I am a skier. When someone says this, you assume he or she is good. Well, I thought I was good. I was not Lindsey Vonn, but I had the technique down. I’d be the fastest person going down the mountain, always waiting for my friends at the bottom
Then, at the beginning of last season, I went skiing with my kids at Vail. It had snowed nonstop for a few days. Vail is a very large resort, and the mountain crew could not keep up with the snow, so I found myself skiing on unusually ungroomed slopes in powder more than knee-deep.
Suddenly, something changed. I could not ski. I could barely make turns. I was falling multiple times per run. My kids, including my nine-year-old daughter, Hannah, were now waiting for me as I dug myself out of pile after pile of snow.
My technique — along with my confidence — was gone. The discomfort from constant falling turned into fear. I was ready to go back to the hotel after only two hours on the slopes.
I was devastated. It was as if I had never skied. So I talked to a ski instructor about this incident. He told me that I’m a “good skier” on groomed slopes because they allow me to go fast without trying hard. Speed covers up a lot of mistakes and lack of skill. Skiing in powder requires different skis — not the skis I had — but more importantly, it slows you down and makes you rely on skills that I thought I had but didn’t.
Since 2008/9, the Federal Reserve neatly groomed, manicured and then finely polished investment slopes for all asset classes by lowering interest rates to unprecedented levels — providing a substantial accelerant that indiscriminately drove valuations of all assets higher. But ubiquitously rising valuations cover up a lot of mistakes and often a lack of skill. Whether you had a rigorous investment process or were throwing darts, over the past several years it hardly mattered — you made money.
Bull markets don’t last forever, and this one is not an exception (this is true despite some ups and downs the market has had along the way). Stock valuations (price-to-earnings) are just like a pendulum, swinging from one extreme to another. Today the stocks in the S&P 500 index trade far above their average valuation.
Historically, above-average valuations have always been followed by below-average ones — taking away the riches that the previous years provided. In other words, at some point it is going to snow and snow hard. Just as I, the great skier, found myself overconfident and unable to deal with the new terrain, investors will find themselves doing face-plants when the stock market turns from bull to bear.
But here is great news: Today the stock slopes are still finely groomed with stocks near all-time highs, and we all are given a unique opportunity to make adjustments to our portfolios and investment process.
You should start by carefully analyzing each stock position in your portfolio. No drooling over how each of them did for you in the past. Drawing straight lines from the past into the future is very dangerous. Instead, focus on the future — a future in which average stock valuations will likely be lower.
Returns for a stock are driven by three variables: earnings growth, change in P/E and dividend yield. You should impartially examine each variable to determine if a stock deserves to be in your portfolio. Then make one of three decisions: buy (more), hold or sell. Just remember, hold is a decision. If you choose not to sell an overvalued stock, one that has low or negative expected returns in the long run, that is a decision.
We must all reexamine and future-proof our investment process. Years of rewards and no risk will loosen the process of even the most disciplined investor. Finally, if you are feeling very confident about your investment prowess today, take a moment to relive that gut-wrenching feeling you had the last time the stock market took a 20 percent dive. This will reset your confidence to the appropriate level and help you to avoid the mistakes that come from focusing too much on reward and too little on risk.
Key takeaways
- Skiing on groomed slopes hid flaws in the author’s technique — just as bull markets hide weak investment processes.
- Since 2008–09, the Fed’s policies “groomed” the slopes for all investors, driving valuations up and masking mistakes.
- Stock valuations swing like a pendulum: today’s above-average P/Es will eventually give way to below-average ones.
- Investors must review each stock position based on earnings growth, P/E change, and dividends — not past performance.
- Value investing lessons: discipline, margin of safety, and humility are essential when conditions inevitably turn rough.
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