Defensive Stocks in a Euphoric Market

Introduction: Better a Seller Than a Buyer Be
The Defense Dilemma Revisited
Defensive Boost to Positive Earners
Conclusion
Exhibits
Appendix: R1000

Introduction: Better a Seller Than a Buyer Be

In Kailash’s recent paper, Better a Seller Than a Buyer Be, we explored the characteristics of today’s market environment with those of the past using “The Buffett Valuation Metric.” Warren Buffett discussed in a 2001 interview that “…the market value of all publicly traded securities as a percentage of the country’s business….” was “…probably the best single measure of where valuations stand at any given moment.” Reproduced from Better a Seller Than a Buyer Be, Fig. 1 shows that as recently as September 2018 Market Cap-to-GDP was equal to the prior peak during the Dot Com Bubble. Figure 2 below, also reproduced from Better a Seller Than a Buyer Be, details the subsequent 10 Year Return for the R1000 at various historical levels of “The Buffett Valuation Metric.” The vertical solid blue line representing the most recent month’s Market Cap to GDP points to a potentially difficult decade to come for the Index.

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