I’ve posted Entry #257 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called It’s Not Possible That Valuations Matter Only at the Margins.
Juicy Excerpt: Stocks don’t suddenly become dangerous when the P/E10 value hits 27. Stocks are virtually risk-free when the P/E10 value is 15. Then they become more risky at 18. And more risky at 21. And more risky at 24. And more risky at 27.
Unfortunately, the growing risk is a silent growing risk. Stocks are far more risky when the P/E10 value is 21 than they are when the P/E10 value is 15. But years can go by before that risk evidences itself in portfolio destruction. Valuation risk plays out the way that cancer risk plays out for people who smoke three packs of cigarettes each day. Heavy smokers often “get away” with their behavior for decades before they contract a disease that kills them. However, the deep reality is different than the surface one. Someone who smokes three packs of cigarettes each day from age 16 to age 66 and then dies at age 67 from lung cancer was not avoiding the risk of smoking for 50 years; he was avoiding only the practical consequences of taking on a risk that would one day cause him to pay a terrible price.