REVERSAL OF FORTUNE (April 22, 2025): Most investors buy whatever is trendiest at any given time and sell whatever has underperformed in recent years. This pattern of buying high and selling low is why most investors underperform the inflation rate and would do far better in "boring" TIPS and I Bonds. Because it has been so easy in recent years to obtain mostly free reliable research on the internet, you would think that most investors would understand the concept of fair value and through their collective buying and selling would ensure that no asset strays far away from fair value. Instead we have the opposite situation: the ability to continuously track key data and to act almost immediately based upon that information has caused far more emotional piling into the most popular assets and panicking out of those which are the most out of favor. As a result, we have more numerous and more dramatic deviations from fair value today than we have experienced at almost any time in history.
In this essay I will list some of the most important assets which have wildly strayed away from fair value and are thereby providing unusually compelling profit opportunities. If you consistently buy anything which is near half fair value or less, and you sell whatever is more than double fair value, you will come out far ahead in the long run. Periodically assets at half fair value will drop further to one-third fair value or less, while assets at double fair value may keep climbing to triple fair value and beyond. This is one reason that, whenever you add to any position at any time, you must do so gradually using a ladder of very small good-until-canceled orders rather than initiating risky lump-sum transactions. You can never calculate in advance how extreme any asset will become in either direction, or when it will happen. Far too many investors spend ridiculous amounts of time and money trying to discover the inherently unknowable.
Gold has become the latest most overcrowded long position and will likely drop below two thousand U.S. dollars per troy ounce.
In December 2024, when many cryptocurrencies including Bitcoin were climbing to new all-time highs, investors were convinced that no matter what happened with the economy, cryptocurrencies would remain in permanent uptrends. When this myth was soon shattered, investors didn't become more conservative: they simply switched from cryptocurrencies to large-cap U.S. stocks in the belief that those would always come out ahead in the long run. As the biggest and most popular U.S. stocks mostly topped out around February 18 or 19, 2025, investors switched to a new favorite: gold. This is hardly a first for the yellow metal, as gold became similarly extremely popular at its previous peaks including its original all-time modern top of January 1980, its next major peak in March 2008, yet another higher high in September 2011, and a more recent post-coronavirus zenith in August 2020. What many investors don't appreciate is that each of these tops was followed by historic losses for gold, silver, and gold/silver mining shares.
Gold mining shares have been a consistent leading indicator for gold bullion in both directions since the 1800s. While funds of gold mining and silver mining shares including GDX and GDXJ peaked one minute after the opening bell on Monday, April 21, 2025, gold itself continued to climb until it barely exceeded 3500 U.S. dollars per troy ounce at 2:18 a.m. on April 22, 2025. GDXJ spent a total of about one hour above its previous multi-year high from August 2020 even though gold bullion had gained more than 65% from its 2020 highs. This kind of underperformance has consistently led to losses averaging 60% for mid-cap gold mining and silver mining shares including GDXJ.
Large-cap U.S. stocks which had been by far the most popular investor favorite in recent years have fallen modestly overall but remain near triple fair value.
Tesla no longer has a price-earnings ratio above 200 as it did in December 2024, nor is Costco's P/E more than 63.5 as it had been at its February 2025 top. However, the most popular large-cap U.S. shares still feature valuations which are roughly triple their long-term averages relative to earnings and profit growth. After years of almost blindly piling into U.S. equity funds featuring these megacap shares, it will take time for investors to realize that their approach is underperforming and to change their method accordingly.
After U.S. large-cap equity bubbles had topped out in 1837, 1873, 1929, 1972, and 1999, they slid more than 80% each time. QQQ lost 83.6% of its value from its intraday high of March 10, 2000 to its ultimate intraday nadir on October 10, 2002, which is more than 5 dollars out of 6. What is perhaps even more important is that in the subsequent multi-year global equity bull market, the previously popular large-cap shares underperformed most other stocks. One dollar invested in the "boring" emerging-market equity fund EEM near the bottom in late 2002 or early 2003 was worth over five dollars by the 2007 top, while one dollar invested in QQQ even if you timed it to the exact bottom in October 2002 and reinvested all dividends didn't even reach three dollars by its 2007 peak [source: StockCharts.com].
Similar underperformance by previous large-cap U.S. favorites similarly underperformed from late 1974 through early 1980 and from the July 1932 bottom through 1937. It will likely be roughly another decade before the Magnificent Seven and similar shares once again have their place in the sun.
Emerging markets overall surpassed their previous all-time record of underperformance relative to U.S. shares which had existed in 1999-2000.
Emerging-market shares consistently underperform the most when we are close to large-cap U.S. equity bubble tops, and thereafter enjoy a powerful upward reversion. Not all emerging markets are alike, which is why I seek those which have above-average insider buying, below-average price-earnings ratios and similar fundamentals, and are the most unpopular. Currently Brazil and its funds are among the most compelling bargains in the world, including the exchange-traded funds EWZ, FLBR, EWZS, and BRF which in recent months have often featured average price-earnings ratios below 8. A number of Asian stock markets are also trading at worthwhile undervaluations including South Korea (EWY, FLKR), China (ASHR, FXI), Indonesia (EIDO, IDX), Thailand (THD), and the Philippines (EPHE), roughly in that order with my favorite choices listed first.
The biggest risks to emerging markets are two which are among the least appreciated by most investors: 1) the usually-dismissed possibility that the currently hated U.S. dollar outperforms most global currencies for the next few years; and 2) the similarly overlooked danger that a severe bear market for U.S. stocks will spill over into other global equity markets.
The unpopular U.S. dollar will likely climb to its highest point versus most currencies since 1985 when it had achieved its all-time high.
There has been a lot of chatter on the internet and elsewhere about the U.S. dollar allegedly on the edge of losing its role as the world's reserve currency. The U.S. dollar index on April 21, 2025 fell to its lowest level since March 31, 2022. Some people believe that countries which have never cooperated with each other for decades will suddenly cooperate to introduce a new strong currency, while others are convinced that a particular cryptocurrency will take over this key role. It is fun to watch reruns of "Star Trek" but in the real world the idea of anything other than the U.S. dollar becoming the go-to global currency is less likely than my being beamed up or having a regular conversation with aliens any time soon.
During the collapse of the internet bubble, the U.S. dollar surged into 2002. The U.S. dollar was also strong heading into early March 2009 when the next bear market had ended. Similar behavior is likely to occur over the next few years. The only interesting question is whether or not the U.S. dollar index merely approaches its 1985 top or surpasses it.
Cryptocurrencies will not become completely worthless, but they will drop even more in percentage terms than almost all other asset classes.
Most people don't realize that it is not a coincidence that the earliest cryptocurrency, Bitcoin, was created in 2009 when we were at the start of the longest U.S. equity bull market in history. All cryptocurrencies are like exotic plants which have been transplanted from a tropical country like Brazil to the temperate climate of the northeastern United States. If you start to grow a tropical plant in Boston in May or June then it may flourish throughout the summer, but the recent pullback is like having the plant survive a cold spell in October and concluding that it can handle the winter with no problem.
Not only have most cryptocurrency investors never seen a true crypto winter, but most young investors in the U.S. stock market also have zero personal experience investing in a bear market. Someone whose 33th birthday is today, when the last U.S. equity bear market ended on March 9, 2009, was a high school junior. If you haven't personally experienced any major event in the financial markets than psychologically you are much less likely to believe that it will reoccur. I expect all cryptocurrencies to suffer some of the largest-ever percentage losses of any sector in history.
The following are recent useful charts:
At the start of 2025, only 2% of U.S. investors expected U.S. Treasuries to be the top-performing asset class of the year:
U.S. assets overall were never more overpriced than they had been on February 18-19, 2025:
U.S. stocks in early 2025 had never been more overvalued relative to the "real" U.S. economy going back to 1928:
Including the entire period since 1900, the S&P 500 set new-time overvaluation extremes during the first several weeks of 2025:
The bottom line: although investors have far cheaper, more reliable, and more comprehensive access to data than they did in prior decades, they are more likely rather than less likely to emotionally drive assets to absurd extremes in both directions. These assets can often initially go to even more exaggerated extremes, but eventually betting on their mean regression will prove to be consistently profitable as it has always been throughout history.
Disclosure of current holdings:
Below is my current asset allocation as of 4:00 p.m. on Tuesday, April 22, 2025. Each position is listed as its percentage of my total liquid net worth.
I computed the exact totals for each position and grouped these according to sector.
The order is as follows: 1) U.S. government bonds; 2) shorts; 3) bear funds; 4) precious metals; 5) emerging markets; 6) energy.
VMFXX/TIAA Traditional, TIAA money market/bank CDs/FZDXX/FZFXX/SPRXX/SPAXX/BPRXX/Savings/Checking long: 36.12%;
17-Week/52-Week/26-Week/13-Week/2-Year/8-Week/3-Year/5,10,30-Year TIPS/4-Week/6-Week/20-Year: 23.54%;
TLT long: 10.59%;
I Bonds long: 3.77%;
PMM long: 0.01%;
XLK short: 28.45%;
QQQ short: 21.58%;
SMH short: 1.14%;
GDXJ short: 0.69%;
AAPL short: 0.13%;
GDX short: 0.01%;
SARK long: 0.59%;
PSQ long: 0.28%;
Gold/silver/platinum coins: 9.76%;
PALL long: 2.22%;
FLBR long: 0.37%;
EWZ long: 0.28%;
VALE long: 0.07%;
EWY long: 0.05%;
FLKR long: 0.03%;
UGP long: 0.03%;
BBD long: 0.02%;
GGB long: 0.01%;
EWZS long: 0.01%;
RIG long: 0.05%.
