A Big Decision for the Dysons

CHISWICK, WEST LONDON – On Monday, we looked at the CAPE ratio, Nobel Laureate Robert Shiller’s ratio of the S&P 500’s price relative to its earnings. Right now, the price of the S&P 500 is the highest it’s ever been relative to its earnings, except for 25 extraordinary months between the years 1998 and 2000.

Today, we look at the Q Ratio…

I’ll unpack that more below. First, an update…

Moving On

Greetings from my mum’s house in West London.

After a lot of back and forth, we’ve decided we’re going to sell this house and most of the stuff inside it. Then, we’re going to put the possessions we treasure most into storage.

Our thinking is this: You only get two parents. My father and Kate’s parents live in the USA.

So, instead of living here, we’re going to bid goodbye to London and move closer to them. It brings tears to my eyes to be writing these words, but it’s what we want to do. We want to spend time with our parents.

My mother worked extremely hard as a self-employed tourist guide in London for three decades. It was normal for her to work 30 or 40 days in a row in the peak season, 16 hours a day, on her feet the whole time. Then, she lived very frugally, and made a very wise property purchase in the 1980s.

Thanks to my mother’s sacrifices, we will have inherited almost $1 million. (My dad paid for English boarding school. You can read my boarding school memories here, here, and here.)

Endless Vacation

Three years ago, I had an epiphany. I lost my business, got divorced, and went through a very deep episode of depression. I only recovered when I reorganized my priorities. I realized the only thing I value in life anymore is being around family and experiencing bonhomie together. So we got rid of all our possessions and attachments and hit the road together, seeking adventure.

We call this the “Endless Vacation” (you can catch up on that here and here).

We estimate our “endless vacation” costs about $40,000 per year. We intend to use the savings we are very fortunate to possess to finance our lifestyle by investing it in the stock market and generating ROI. We’ve been doing this for three years now, and so far, so good…

Tobin’s Q

Back to stock market valuations…

The Q Ratio, also called Tobin’s Q, compares the stock market’s valuation of companies in the S&P 500 with their actual net worth, measured at replacement cost. Its long-term average is about 0.77. The chart below shows the Q Ratio going back 120 years on the bottom and the S&P 500 adjusted for inflation on top.

When the line on the chart is high, it shows that the S&P 500 has a high price relative to its net worth. It’s expensive. When the line is low, the stock market is undervaluing the S&P’s actual net worth. Right now, the S&P’s net worth is valued by investors at the highest price in history, 1.91x, which is 149% above its average.

Now look at this chart of the S&P 500. I’ve laid above the Q Ratio chart. It shows the S&P 500 adjusted for inflation. Notice that buying the S&P 500 at such high Q Ratio valuations as we had in 1905, 1929, 1937, 1968, and 1999, and as we have today, was never a good decision in terms of market timing.

We know the reason valuations are so high is because of falling interest rates and massive credit supply. And we know these reasons won’t be so much of a factor anymore (because interest rates are as low as they can go).

We know the best time to own the S&P 500 is when valuations are likely to expand and we know the worst time to own the S&P 500 is when valuations are likely to contract. With all that we know, I’m left with the unshakeable conviction that now is a terrible time – perhaps the worst in all the financial history – to own the S&P 500.

What’s the correct response to this chart from a traveling family looking to finance its “Endless Vacation” with ROI?

In my opinion the correct response is to stand aside and avoid all exposure to the S&P 500. For us this means owning gold and other cheap hard currencies, and waiting for the bubble in the S&P 500’s valuation to burst so we can swoop in like vultures and buy great businesses at much more reasonable prices. We are prepared to wait as long as it takes…

– Tom Dyson

P.S. The bubble in stock market valuations (and property and bond market valuations) is symptomatic of a massive surplus of capital relative to the number of ROI opportunities. Balance will only be restored by either reducing the surplus of capital, by A) devaluing it through inflation or B) deleting it through default or by C) increasing the number of ROI opportunities (growth).

The political class has chosen paths A and C. It’s as simple as that. The only safe place left, therefore, are long-term assets of limited supply that are still cheap. They’re very difficult to find…

Readers warn about the dangers of formal education, praise Tom and Kate for homeschooling their children, and share some encouraging words…

Reader comment: Keep your kids the hell away from formal, organized education if you value their minds and souls. We had three children in public schools and three more in a Catholic private school that was considered elite. And guess what? They’re all idiots today because of the brainwashing by the system. And soulless to boot. About all they learned was how to game the system.

Your kids deserve better!

Reader comment: Keep up the great work. Be careful when you go to pick up the car, you might like the weather and not want to return to London. Sounds like you guys are just having a blast which that’s what it is supposed to be.

Continue to enjoy the things you enjoy, and the rest will fall into place.

Reader comment: My wife and I chose to homeschool our girls from day one. Our daughters are now 24 and 21. They both were homeschooled K-12. Both have gone on to receive an associate degree from a local community college. In my opinion, it is the best thing we could have ever done for our girls. My wife was the “coordinator” as you have described it. They had been given guidance and direction and a schedule to adhere to.

My wife never thought she could do it, but she did, with outstanding results. I wouldn’t have done it any other way. The misconception that children will lack social skills is a narrative pushed by the traditional education system.

We lived in a rural area, 30 minutes or more from a city, yet my girls were able to interact with other children in homeschool groups learning music, swimming, Girl Scout activities, anything they chose to do.

Keep giving your children a real-world education. There is no better way to teach them than what you are doing now. God bless.

Tom’s note: As always, thanks for writing in! Please keep your messages coming at [email protected], and I’ll try to answer as many questions as I can in a future Friday mailbag edition.