Good afternoon.

Yesterday, crude oil hit its highest price in more than seven years, creeping toward $100 a barrel. Federal Reserve officials called for policies that would raise interest rates to fight inflation, which recently hit a 7.5% annual rate. The Cboe Volatility Index—Wall Street’s so-called fear gauge, nicknamed the VIX—rose roughly 10% on Monday.

Valentine's Day didn't seem to bring investors much that they could love.

Yet, after all this, U.S. stocks shot up today on tentative indications that Russia might not invade Ukraine. And markets remain barely below record highs. The Dow Jones Industrial Average closed yesterday 6.1% below its all-time high set in early January; the S&P 500 is off 8.2% from its own record on Jan. 3.

Are stocks in a bubble? Several times a day, I come across data online suggesting that U.S. stocks are the most expensive they've ever been.

"Regression to the mean," in which extreme highs or lows move back toward the long-term average, seems inevitable.

But what does "the mean" mean? Maybe the higher valuations of the present are abnormal. Maybe the low valuations of the past were.

You can't answer that riddle even by using long-term numbers like those from Yale University economist Robert Shiller. As I wrote in last weekend's column, The Trouble With a Stock-Market Bubble:

...could the mean keep rising if corporate taxes stay low, interest rates remain moderate and new technologies keep transforming society?

“The problem is, we don’t know,” says Prof. Shiller with a dry laugh.

Years ago, I attended a dinner with a half-dozen of the smartest bond investors in the world. I asked, "Is the bond market a bubble?" Every single person said yes, nearly all of them emphatically.

That was in 2011; they turned out to be wrong for more than a decade, as interest rates kept falling and bond prices kept rising.

And if I had a dollar for every time a professional stock investor has told me that U.S. equities are a bubble, I'd have to roll the money to the bank in a wheelbarrow.

Because bubbles are easy to spot in hindsight -- What about 1929? Of course stocks were overpriced! Why do you think they call it the Roaring Twenties? And 1999? Can you believe people thought Enron and WorldCom and Pets.com were great companies? -- it seems they should be easy to spot in foresight.

But they aren't. Charles Mackay, author of the classic book known today as Extraordinary Popular Delusions and the Madness of Crowds, was a ferocious critic of human folly who mocked the speculative bubbles of the 17th and 18th centuries. He also witnessed a gigantic bubble in his own time and never even warned about it, evidently because he didn't think the prices of British railway stocks were out of line in the 1840s.

Can you imagine living through this...

and not calling it a bubble? That's exactly what Mackay did, as mathematician and financial historian Andrew Odlyzko has shown.

All this is why the great investor Benjamin Graham believed that investors should never be entirely out of the stock market (or entirely in it, either). Without the benefit of hindsight, it's extraordinarily hard to be sure that a market is -- or isn't! -- in a bubble. 

Graham advised that when enthusiasm is high, you should trim back your stocks, but never to zero -- and when pessimism prevails, you should raise your allocation to stocks, but never to 100%.

Graham suggested keeping a minimum of 25% and a maximum of 75% in stocks, with the rest in bonds. As he wrote in 1949:

The chief advantage, perhaps, is that such a formula will give [the investor] something to do. As the market advances he will from time to time make sales out of his stockholdings, putting the proceeds into bonds; as it declines he will reverse the procedure. These activities will provide some outlet for his otherwise too-pent-up energies. If he is the right kind of investor he will take added satisfaction from the thought that his operations are exactly opposite from those of the crowd.

Wise words, then and now.

In previous issues, we've talked about three of the seven virtues of great investors: curiosity, skepticism and discipline. They are what make independence possible.

And without independence, investors are doomed to mediocrity.

What's your single most valuable asset as an investor? Your mind!

If you let other people do your thinking for you, you've traded away your greatest asset -- and made your results and your emotions hostage to the whims of millions of strangers. And those strangers can do the strangest things.

Independence takes time and a stubborn streak. As reader Kelly Ehler emailed me:
My greatest virtue is not listening to other people's advice. I watch entire sectors for years and then invest when I think the sector is in recovery mode or, as Warren Buffett says, buy when everyone is panicking. 

It also takes a deliberate kind of orneriness, as reader Wayne Low explains:
After identifying a promising investment, I search the web for recent news on it to gauge investor sentiment. If I encounter:

• Positive news, I don't invest for the moment because it signals the investment's price may not be as attractive as it could be
• No news, I proceed because it signals the investment is flying under the radar of investors and hasn't been bid up yet
• Negative news, I determine whether the news changes the promise of the investment opportunity or not. If not, I proceed even more wholeheartedly because it signals the investment may be "on sale" for a bargain (getting in on the basement floor)

It helps to have what Charlie Munger calls "gumption," which individual investors may be able to wield better than professionals can. As Mr. Munger told me a few years ago:
You have to strike the right balance between competency or knowledge on the one hand and gumption on the other. Too much competency and no gumption is no good. And if you don't know your circle of competence, then too much gumption will get you killed. But the more you know the limits to your knowledge, the more valuable gumption is. For most professional money managers, if you've got four children to put through college and you're earning $400,000 or $1 million or whatever, the last thing in the world you would want to be worried about is having gumption. You care about survival, and the way you survive is just not doing anything that might make you stand out.

To some extent, an independent streak must be inborn; some people have it and some don't. Think of quirky misfits like Michael Burry or Steve Eisman in The Big Short, seeing what others miss. Great investors like Ben Graham, Warren Buffett and Mr. Munger don't try to fit in; they try to step out. The approval of others -- at least when it comes to investing -- means nothing to them.

Yale economist Robert Shiller told me in 2010:
"People who insulate themselves from the collective consciousness are not very numerous, probably because it's hard to do." Added Prof. Shiller: "I don't follow the crowd as naturally as other people do. I'm kind of 'off' there. When I watch a sporting event, I'm always amazed at how intensely people care who wins. As a child, I read [Aldous Huxley's novel] 'Brave New World,' and I never wanted to get socialized like that into a caste or clique whose beliefs are reinforced by other people's thinking."

Can you learn to think more independently? I believe you can.

In genetic and neurological tests, I show a predisposition toward intense fear of loss as well as the impulse to get rich quick -- a potentially disastrous double whammy. Yet, when money is on the line, I tend to stay calm in falling markets and can defer gratification almost indefinitely.

I say that not to boast -- but because, as I wrote years ago, 
growing up on a farm, with warm parents who knew a great deal about history, may have trained me to evaluate momentary changes in a longer-term context and to think twice before acting on gut feelings. From studying the writings and careers of Benjamin Graham and Warren Buffett, I learned to distrust the crowd and to remember that future returns depend on today's prices

Investors can cultivate their independence by working at it, by always asking whether what other people are saying or doing makes sense, by never pursuing a course of action just because other people are. It isn't a some-of-the-time effort; it's an all-the-time effort, the work of a lifetime.

Be well and invest well,

Jason

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It is easy in the world to live after the world’s opinion; it is easy in solitude to live after our own; but the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.
—Ralph Waldo Emerson