Robert Shiller, who has a pretty accurate gauge of stock market valuation (The CAPE model), came out recently reiterating how the market appears overvalued.

In this New York Times article, he details how the market is at its highest level, matching levels not seen since 1929, 2000 and 2007.

The problem is, predicting the stock high is trying to determine how high is up.  Yes the market may be overvalued, but until it turns you never know how close  the top is.  So it could run alot higher.  Notice from the CAPE chart below that we appear to be way below the irrational exuberant highs of 2000:

The current CAPE is around 25 – it was at this level in 1996 and 2005,  so indeed we could have a few more years before valuation reverts to the norm.  But this is like a game of musical chairs, whereas when the music stops and people rush to get out, you wont want to be left standing alone.   And given the Fed is still making asset purchases as part of the economic recover from the last big market correction in 2008, if the fall happens anytime soon, it could be a bad one.

Every once in a while luck turns out to be better than wisdom in investing.  My most recent example of dumb luck in investing was Canadian Pacific Railway, an stock position  It took back in June 2011.   My decision to buy the stock primarily based on the thesis that oil prices would be ramping up as the Chinese and other emerging markets started demanding more oil.   The assumption was that as energy prices go up, more goods would be shipped by train than by truck.

My thesis turned out to be wrong, there was no oil shock, and the discovery of additional oil fields and fracking let to an increase in domestic oil production.   As luck would have it, the domestic oil production increase was in North Dakota – in Canadian Pacific’s backyard, leading to a large increase in oil by rail for Canadian Pacific.  The other piece of luck was an activist investor group tried to grab control of the company, leading to a big proxy fight and led to a runup in the stock (Interestingly, that also led to the only time I have ever been called at home asking for my vote in a proxy vote for a stock – I don’t even know how they got my phone number).

To be fair to myself, the other reason I bought Canadian Pacific was the yield was over 2% at the time, and the dividend appeared safe, so it was a conservative bet.

Last month I sold out of my position because I didn’t really know why I still owned it, except for the reason was it keeps going up.  The valuation wasn’t great, and the dividend yield is now down under 1%.    So I decided it was time to get out.  I could be wrong, but I can’t depend only on luck when investing in the stock market.

This chart from the St. Louis fed caught my eye showing a shift away from single family housing since 2010

Back at the dawn of the internet age, I recall speculating with co-workers on whether or not the internet would spur population spread to the suburbs or rural areas, since so much more could be done without a physical presence(i.e working remotely, shopping online).  But looking at this chart, it would seem the population is aggregating in urban (or at least concentrated) areas.  Another thought is perhaps this could be related to the aging baby boomers downsizing, thus flooding the market with single family homes.

I don’t know if four years can be considered a firm trend,  but it does appear the demand for housing is shifting to more people owning condos or renting apartments. If you believe this is a trend that will continue,  how should you invest to take advantage of this trend?  Maybe concentrate on REIT‘s that invest in urban properties, or focus on businesses that service the urban consumer.  At any rate, it is a trend worth keeping an eye on and could impact the economy in unique ways.