A Much Better Alternative to Trading

The Dow rose back above 17,000 yesterday. All clear. US stock market investors: Your money will probably not die today. Maybe tomorrow.

But does it really make sense to be in the US stock market now?

There may be apples higher up in this tree, but it is dangerous to reach for them.

We came up with our Simplified Trading System (STS) a long time ago as a way to tell us when it was time to put away the ladder. We weren’t completely serious about it then…and still aren’t now.

Still, it’s a great system…but only for people with the life expectancy of Methuselah and boundless patience.

The original idea was that there was a time to be in stocks and a time to be out. When you were out…you just stayed in cash. And because we’re talking about long periods of being in cash, you should be in the ‘cash’ that holds up over time: gold.

P/E < 10 = Buy stocks.

P/E > 20 = Sell stocks.

Otherwise = Gold.


Well, yes and no. You have to decide how you’re going to calculate the P/E ratio, for example. And therein hangs a long and complicated tale…

Artificial earnings

Forward earnings estimates? Last year’s ‘as reported’ earnings? Earnings averaged over the 10 years and adjusted for inflation? Normalized earnings?

To put this in perspective, we are suspicious of ‘as reported’ earnings. The Fed and other central banks are artificially pushing down interest rates. This artificially pushes up earnings.

That’s because ultra low rates push down corporations’ interest expenses on their debt. Meanwhile, earnings per share — even more important to shareholders than earnings — rise due to debt-fuelled share buybacks.

We’d rather base our strategy on something more real. And right now, we guess that earnings, adjusted to normalized interest rates, should put the P/E ratio way over 20 — long past our ‘sell by’ date.

Sure, our STS can be improved. But had you followed the system since 1980, you would have bought the S&P 500 in the early 1980s and enjoyed at least 10 years of that bull market. (The index had started trading above 20 times earnings by 1992.)

You would have made about three times your money by the time you got around to selling out. (At that point, the better move would have been to put a trailing stop-loss on your position. But who knew?)

This would also have put you into gold near its bottom. Let’s say you bought at around $400 an ounce. Stocks have not fallen to a P/E, on last year’s earnings, of less than 10 since. So, you’d still have your gold — now worth about three times what you paid for it.

If you’d started in 1980 with $10,000, now you’d have about $90,000 — with almost no fees or trading costs along the way…and only one tax event (at capital gains rates).

If you’d started with $1 million, you’d now have about $9 million.

Better than the STS?


No. But not bad for making a total of two moves…neither of which was very risky.

But of course, you would have missed all the fun of trading in and out…talking to your broker…watching Jim Cramer on CNBC…and reading our newsletters.

And today, you’d be sitting on a pile of gold, cursing us for having kept you out of one of the biggest bull markets in history.

But can you really expect to do better?

Maybe! We developed the STS because we don’t have the temperament to do serious stock research. We enjoy economics…and trying to put the pieces of the big puzzle together. We don’t have a head for the painstaking, detailed work required of a stock analyst.

But we’ve seen that a careful investor who is willing to do his homework can outperform the markets over long periods.

We saw evidence in the track records of our own colleagues Porter Stansberry and Chris Mayer, for example — who have more than doubled the market averages over the last 10 years. Thousands of other investors have done likewise.


Bill Bonner
For Markets and Money

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Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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