Life Is Full of Hard Choices

If you've been reading me for a while, you know I love sayings.

At their best, they capture a deep truth in a neat little package.

But at their worst, they become a substitute for thinking.

Here is a saying I could never "get"…

TINA: There Is No Alternative.

That's a way for investment people to say:

"What do you want from me? We HAVE TO buy stocks."

Really?
Have to?
Tell me more…

You see, there is this dichotomy between stocks and bonds.

Bonds earn you interest. That gives them structure. That's why some clever Wall Street marketeer, presumably during the fedora era, decided to call them "fixed income" assets. The interest rate either makes sense to you, net of taxes and inflation, or it doesn't.

Stocks don't have that structure. They don't pay contractual interest, they don't mature. That makes it much easier to buy stocks without having a crisp sense of “the terms of the deal.”

But let's go back to bonds for a minute…

When rates were close to zero in the run-up to 2023 you'd run the math: near zero interest income, minus federal taxes on that nothing, minus inflation running north of zero. Your real purchasing power was eroding in real time.

You could try "reaching for yield," as the expression goes, with risky corporate bonds or other exotica, but after state and local taxes, you'd be right back to the same slow bleed.

Given the remarkable success of market-based American capitalism over the past century or so, investing in stocks had been highly rewarding over the long run. So who's to complain?

Well, past performance is no guarantee of future returns, as the saying goes (for excellent reasons).

Sure, I hope the U.S. equity market does nothing but go up for the rest of my lifetime. That would be truly wonderful. But hope is not a strategy.

We have now squarely left the good ol' days of the last two years, where you could "T-bill and chill" while short-term Treasury rates were 5% or better.

Before we all dive headfirst into TINA territory, let me show you something.

This is the Shiller CAPE ratio— stock prices divided by 10 years of inflation-adjusted earnings. It smooths out business cycle noise to give you a sense of valuation relative to underlying earnings power.

This goes back to 1881, courtesy of Nobel-winning Professor Bob Shiller at Yale.

Notice where we are: the round figure is 39. That's the 98th percentile. In 145 years of data, the market has only been more expensive once—briefly, at the Tech Bubble peak in 2000.

You can also see the shaded regions marking major crises. High valuations don't predict crashes. But they do tell you something about the statistical distribution of potential future returns and the real pain that people suffer when markets dash dreams.

Which brings me to this next figure.

This shows what actually happened if you invested at any point in history and held for the next 10 years. Blue is U.S. stocks, purple is U.S. 10-year Treasury bonds. Real returns, meaning gains in purchasing power, net of inflation.

Look at the late 1990s. Valuations peaked around 2000. And returns suffered afterwards. Investors who bought at peak valuations lived through nearly a decade of negative real returns. Not low. Negative. Wealth destruction, not wealth building.

The pattern?

Starting from extremely high valuations has historically compressed prospective returns.

The historical average for stocks is 7% net of inflation. But that includes buying at 1982's bargain prices, the reasonable 1950s, and the nosebleed levels of 1929 and 2000.

Starting from the second-highest valuation in 145 years? History can’t tell you the answer. But it’s not encouraging.

(For what it’s worth, a friend recently called looking at charts like these “astrology.” He’s not wrong. Which is why this may inform you, but please don’t think you can predict what happens next.)

Another way to say this is that the equity risk premium—that 4.5% edge stocks have shown over bonds in history—hasn’t been constant. It’s varied with starting valuations. And there have been multiple 10-year periods, like the 2000s, where bonds outperformed stocks.

When someone says "TINA," what they're probably saying is: "I'm assuming stocks will deliver their historical average regardless of price."

That assumption has been tested. Repeatedly. It has historically failed at extremes. Maybe this time is different… but can you be sure?

The big lesson: valuations tend to impact future returns. Not for timing. For probabilities. For what you can reasonably expect over a decade.

Right now, those probabilities don't seem to justify the casual confidence embedded in TINA.

This is why I focus on risk. On managing regret. On being prepared when things don't go according to plan. On remembering that Man plans and G*d laughs.

So where does that leave us today?

T-bills are yielding roughly 3.5%. Run that through your personal tax and inflation calculator. For most of you reading this, that's probably barely breaking even on purchasing power.

And equities are trading at the second-highest valuation in 145 years, which makes it hard to be optimistic about the next decade of returns—no matter how bullish you are on American capitalism over the long run.

This is the uncomfortable reality: both traditional "safe" and traditional "growth" assets present uneasy trade-offs.

It's hard stuff. But we weren't promised easy.

We have to live in the real world. Accept what is and deal with the trade-offs in a manner that manages regret risk (to the downside and to the upside).

Here's what that means in practice:

Push your thinking to extremes.

• What happens if I'm right?

• What happens if I'm wrong?

• What decision would I regret least?

Condition your expectations to current valuations. They contain information, even if they can't predict the future with certainty. Starting from extreme prices changes the probability distribution of outcomes.

Manage regret. Manage risk. Maintain agency.

But here's the thing: there is always a choice to make.

And that’s far more productive than pretending there's no alternative.

Speaking of the 2000s...

Remember what I said about investors who bought at peak Tech Bubble valuations enduring a decade of negative real returns?

I recently sat down with Devin Shanthikumar—faculty at UC Irvine's Merage School of Business—who was a student in the Bay Area during that exact period.

She watched smart, technologically sophisticated people make devastating financial mistakes. Not because they lacked intelligence, but because they didn't understand the incentives embedded in the financial system.

That experience shaped her entire research career.

We talked about why sell-side analyst recommendations don't mean what they appear to mean (they “speak in two tongues,” as Devin’s research captures), how analysts balance competing pressures from different audiences, and what happens when investment commentary moves into more disintermediated online spaces (think “reddit”).

We also spent time on her current research: how AI is changing security analysis. One surprising finding—rather than forcing consensus, AI is actually enabling analysts to be bolder, freeing them to focus on the irreplaceable human judgment parts of their work. I like that.

If you want to learn more about the incentives that drive market information—and what technology means for the future—give it a listen on TREUSSARD TALKS:

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