn’t it?

Mark Biller: Yeah, that’s right, Rob. You know, there’s a measurement of how positive stock market investors are feeling. That’s called the Citigroup Panic/Euphoria Indicator. And at the beginning of this article that we’re talking about, we discuss how last month this indicator showed that market sentiment was the most euphoric it’s ever been in the history of this indicator. Even surpassing the reading from the previous peak, which was during bubble in early 2000.

You know, there are lots of other signs of this euphoria around too. You can look at things like that GameStop frenzy that I know you talked about here on MoneyWise at the end of January now because we’re particularly numbers-driven at SMI. We highlighted in the article, one of Warren Buffett’s favorite market valuation signals. And that’s the ratio between the total value of the U.S Stock market and U.S. Gross domestic product or GDP.

So in other words this ratio measures how richly valued is the stock market compared to the actual economy, which makes it a good measure to compare across time as the economy has grown over the decades. Now, this particular indicator was interesting to us because a year ago, exactly one week before the COVID-19 bear market began, we wrote an article for SMI readers that showed that this indicator had just surpassed its March 2000 peak level, which was roughly 143%.

Now we fast forward to today — and of course, this is following a full year of these rolling lockdowns and this massive global recession we’re trying to fight our way out of. And while you’d expect this ratio would have gone down — the value of the market relative to the economy might’ve come down — just the opposite is true. It’s actually soared from 143% a year ago to 192% today. So, in other words, the stock market has never before been this richly valued relative to the actual economy.

Rob West: Wow. Fascinating, Mark. How do you account for this? Especially since parts of the economy are still in fact suffering from COVID shutdowns.

Mark Biller: It’s usually a mistake to try to boil down the market’s behavior to any single factor, but I’m not going to let that stop me here. (chuckle) The uncomfortable reality is today’s market levels clearly are based to a large degree on the belief that the world’s central bankers and governments are justifying these high valuations through low interest rates and just massive fiscal and monetary support. And to their credit, investors have learned over the last dozen years that when governments take these kinds of actions that we’re seeing today, a large portion of that support winds up driving up the prices of stocks and bonds. And, to be fair, governments around the whole world have never acted at this kind of scale before.

Rob West: And, to be fair, you felt like it was necessary, right?

Mark Biller: Yeah. I mean, they were trying to fill in this giant pothole caused by these economic shutdowns. So they clearly had to do something,

Rob West: What’s likely to happen as a result of all of this incredible monetary policy and stimulus.

Mark Biller: You know, we have to say anything can happen, right? We never know with any certainty what the future is going to hold. But from these current levels — these high valuation stock market levels that we’re talking about — the two most likely paths forward seem to be either, on the one hand, we will eventually see this market bubble pop anyway and we get the kind of deflationary bear-market type of scenario that we’ve always seen at the end of prior episodes of significant market excess and euphoria. So that’s one path.

The other path is that all of this government spending and borrowing ends up devaluing the value of our money to the point where the 40-year inflation cycle reverses. And we start seeing higher inflation again. Now, to be very clear, this doesn’t necessarily mean that we’re talking about like 40% hyperinflation or anything like that. But even a return to inflation of 3%, 4%, 5% — that would be a huge change relative to what we’ve seen the past couple of decades.

Now, in that scenario that inflation could potentially continue to hold asset prices up without there being a big decline, while the real value of those assets is actually eroding little by little due to that inflation. Now, that could potentially give a way out without asset prices having to drop really significantly from current levels.

Rob West: Well, in that second scenario you just described, where the erosion of purchasing power is hidden, that’s clearly more palatable to policymakers, right?

Mark Biller: Oh, absolutely. That’s the outcome they’re clearly targeting with both their words and their actions. And, you know, they’re confident that they can contain this inflation if it shows up, which is historically been a very dangerous game to play. But they want really at all costs to avoid letting the markets go down that deflationary path — the first path — because there’s a lot of pain with that, especially when you consider that in all likelihood, the economy would be likely to follow that path down into another recession.

Rob West: Is it really possible that it could be different this time? I mean, we’re looking at all of the warning signs that we’re overvalued. We’re 12 years into a bull market, so the cycle is ripe to roll over. Can we actually avoid a big bear market at the end of this run-up in stock prices?

Mark Biller: That is certainly the question of the day, right? And we look back to the famous investor, John Templeton, who’s famous for warning that the words "this time is different" are among the most costly words in investing. Now, what most investors don’t remember though, is Templeton did concede that about 20% of the time that phrase is actually true.

And I would just say that this time in many respects is different from the standpoint that we just have no historical precedent to compare today’s level of government policy and involvement with. And that does make it impossible for us to say for sure which of these two paths markets are going to follow. So, given that, what do we do as investors? What do we do with that uncertainty?

And that’s where the verse from Proverbs 23 that Steve quoted at the top really says it all. We need to have "wisdom to show restraint." A lot of investors right now are falling into the trap of blowing right past restraint as they chase future riches and returns right now. But that doesn’t mean that we have to do that same thing just because the rest of the market is.

Rob West: That’s a good word. Mark, talk to us just for another moment about this monetary policy, because interest rates are supposed to be an indicator of the real risk that’s embedded in the markets and the economy. But if we’re manipulating that, aren’t we in a sense covering up what might actually be going on behind the scenes?

Mark Biller: Oh, absolutely. You know, we’ve got a very large element of "when your only tool is a hammer, everything looks like a nail" going on right now with the central banks. And, really, they have been pounding the only policy tools that they have, and that they know how to use, and hitting them harder and harder over the last 12 years — to where over the last year, we’ve heard the chairman of the federal reserve repeatedly punting when asked, you know, "What else are you going to do? What else can you do to help the economy?" He’s continually punting now and saying, "We’ve basically done all we can. We need fiscal policy" — which is the Congress, the government — "to come in and do their part. Because from the central bank side, with the interest rates, we’ve done everything we can."

Rob West: All right, Mark, we’ve got just a couple of minutes left. What are some tips to help investors check this impulse that we’re talking about and really align themselves with God’s best for their investments?

Mark Biller: I would say, Rob, the first key to investing in overvalued or potentially euphoric markets like we have today is to focus on risk first and returns second. And that’s the opposite of what our natural tendency is when we see the market going up, up, and away. Our investment choices regarding what strategies we use, the types of assets that we own — that really needs to be based on the idea that another sharp downturn could happen at any time from these levels where we’re at.

And then a second kinda related point would be not to take on more risk than is necessary to meet your specific goals. If you’ve been blessed to be in a position to meet your retirement goals with a less-aggressive investment plan than what you used to have, well, that’s fantastic. Dial back your risk. So many investors lose sight of the fact, especially in a hot market like this, that the object isn’t to build the biggest nest egg possible. It’s not about "beating the market." What your goal needs to be is to be a good steward and to be able to meet your future financial needs.

And a final point to help steer clear of danger is to set an ultimate finish line and then scale back your investing risk once you reach it. And that can protect you from sacrificing things you truly treasure — like financial freedom and security — in pursuit of things you no longer need, which is more dollars in an investment account.

Rob West: Absolutely. Well, Mark, you always keep us grounded, you always have timely wisdom and analysis — and we’re grateful for you stopping by.

Mark Biller: Well, thanks for having me glad to be here.

Steve Moore: SMI’s executive editor, Mark Biller has been with today. You can read his article The Wisdom to Show Restraint when you visit them at You’re listening to MoneyWise Live.

Written by

Joseph Slife

Joseph Slife

Joseph Slife has been a news writer for the Associated Press, a college instructor, and a radio host. He and his wife Joye have three grown sons.

Revolutionize Your Investing Approach

Unlock Your Wealth-Building Potential with Sound Mind Investing

Don't leave your investments to chance. Let Sound Mind Investing guide you to financial success. Experience the power of our simple, rules-based strategies and see your wealth grow.

Unlock your wealth-building potential for as little as $0.32 a day.