Ben Carlson: Investing at All-Time Highs | Rational Reminder 412

ELI5 / TLDR

Ben Carlson writes about markets for a living, and his whole pitch is that the boring advice is the correct advice. Buying when stocks are at all-time highs usually works out fine. The scary counterexamples people love to cite — Japan in 1989, the 1929 crash — were extreme outliers, and even those weren’t as ruinous as the headline numbers suggest if you zoom out far enough or simply held more than one country’s stocks. The hard part of investing isn’t picking the right asset; it’s surviving your own reactions to losses, noise, and the temptation to do something clever.

The Full Story

All-time highs are not the high

A common fear is that the next record high is the high — the peak before a long fall. The data says otherwise. New highs are actually rare: stocks sit at an all-time high only about 7% of trading days. The other 93% of the time, you’re looking up at a past peak. And historically, returns over the next one, three, and five years tend to be better when you buy at a high, not worse.

“Bull markets last longer than people think… one of them is going to be the peak. It’s going to happen, but that’s just one. Most of them are just fine.”

The Japan question

Every time Carlson argues for long-term investing, someone replies “What about Japan?” Japan was arguably the biggest bubble in history — not just stocks at 100 times earnings, but real estate so inflated that the grounds of the Imperial Palace in Tokyo were reportedly worth more than all of Canada’s real estate combined. Buy at the 1989 top and you were underwater for over three decades; the Nikkei didn’t make a new high until 2024.

But Carlson’s point is that the bubble was inflated by enormous prior gains. Japanese stocks returned about 22% a year from 1970 to 1989; small caps did 30% a year for two decades. Returns that extreme almost guarantee a brutal hangover afterward. Stitch the boom and bust together and you get roughly 8.7% a year over 55 years — not far off other markets. It was “extreme mean reversion,” a very long round trip rather than permanent destruction. And the rest of the world did fine: the US had one of its best decades ever in the 1990s, right after Japan peaked. The real lesson isn’t “stocks are dangerous,” it’s “don’t put all your eggs in one country.”

“Showing exceptions to the rule doesn’t necessarily invalidate the rules.”

1929 was worse than the chart looks

US stocks fell about 86% in the Great Depression. Carlson finds it hard to imagine that today, for two reasons. First, almost nobody owned stocks then — only 1-2% of households — so it was the economy that crushed people, not the market: 25% unemployment that barely improved until World War II, corporate profits down 70%, GDP down 30%. Second, policymakers have since learned to act as a “lender of last resort.” Ben Bernanke literally studied the Depression and refused to repeat it in 2008.

Two counterintuitive facts stand out. The worst-ever 30-year return — buying at the September 1929 peak — was still about 8% a year (a total return of 850%), because the crash was followed by the best 30-year stretch on record. You went from worst to best in about three years. And if you simply deleted the Depression from US market history, the long-run return rises from roughly 10% to 11% a year. A catastrophe, yes, but not one that rewrote the whole game.

He’s wary of assuming the danger is gone, though. He cites sociologist Charles Perrow’s idea of “normal accidents” — make a complex system safer in one place and the risk often just migrates elsewhere. We may have cut off the left tail of 1929, but we don’t know where that risk went.

Volatility is not risk

Wall Street loves to put a number on risk. For most people, Carlson argues, risk is qualitative — closer to emotion than to a statistic. He frames it as three things: your need, ability, and willingness to take risk. Need and ability you can roughly calculate (what return do my goals require, what’s my net worth and savings rate). Willingness is the squishy one — someone with a seven-figure portfolio and every ability to take risk may still say no because they’ve “already won the game.”

The single most important concept, in his view, is how you handle losses. Drawing on Daniel Kahneman, losses sting about twice as much as equivalent gains feel good. That asymmetry is why bear markets are so volatile in both directions — panic produces huge down days and huge up days clustered together. The same study showing “if you missed the best 25 days” and “if you missed the worst 25 days” misses the point: those best and worst days happen in the same chaotic stretch. March 2020 had 8-9% down days and 8-9% up days within the same weeks.

The market is the best casino in the world

His least favorite analogy is “the stock market is a casino.” In a real casino, the longer you sit at the blackjack table, the worse your odds, because the house edge grinds you down. The stock market is the inverse. Over a single day it’s nearly a coin flip — about 53-54% of days are positive. Stretch to a year and roughly 80% of periods are positive; over seven years, about 98%.

“The longer you stay in the stock market casino, the better your odds of walking away a winner. That makes it the best casino in the world.”

The catch is patience — and modern life makes patience hard. He contrasts the 1987 crash, which he only heard about on the car radio and couldn’t even check until he called his broker the next day, with today’s phones that alert you to every tick. “It was so much easier to be naive in the past.” Meanwhile brokers actively push the casino-like products — options, meme stocks — and Americans now spend more on lottery tickets each year than on sporting events, books, video games, movies, and music combined.

The market is not the economy

People assume stocks and the economy move together. Sometimes they do, often they don’t. The US market is roughly 40-50% technology; the US economy is about 70% consumer spending, much of it services. So they can diverge. The stock market is forward-looking and reacts instantly — a speedboat. The economy is backward-looking, measured on a lag, and turns slowly — a battleship. The old joke: the market has predicted nine of the last five recessions.

He also notes that everyone runs their own “personal economy.” Your household inflation rate — daycare, rent — is never the government’s number, which is why official figures make people so angry.

Diversification as the closest thing to a free lunch

There are no real free lunches in investing, but diversification comes close. Carlson splits it three ways: geography (countries), asset class (stocks, bonds, cash, real estate), and strategy (small caps, value, dividends, quality). The US has had three lost decades in the past century — the 1930s, the 1970s in real terms, and 2000-2009, when the S&P 500 lost about 1% a year. In each case, other things did fine. Even within Japan’s lost decades, Japanese value and small-cap value stocks did okay.

The cost of diversification is that you’re “always apologizing about something.” You give up the home runs to also avoid the strikeouts. And the hard part is that cycles don’t run on schedule — the current US bull market has lasted ~17 years, far longer than anyone predicted, which means you may spend years “rebalancing into the pain” of cheaper international and emerging markets before they turn.

Risk/reward, not bullish/bearish

His one big professional belief: an individual investor doesn’t have to be bullish or bearish. With real clients, portfolio changes almost never come from a market call — they come from life events. A new job, a job loss, an inheritance, a marriage, a death. The question isn’t “is the market overvalued,” it’s “has the risk/reward setup changed, and am I still being paid enough to take this risk.” And ignore the billionaires on TV calling for a recession — they don’t know your goals, and often their own portfolios don’t match their pronouncements.

Key Takeaways

Stocks sit at all-time highs only ~7% of trading days; historically, one/three/five-year returns from a high are better than average, not worse.
At Japan’s 1989 peak, stocks traded at ~100x earnings (vs. ~45x at the US dot-com peak); the Imperial Palace grounds were reportedly worth more than all Canadian real estate.
Japanese stocks: ~22%/yr (1970-89), then ~1-2%/yr since 1990 — but blended, ~8.7%/yr over 55 years. The Nikkei didn’t make a new high until 2024.
US stocks fell ~86% in 1929; only 1-2% of households owned stocks, so the economic damage (25% unemployment, -30% GDP, -70% corporate profits) hurt more than the crash.
Buying at the Sept 1929 peak still returned ~8%/yr over the next 30 years; deleting the Depression from history only lifts the long-run return from ~10% to ~11%/yr.
Long-term US fixed-rate mortgages are an artifact of the Depression — created after 40-50% of households defaulted, to extend loan terms.
Losses feel roughly twice as bad as equivalent gains (Kahneman); the “best days” and “worst days” of the market cluster together inside bear markets.
~53-54% of single trading days are positive; ~80% of one-year periods and ~98% of seven-year periods since 1950 are positive.
Non-recessionary bear markets average ~25% declines; recessionary ones average ~40% and last much longer.
The US has had three “lost decades” in 100 years (1930s, 1970s real-terms, 2000-2009); in each, other asset classes/strategies did fine.
Risk profile = need + ability + willingness to take risk. Need and ability are quantifiable; willingness is qualitative and the hard part.
The market is ~40-50% tech; the US economy is ~70% consumer spending — they can and do diverge.
Americans spend more on lottery tickets annually than on sporting events, books, video games, movies, and music combined.
The book is Risk and Reward (Harriman House); the blog is A Wealth of Common Sense.

Claude’s Take

This is Carlson doing exactly what he does well: taking the scariest stories investors tell each other and showing they’re either overstated or beside the point. The Japan section is the standout, because “what about Japan” is the single most common gotcha against long-term investing, and his rebuttal — that the bust was the mirror image of an absurd boom, and that the rest of the world barely noticed — is both correct and rarely made this cleanly. The 1929 reframing (worst 30-year return still ~8%/yr; deleting it only moves the needle from 10% to 11%) is the kind of fact that quietly rearranges how you think.

Where it’s thinner: almost nothing here is new if you’ve read his blog or any evidence-based investing writer. The conversation is a comfortable victory lap among people who already agree — three guys nodding at each other about diversification. The most honest moment is the “normal accidents” aside, where he admits the risk we cut off in 1929 may have simply moved somewhere we can’t see. That’s a sharper thought than the rest of the episode lets him develop, and I’d have liked more of it.

Score 8. High signal-to-noise, genuinely useful data points delivered without hype, and a host pairing that knows the material cold. Docked from higher because it’s reassurance more than challenge — you’ll leave more confident, not more surprised.