I developed my full-blown reading addiction as a wee lad, way back in elementary school.
I've got vivid memories of my mother walking me up to the "Bookmobile" in the Drug Fair parking lot every Thursday, and once a month or so we would go to the "cathedral" - the main library.
Then again, "in my day," as it were, we didn't have tiny devices with the computing power of NASA in our pockets to distract ourselves with.
Instead, we passed the time by getting lost in different worlds of words, consuming as much storytelling as possible, and spending time in the authors' minds for hours on end.
I read a lot of war novels and Westerns, which cultivated my standing belief that young men should be forced to read the "frontier stories" of Louis L'Amour to learn about honor, courage, respect, and the proper way to conduct themselves.
But... my favorites?
Undoubtedly, that'd be the real-life pirate stories - the tales of Edward "Blackbeard" Teach, Jean Lafitte, and even Grace O'Malley, the "Irish Pirate Queen."
Besides, if I'm honest, I've got to credit those pirate swashbucklers (at least in part) with my perfect investing track record.
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There Are Bad Investment Pirates...
The majority of individual investors out there - you know, the ones trying to make enough cash to put the kids through private school and buy that new minivan to drive them there every morning - are vulnerable to pirates.
They unknowingly allow the thieves plundering the high seas of lower Manhattan to force their hand into buying ETFs and other horrible investments.
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But I've been in the markets for over three decades. In that time, I've learned that using a math-based approach to investing offers much greater profits than letting 23-year-olds in suits make decisions for me.
I can do my own math to develop investment ideas, and I can guarantee my math is better than the numbers those bankers say they're crunching (but most certainly aren't).
Buying stocks in semi-quantitative portfolios helps me capture the unreasonably high returns I need.
Now, don't mistake confidence for arrogance - I like to think I'm a smart guy who's developed some excellent methodologies, but I'm also not dumb enough to think I'm the smartest guy on the planet.
On the other hand, being the dumbest guy in the room is always the best thing that can happen to me, since I'll always leave that room smarter than when I entered.
Here's what I mean...
... And There Are Good Investment Pirates
So, while I despise the Wall Street "pirates" stealing your money with low-return, high-fee tricks, I myself scour the Earth "pirating" good investment ideas.
To do that, I have to get through a ton of bad ideas - dangerous ones, too.
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But there are some brilliant people doing some outstanding work. It would be just stupid not to steal their ideas.
Time for a case in point...
After my articles on avoiding the apocalypse, I was asked how it might be possible to see that apocalypse on the horizon (and get the hell out of the way).
Frankly, markets tanking isn't really something I've spent a lot of time thinking about. After all, my "rigorous valuations" approach tends to have an element of natural market timing in it; there are lots of cheap stocks at market bottoms and very few at market tops.
But I understand that not everyone has the patience for such an approach.
So, I slapped on my eyepatch and went sailing around the web looking to see what smarter folks I know have to say about measuring market risk.
Turns out, there are just two indicators worth keeping on your radar.
Two Metrics I Found During My Idea Pirating Voyage
One of the very best indicators of where we are in the market is the CAPE (cyclically adjusted P/E, or price/earnings) ratio.
I know - it's a mouthful. But it's much simpler than you think.
Developed by a Yale professor named Robert Schiller, the CAPE ratio compares the S&P 500's price to its 10-year average earnings. The higher it is, the worse the likely performance of the stock market will be for the next ten years.
When it's low by historical comparison, it is time to be buying stocks with both hands, borrowing money, digging up coins out of the couch, and doing whatever you can to find money to put into the stock market.
When it's in the upper ranges - say the top 30% - of historical levels (it is in the upper 10% as I write this), it is probably time to follow some of the techniques I talked about a few weeks ago.
If you ever see the CAPE ratio at historically high levels but lower than the actual trailing 12-month P/E ratio, it indicates a short-term earnings depression that will self-correct - but not before doing enormous damage to stock prices.
The second indicator is one you've surely heard of - Treasury yields.
If the 10-year Treasury yield is lower than the 2-year Treasury yield, you have the dreaded inverted yield curve. That indicates the market will likely tank, and it's a good idea to hedge or get out of stocks when that happens.
So, let's take our indicators out and see where we are now...
The CAPE ratio currently hovers near 32.57, easily in the top 10% of historical measurements, so the yellow light is definitely flashing. But there's no need for panic, as it's still above the trailing 12-month S&P 500 P/E ratio of 24.52.
The 10-year Treasury yield of 2.83% is above the 2-year yield of 2.59%, but not by much. Keep in mind that, while the spread is low, it has been here many times in the past without going negative, so jumping the gun and panicking is a horrible idea.
React to what does happen and quit trying to predict what might happen. You will have a lot more money and sleep better at night.
Put these two indicators together, and yes, you have some reasons for caution. Some of our measuring tools are flashing yellow, but nothing is screaming "sell" just yet.
If you're using the risk-aversion and hedging approach, there is nothing to do, no matter what the well-dressed folks trapped inside your TV are saying right now.
Keep in mind, none of these are short-term indicators. They are tools for capturing long-term trends in the stock market.
But those of you following my methodology know that I don't care what the market does. We pounce on undervalued companies that are great investments no matter how wild the S&P 500 is.
That alone is enough to make you a lot of money and ensure a good night's sleep.
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About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.