The Benefits of the Other Side

A cura di Jack Forehand, Validea
Polarization has become the new thing. Everyone seems to have such strong opinions one way or the other on every issue that they just can’t see how the opposite opinion to their own is even possible. They can’t see how a rational human being could think differently than them.
Obviously, the biggest place we currently see this is in politics. More and more political opinions are cast in stone and are not subject to negotiation, or even subject to facts that contradict them. You are either on the right or the left and the opposite side is your enemy.
The belief that there is an absolute right answer and an absolute wrong one is fraught with problems, though. It leads to not even considering the opinions of others. It becomes the enemy of learning. And it leads to poor decision making.
We all are subject to this. We like to point our fingers at others, but they are often best pointed in the mirror.
I was born and raised in Connecticut. It is one of the bluest states in the country. My wife grew up in Georgia, which is about as red as any state gets. Since we got married, I have had an opportunity to spend a significant time in the South. As a result, I have also been exposed to many opinions and views that are very different from my own. That process has been a great learning experience for me. I have been able to experience a different way to look at the world. I have learned that many people who feel differently than I do have well-reasoned arguments behind what they think, even if I don’t agree with them. But most of all, I have learned that I learn much more from people who disagree with me than those who share my beliefs. I have learned the benefits of the other side.
Don’t worry, I am not going to make this post about politics. My focus here is on investing and it turns out that being able to see the other side is essential here as well. Investors tend to build a series of beliefs over time and then to seek confirming evidence of them. It becomes a viscous cycle where an investor reaches a conclusion and then selectively reads and listens to only those who back up that belief.
The Pitfalls of Market Valuation
Market valuation is one place you often see this type of thought process. The market is clearly expensive right now relative to history. Some metrics make it look worse than others, but no matter what you look at, you will likely see at least an above average valuation. Even if you look at more recent history, when valuations have been above historical norms, valuations still look stretched. This chart from our market valuation tool looks at the TTM PE ratio of the S&P 500 since 2005. It has only been more expensive 20% of the time.
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