The one truth about speculation: The stock market is manic-depressive. It swings from oversold to overvalued every generation or so.
The simplest market-timing system, therefore, is to be a contrarian.
That means buying stocks when everyone else is selling… and selling stocks when everyone else is buying.
In my case, selling stocks also means waiting on the sidelines in gold. More below…
Our Contrarian Idea in Action
I first understood this idea at school, studying the Crash of ’29 and the Great Depression in history class.
I was just getting interested in investing. I bought my first stock at age 11, and it’s been my “guiding star” ever since.
The chart below shows that contrarian idea. It tracks the P/E ratio of the U.S. stock market going back 120 years.
(The P/E – or price-to-earnings – ratio measures how much investors are paying for every $1 of a company’s earnings.)
You don’t need to understand everything that’s going on in this chart.
Just notice how valuations have oscillated around the mean (the horizontal black line). They’ve been moving between overbought and oversold.
And notice the towering peak in 1999.
It was with this perspective that I watched the tech-stock mania and the bursting of the bubble in 2000.
The internet and technology had caught the public’s imagination.
Taxi drivers were recommending stocks. Grandmothers were forming investment clubs. And the press was talking about a “new era” in which stocks would never fall again…
“This is straight out of the textbooks,” I thought at the time. “A classic mania.”
I didn’t have any money to invest back then. I had just graduated from university.
But I did have the insight that this moment would positively, absolutely mark the beginning of a new market cycle… that gold would outperform stocks… and that valuations had begun their long walk down the mountain.
That was 20 years ago. Since then, gold has outperformed stocks by about 5-to-1. And I’ve been bearish on stock market valuations the whole time. I’ll continue to be bearish on them until we reach the cycle trough.
If my hypothesis is correct, the prescription is simple: own gold, sell stocks.
When we reach the cycle trough, it’ll be time to sell gold and buy stocks. But that’s still years away. For now, gold is the place to be. Stocks are the place NOT to be.
But how do we know when we’ve reached the cycle trough? For that, I follow the Dow-to-Gold ratio.
It tracks the Dow Jones stocks as priced in gold. And it tells us the best times to buy gold, and the best time to buy stocks.
You buy stocks when they are cheap relative to gold. That is, when the Dow-to-Gold ratio is below 5.
You sell stocks when they become expensive – when the Dow-to-Gold ratio rises above 15. At that point, you sit in gold until stocks become cheap again (in gold terms).
When the valuations bear market began in 1999, the Dow-to-Gold ratio reached 41. It’ll be below 5 when the valuations bear market is over… which I expect will happen sometime in the next five to 10 years.
The Dow-to-Gold ratio is at 14 today.
– Tom Dyson
P.S. Kate and I went “all in” on gold two years ago, as a way to keep our wealth safe while we wait for the Dow-to-Gold ratio to fall. I invested nearly $1 million of my own money into this strategy. And last week, I shared the details in a special briefing. If you missed it, watch the replay right here.
Gratitude for Tom in today’s mailbag, as readers share the impact of these Postcards on their lives…
Reader comment: Tom, hello! Congratulations to you and all of us for joining in this new venture and adventure! I listened to the story that you conveyed of your life and believe that you will become stronger for it. Also, you are very fortunate to have your family, Kate and the children! How lucky all of you to be together again. I look forward to building our investor futures together.
At any rate, we know that there are no guarantees but can enjoy the ride along the way. My best to you and all! P.S. Am I excited about the prospects of our venture? Yes, yes, and yes!
Reader comment: Thanks for sharing so much of your personal life through the lens of these Postcards. There are so many extremely valuable lessons you have learned on your journey. Knowing that you now have the personal relationship with your family that fulfills all of you is something that most families never really find, especially when they have such young children who have seen their parents divorced (and then reunited). You’re a lucky man and a lucky clan!
Teaching kids outside the box (a conventional classroom) has many trials, but also so many more wonderful benefits. Your kids will undoubtedly grow up as true “chikyujin,” (citizens of the world in Japanese), and certainly understand this planet much better than traditionally schooled kids. It’ll be so much fun to see what path they ultimately choose for their lives!
No matter what happens in this crazy world going forward, I’m sure your family will be able to “go with the flow” and come out the other side stronger.
Reader comment: Narcissistic? I think not. Would anyone (not in a miserable state of mind) say that to Beethoven? Mozart? Picasso? Vivaldi? Of course not. Keep those pictures, notes, failures, dreams, and hopes coming! Most of us love them. They reflect the human dramascape somewhere, for someone, everytime you write/post. They are inspiring, uplifting, teary, like rooting for your favorite team!
Tom’s response: Thank you for your messages! Please keep writing us at [email protected].