{"id":20110,"date":"2025-08-31T00:58:25","date_gmt":"2025-08-31T00:58:25","guid":{"rendered":"https:\/\/finderica.com\/?p=20110"},"modified":"2025-08-31T00:58:25","modified_gmt":"2025-08-31T00:58:25","slug":"how-to-gain-an-edge-in-your-investing","status":"publish","type":"post","link":"https:\/\/finderica.com\/?p=20110","title":{"rendered":"How to Gain an Edge in Your Investing"},"content":{"rendered":"
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People hate when I show them this chart.<\/p>\n

Most investors are perpetually Pollyanna-ish. If the market\u2019s up, all is well.<\/p>\n

Not me.<\/p>\n

I deal in facts, figures, and plain truths \u2013 whether they make me comfortable or not.<\/p>\n

That\u2019s not cynicism. It\u2019s realism. And realism pays.<\/p>\n

So when I say people hate this chart, it\u2019s because there\u2019s nothing comfortable about it.<\/p>\n

The cyclically adjusted price-to-earnings (CAPE) ratio \u2013 also called P\/E 10 \u2013 uses inflation-adjusted earnings averaged over the past decade. It smooths the cycle and gives a clearer long-term view of price versus earnings.<\/p>\n

The chart below plots the CAPE of the S&P 500 in standard deviations from its long-term mean. In simple terms, it shows how far today\u2019s valuation sits from \u201cnormal.\u201d<\/p>\n

Right now the reading is near three standard deviations above average.<\/p>\n

\"Chart:<\/a><\/p>\n

That is an extreme level by any historical yardstick. Readings that high show up only a tiny fraction of the time \u2013 roughly a few tenths of one percent.<\/p>\n

For years, I\u2019ve tried to alert investors to the market\u2019s rich valuation. But we live in a value-blind regime. Most folks only care about rising prices and earnings growth.<\/p>\n

Those matter. But they\u2019re not everything.<\/p>\n

When you focus on the right things \u2013 not just surface-level hype \u2013 you become a more principled, disciplined investor.<\/p>\n

It doesn\u2019t mean you stop investing. It means you raise your standards.<\/p>\n

A market drenched in rich valuations isn\u2019t one to avoid. It\u2019s one that demands scrutiny and wisdom \u2013 the kind value investors have practiced for decades.<\/p>\n

You weigh price against quality. You insist on a margin of safety. You accept that the crowd can be wrong for a long time.<\/p>\n

Frankly, I like when most people ignore this. It gives me an edge. I look where others won\u2019t because they\u2019re busy chasing buzz. (My August 15 Value Meter column is a perfect example.)<\/p>\n

Right now, the best values I see are in small caps. They trade at a clear discount to large caps.<\/p>\n

\"Chart:<\/a><\/p>\n

Over full market cycles, that\u2019s often where leadership flips and excess returns emerge. So long-term investors should be ecstatic about this.<\/p>\n

History favors small caps on a global scale, which makes today a real opportunity.<\/p>\n

But don\u2019t look only at the U.S.<\/p>\n

Over the past 20 years, U.S. small caps have lagged large caps. But abroad, the story flips. In developed international markets \u2013 and in emerging markets \u2013 small caps have led.<\/p>\n

\"Chart:<\/a><\/p>\n

Leadership rotates. Valuation gaps close. That is how cycles work.<\/p>\n

The long-run data also suggests the U.S. gap is likely to narrow. Trends mean-revert, and current valuations help. (When you can buy durable small businesses at a discount while attention fixates on mega-cap winners, the odds tilt in your favor.)<\/p>\n

That\u2019s why it\u2019s better to buy when small caps are out of favor \u2013 when focus is elsewhere and sentiment is sour. It\u2019s not about calling a top or a bottom. It\u2019s about treating price as a key part of the process and letting time do the heavy lifting.<\/p>\n

Today, that discipline seems boring. Good. Boring sets you apart.<\/p>\n

Take advantage of it.<\/a><\/p>\n<\/p><\/div>\n