Be Careful Shorting A Market With Corporate ROIs Near All-Time Highs

June 17, 2016

I was recently in a hotel lounge in Chicago meeting with a colleague when a very nice couple in their early 50s sat down beside us. Quite educated, they were in town for a conference for orthopedic surgeons. We exchanged small talk and our respective professions. As an occupational hazard, after just a few minutes, the good doctor had rolled up my colleague’s pant leg, examining the quality of his torn ACL repair. And, as hotel lounge discussions go in the subject of finance, the conversation naturally moved to their retirement accounts.

In a nutshell, they stated how happy they were to be heavily invested in fixed income. In their words, the stock market had gotten “too expensive and overvalued.” I asked what made them feel so strongly. They responded straight away that “the market was at all-time highs.”

I can’t blame the couple for having the notion of an expensive market. I expect they enjoy a fairly high income stream and so a focus on capital preservation isn’t the worst idea I’ve ever heard.

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