Disclaimer: I am nothing but optimistic about the stock market outlook today, May 2nd, 2025. This post isn’t really about current events, just current thoughts rumbling in my head that may be of value to investors.
There’s a news headline today saying a market valuation metric coined and favored by Warrant Buffett is signaling a buy sign. I agree with Buffett’s affinity for this metric, just as I often hold regard to Warren Buffett’s wisdom. When someone has 80 years of market experience, you’d be a fool not to listen to what they share. But it made me think about what we do when the same metric signals the opposite.
When valuations are low or “cheap” like they are today, there’s a high probability of stock prices going up from here. But when valuations are high, it doesn’t necessarily mean a crash or correction is imminent.
When prices are high, it is often for a good reason, and whatever it is that’s going well enough to drive prices up may not collapse instantly. Good news and healthy conditions may continue to carry positive investor sentiment right along for some time. No rule says high valuations can’t go higher. If you sell just because valuations are high, you might miss out on continued growth. A good example was when our aforementioned Buffett indicator, AKA the Market capitalization-to-GDP ratio, signaled it was time to sell in February of 2021, but markets saw continued growth until 2022.
Here’s the conundrum:
The good news is the market doesn’t usually experience a downturn unless something bad happens.
The bad news is something bad could happen at any moment.
- Geopolitical conflict
- War
- Natural disaster
- Pandemic
These are just what we’ve seen in recent years. The higher the valuation is when something bad does happen, the farther things could fall. This is a tightrope to walk, but that doesn’t mean you shouldn’t walk it.
The Mainsail Equity Model doesn’t time the market. We don’t hop in and out trying to bet on timing. Neither does Warren Buffet, even when his favorite indicator says to. We primarily hold to seek long-term compounding growth, and we weather the storms as they hit us. We do maintain a cash position to deploy during the inevitable market corrections. We understand market corrections are unavoidable, and we are willing to weather those in exchange for the opportunity to capture growth.
May has arrived, and the weather here is delightful. Washington is experiencing a wildflower “superbloom,” and you should get out and see it. I hope you enjoy a lovely weekend.
Live long and live well,
Alyse
Northshore Wealth Management 