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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to How to Retire On Time, a show that answers your retirement questions. We're here to move past that oversimplified advice you've heard hundreds of times. Instead, we want to dive into the nitty gritty because, well, frankly, there there's no such thing as a perfect investment product or strategy. There are certain things you just need to know, so we wanna dive into that. As always, text your questions to (913) 363-1234.
Mike:And remember, this is not financial advice. This is just a show. So do your research. David, what do we got today?
David:Hey, Mike. Is the market overvalued? Great question because this is popping up
Mike:in everyone's feed. Market's overvalued. Oh, look at this. Look at that. And it's a lot of fear and trepidation now in the market.
Mike:Overvalued is a subjective term. Before everyone gets upset with me by saying that, let me explain.
David:Okay.
Mike:Alright. David, what's the appropriate price of eggs?
David:I could give you an answer and someone else could give you a different answer. Right?
Mike:What's your answer?
David:Making your point. I don't know. $2. For a dozen eggs? Yeah.
David:Is that even possible somewhere? I don't know.
Mike:Oh. So you probably won't be buying eggs for a while if you expect $2 to be the price of eggs.
David:Am am I living in the nineteen eighties? Yeah. I think so.
Mike:Yeah. Maybe maybe it's $3.
David:Okay.
Mike:But what if the price of eggs all rises to be $4, or $5 for a dozen, or whatever it was in your local community when there was the egg shortage? Prices have gone down a little bit, but still. Yeah. You have to ask yourself at some point, it might be overvalued, but what are you willing to do? Just not buy eggs?
Mike:So is the market overvalued? That is a subjective turn on the price you're willing to pay for a stock. And you have to ask yourself how long do you wanna hold the stock? Because it's the price you bought it for versus the price you want to sell it, which might be in one year, five years, or ten years. You see how this kind of all works together?
David:Okay. Yeah. So I'm buying it at whatever, a dollar a share, and I wanna sell it $5 a share.
Mike:Yeah. Yeah. That That'd be a great return, by the way.
David:Well, yeah, I cherry picked that one.
Mike:So now let's dive a little bit deeper into this. Think about it for a second. How do you measure the price? Because every day, it's a voting machine. What do people think the price is?
Mike:And it goes up and it goes down. It's just if more people wanna buy, then more people wanna sell, the price goes up. If more people wanna sell, then wanna buy, the price goes down. So over the short term, it's just it's emotions. Over the long term, things tend to work themselves out to an appropriate price on average.
Mike:K? So you have to ask yourself, what's the legitimacy of the company, their fundamentals, and the price? So let let's break it down a little bit differently. Okay? Okay.
Mike:What is a company? Gosh. That's such a stupid existential question.
David:I guess like a company
Mike:It's a business.
David:An organization that is providing a service or a product. Right?
Mike:And they wanna create money. They want a profit.
David:They wanna be a profit maximizer.
Mike:So when you are a company and you have a profit, good. Maybe they reinvest the profit or they pay out a dividend, but there is a legitimate claim that this business is working. Now if you have a business that never turns a profit, forget about the tech IPOs and all that for just a second. Think of a normal business. Right.
Mike:Right. Normal business situation. They're turning a profit. If they don't turn a profit, at some point, they're going to go bankrupt or close to it. Toys R Us, Bed Bath and Beyond, what are the other ones that have really struggled?
Mike:Oh. Bath and Beyond's not bankrupt, but it's really struggled. It's struggled to turn a profit. Cracker Barrel's been under a lot of scrutiny lately. Their their shares haven't done so well.
Mike:If you look at instead of the price and the excitement of the price and you look at the actual company, then you can start to understand two things. One is price earnings. It's a fancy way of saying, what is the price of the stock versus the earnings of the company? Is the company profitable or not? And then you compare the two, and you can look at the twelve months behind, the twelve months ahead, the projections, whatever might be, and make an assessment.
Mike:Is the earnings, the profitability worth the price? And you might think, like, a 16 x price earnings ratio would be an appropriate level, because if you buy into it, the profits rationalize that price, and you kinda get your money back in some way over a certain period of time. If the price earnings is, let's say, 600 x, that means the company has to grow, like, double, double, double, double, double, double, double Right. And over and over again without the price changing.
David:Yeah. Can you break that down? What does that mean? Like, 16 x, 600 x?
Mike:Let's say we're doing this on the fly. Let's use chickens as our analogy. We talked about eggs. Yeah. Yeah.
Mike:Yeah. Alright. Let's say you bought a chicken Yeah. And you're gonna get three eggs every single week. What's the price value of the chicken?
Mike:Well, you're gonna price the chicken based on the eggs and how long you think the chicken will live.
David:Okay.
Mike:That's kind of when you would sell the chicken, I guess, or whatever this analogy is gonna end up being. But what if you buy a chicken, it's laying three eggs, but you think it's gonna do five eggs in the near future? You might pay a little bit more for the chicken because you believe the chicken will start laying five eggs. I don't know much about chickens. Maybe the chicken can start doing like two eggs a day or whatever.
Mike:Again, I'm I've never owned a chicken. I go to the store for my eggs. But do you see how this kind of plays out? You're looking at the yield, the price to buy the chicken versus the yield or the eggs it's gonna offer you. Okay.
Mike:So when you look at a stock, the price of the share of that company versus the earnings of the company, the legitimacy of the company, those correlate. And when the price earnings gets high, the company is going to have to kind of catch up with these futuristic expectations.
David:Okay.
Mike:We're buying based on the value we think it will have in the future, not today.
David:I get that. Yeah.
Mike:That is what most people would refer to as the overpriced kind of calculation. Now you could look at price booked or the net assets of a company, how much debt there's other things you could look at to kind of create an opinion, but it is an opinion because what is overpriced? If you ask Benjamin Graham, so Warren Buffett's mentor, it's maybe anything above 20 PE. He would probably view as overpriced. Warren Buffett might be a little bit different.
Mike:You got any hedge fund manager. They're all gonna have their own opinion of what is overpriced and do their own assessment of the stock and its future value.
David:And so if the whole market is overvalued, does that mean all like, take the S and P 500. Are all 500 companies overvalued, or just some of them overvalued and it's skewing the opinion? Or
Mike:Yeah. So when you have more bull market people, that's a fancy way of saying people that wanna buy into the market, then people wanna sell their shares. The prices run as in they go up. The market right now seems to be melting up. Everyone's trying to buy.
Mike:Few people wanna sell, so the price is just going high, high, high. Okay? So that's one problem, because at some point, we have to get back to reality of what is the business profitability actually being. There are a few exceptions to this. So quick story.
Mike:Amazon, about 2015, 2016, had a very high price earnings. This is right when they got into data centers, Amazon Web Services, and so on, and people thought this is incredible. They're putting a ton of money into it. It's going to significantly increase their revenue, so they were willing to pay a high PE value because they were like, yeah. We need storage.
Mike:The cloud is the next big thing. And so they felt that they would rationalize the price because of the future earnings they expected. So they're willing to pay a high price earnings amount, and it worked out.
David:They were right.
Mike:They were right.
David:Okay.
Mike:People that bought Amazon at a higher price, it still worked out for them because Amazon was able to deliver on the expected, not their promise, but the expected returns that analysts had for
David:this. Okay.
Mike:So today, you have to kind of look at, does the market rationalize its price, or is it overvalued because too many people want to buy and not enough people wanted to sell? When you print a lot of money, guess where it goes? It goes to people's pockets. What do people do with it? They spend it.
Mike:At some point in the circulation, the spending and makes its way to the market. And then when it makes its way to the market, you've got more people buying and selling, so you melt up. You you're increasing the price of all these different stocks. So there's something for anyone that's really inquisitive, look up the Schiller PE ratio. I've heard of that.
Mike:Yeah. So doctor Schiller from Yale. I don't know if you won a Nobel Prize for this or not. If he didn't, he should. It's quite profound.
Mike:But doctor Schiller figured out that if you look at their price earnings over a longer term period of time, and there's a bunch of data points that go into this, and you're accounting for inflation, you can get a more accurate reading of the price earnings or the profitability versus its price and the expectations. And it's only been higher once before to my recollection based on today's price earnings or valuation of is it overpriced or is it not overpriced? That was February.
David:Oh, okay.
Mike:What happened in February? You know, there's this thing called the Internet that was invented, and everyone loved it. And if it said .com, you made money until you didn't. Right. So the argument that the market is overvalued is a fair argument because a lot of money has gone into the market based on future expectations.
Mike:The question is, can AI because a lot of this overvaluation is based on AI. Can AI deliver an increased corporate profitability or not? Or did we price it wrong? Or do we have not the right expectations? Or is the momentum not able to sustain the growth of the market long enough for AI to deliver?
Mike:Look at .com for a second. Dotcom, great idea. We all use the Internet today. Yeah. But it didn't really deliver in 02/2001 or o two.
Mike:It kind of took a few more years for us to figure out how to really use it. What if it takes another five, seven years for us to really figure out how to implement AI into the corporate world for profitability and genuine effectiveness. It's nice to ask ChatGPT or Croc or whoever. Yeah. Claude.
Mike:Yeah. It's nice to ask them questions. It's nice to treat them as a fancier Google. Yeah. Right.
Mike:But I only know, like, a couple of people that actually have taken their standard operations and now has AI doing it. A lot of people are struggling to figure out how to do that. So there's a lot of questions here. Is the market overvalued? That's a fair argument.
Mike:But does that mean it's going to have a significant correction?
David:No one really knows?
Mike:No one could tell you. It's just impossible to know because either it's going to satisfy the expectations or it's not. But here's just kind of my my parting words on this. Alright. At some point, if everyone wants to buy and no one wants to sell, you have no transactions.
Mike:If there's no transactions, you're not growing the price anymore, so it starts to slow down. And if it starts to slow down, then people might get scared. And then you might get more sellers than buyers, and then the price starts to go down. That's kind of how a market top happens is when everyone's a bull, everyone's buying, and there's no one to buy from, it starts to tip the wrong way, and then people panic.
David:This is where the market gets emotional. Is that what we're saying? Yeah. We're reacting to why is this slowing down?
Mike:Yeah. So over a ten year period of time, I think the market is efficient. But from a year to year basis, I do not think it's efficient. I think it's more emotional. Mind your stocks.
Mike:Mind your bids. Mind your purchases. Mind your investment decisions. Follow systems, not sentiment. Know how you price something and what your standard is.
Mike:Understand what price are you willing to pay for something, and what price or price earnings are you willing to sell something and move on. These are really important discussions to have with yourself, with your adviser, with your spouse, with whoever's involved in your investment making decisions, so that you can follow the system and not sentiment or your emotions. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time.
Mike:Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com today to learn more and get started.