In one sentence: In the 350th episode the hosts ask whether the Rule #1 method has been beaten by simply holding the market, argue about whether high valuations are a permanent change driven by central banks, and conclude that being patient with cash is still safer.
Key ideas
- A defensive stance has lagged. In 2021 the S&P 500 rose roughly 27–28% and the Dow about 18% (Phil's figures); his portfolios were around 12%, with one a little higher, because he was heavily in cash. Phil admits that much of the recent rise was recovery from the 37% drop in March 2020. [01:00–05:00]
- The fair challenge. If doing nothing in an index beat you for 11–12 years, why do the work? Buffett's last decade also trailed the market. [05:00–08:00]
- Weighing machine on both ends. Danielle: if prices eventually track business value when the market is low, the same must hold when it is high. Prices have drifted from earnings, in her view, because of government support. [08:00–10:00]
- The counter-argument. Smart people say current prices are justified by low rates and technology; Buffett missed Amazon and Apple partly by discounting earnings too heavily. Phil agrees the case isn't baseless. [10:00–12:00]
- Long-run ratios. Shiller's cyclically adjusted P/E averaged about 16 over 140 years. Phil cites the Wilshire-to-GDP ratio at about 250% in 2021 against 50% or lower for most of Buffett's career, and points out the 1929–1955 and 1965–1983 periods of near-zero market returns. [11:00–17:00]
- Is this permanent? Possible reasons: central banks printing money and holding rates near zero, and fiscal stimulus. Phil says they've avoided the usual consequences so far, but "no one has ever done that" permanently. [18:00–26:00]
- Bonds no longer protect. A 10-year Treasury paying 1.6% with inflation of 5% or more loses buying power. Phil's "10% real" estimate is his own. This pushes savers into stocks and into speculation such as Robinhood trading and call options. [20:00–24:00]
- Rebuttal to "just index". Someone who put money in an index in 2009 got about 13% a year (100,000 to roughly 400,000), while ten good companies picked by a class in Singapore compounded about 32% (roughly 1.5 million). That's a lucky start date, a hindsight example, and Phil says so. Buying at the top is more likely to resemble 1929. [26:00–29:30]
- The cash trade-off. Holding 30–50% cash fell about half as much as the market in the drop and allowed buying. Expect to lag for years while waiting. [29:00–31:00]
- New-era arguments. Danielle adds retail money and app-based gamification; Phil expects boomer retirement to drain demand. She notes that investors piled back in after March 2020, and neither claims to know. [31:00–36:30]
How it maps to RuleOne
- The screen is about individual company valuations; the market-level view here is a reason the site's output can show few buys at times. A long list with no bargains is normal.
- Cash and tranche buying in /holdings/ are the practical tools for the "wait" approach.
Buffett, Munger and Graham links
- Graham's "Mr. Market" and the weighing-versus-voting-machine line (Buffett cites it from Graham, for example in his 1993 and 2003 Berkshire letters).
- Buffett's 2001 Fortune article on market value to GDP is the source of the Wilshire-to-GDP ratio he called "probably the best single measure".
- Shiller's Irrational Exuberance for the CAPE ratio.
Words to know
- Shiller P/E (CAPE): price divided by ten-year average inflation-adjusted earnings.
- Wilshire-to-GDP: total US stock market value divided by GDP.
- Real return: return after subtracting inflation.
Try this
Look up the current Shiller P/E and compare it with the long-run average. Then open /stocks/ and count how many names pass your screen. Write one paragraph on whether your cash level fits what you find.
Check yourself
- Why does Danielle say the "weighing machine" idea has to work both ways?
Answer
If prices revert to value when low, they must also revert when high. - Why were bonds a poor safe haven in 2021, per Phil?
Answer
Yields (about 1.6% on 10-year) were below inflation, so buying power shrinks. - What are the weaknesses of the 2009 comparison?
Answer
It depends on hindsight and a lucky starting date near the bottom.
Short quotes
"No one has ever done that yet ever in the history of the world." (Phil, ~35:30, auto-transcribed)