Expensive Is Not a Feeling You Measure With
Notes on The Compound and Friends, September 8, 2026: what it means that only 27 S&P 500 stocks trade above 40x forward earnings, why 'invest in what you know' keeps failing, and the one ingredient this mania is missing. Educational, not investment advice.
A man lost his axe and suspected his neighbour’s son. He watched the boy walk — the walk of an axe thief. He watched his face — the face of an axe thief. He listened to him speak — the speech of an axe thief. Every gesture, every manner, was the manner of a thief. Then he dug in his own valley and found the axe. The next day he saw the neighbour’s son again, and nothing in the boy’s manner resembled a thief at all.
—— Liezi, “Shuo Fu” chapter (Warring States period; translation mine)
The boy did not change. The man had reached his verdict first.
That story ran through my head for most of this episode of The Compound and Friends (September 8, 2026 — Michael Batnick hosting, with Sean Russo and Matt Cerminaro). The whole hour circles an unwelcome idea: the market gets called a bubble every day, and yet when you spread the multiples out on the table, a great many stocks are getting cheaper.
What the episode is about
Josh is out with a back injury, so it’s three guys and a stack of charts. The spine of it is Matt’s idea of a “great rerating” — the follow-up to the broadening everyone discussed earlier in the year. The index sits near highs while individual valuation multiples compress.
The back half covers three things: why the second-most-quoted piece of investing wisdom, “invest in what you know,” keeps blowing up in people’s faces; what ingredient this alleged mania is missing; and Apple’s $2,000 folding phone.
The main points
One: only 27 expensive stocks left. Matt’s opening chart counts S&P 500 members with a forward P/E above 40. The line has been falling, and today it reads 27. The last two times it sat this low were March 2020 and October 2022 — both bear market lows. The index is currently within 2% of an all-time high. Michael’s reaction: if you had to bring one exhibit before the bubble judge, this is Exhibit A.
Two: the sector breakdown tells the same story. Within technology — supposedly the epicentre — 38% of constituents carry a forward P/E between 10 and 20, and the next-largest bucket is 20 to 30. Two-thirds of tech trades below 30x forward; one in four trades above it. Across all sectors, 52% of stocks fall in that 10-to-20 bucket.
Three: Sean takes apart the price-to-sales rebuttal. The standard counterargument points at price-to-sales, which is at an all-time high. Sean’s arithmetic is clean: a company with $10 of sales earning $2, at 15x earnings, trades at 3x sales. If that $2 of profit becomes $4 on the same $10 of revenue at the same earnings multiple, the sales multiple doubles while the earnings multiple sits still. Rising margins push price-to-sales up on their own. A ratio with no immunity to margin expansion cannot prove the market got more expensive.
Four: the growth is coming off a high base. A Deutsche Bank chart shows quarterly S&P 500 earnings breaking above the top of a ninety-year channel — and it’s realized earnings breaking out, not projections. Sean adds the part that matters: the 2021 growth spike came off a COVID-flattened base, where the comparisons were trivially easy. This round of growth stands on a base that was already high. Nobody on the show claims a new paradigm. Michael says outright that he’s a gaps-get-filled guy and expects the line back inside the channel.
Five: the fear is already in the price. This is the best piece of reasoning in the hour. Every worry you hear — debt, capex, circular spending, unsustainable earnings — is consensus, and consensus lives in the multiple. The market trades at 19x, below its five-year median. Earnings surging while multiples compress is the market saying it doesn’t believe all of those earnings will hold. The fear isn’t in the headlines. It’s in the denominator.
Six: “invest in what you know,” live at the crash site. AutoZone down 32% from its high, Domino’s 28%, Lululemon 55%, Nike 50% (market cap down to $56 billion), Netflix 40%. Michael adds one he didn’t chart: McDonald’s relative to the S&P 500 hasn’t outperformed since 2007. Nike’s share price is back where it stood in 2014 — an entire decade of nothing. Matt tells his own story: he started buying single stocks in December 2019 — Procter & Gamble, Coca-Cola, Apple — reading the same Peter Lynch book everyone reads. COVID cut them in half, he sold like an idiot, and he switched to indexing. He calls it the best thing that could have happened to him, because he learned that understanding a business model is not the same as having an edge. He ate at Chipotle every weekend after football practice. The stock didn’t care. The stock doesn’t know you own it.
Seven: the missing ingredient is fraud. Michael has been listening to a book about the global railway mania of 1873, and noticed the same ingredient in every mania: fraud. So he asks the other two — where is it? What they come up with — a celebrity memecoin, athletes signing with a prediction market, a broker landing 18th out of 18 slots in an IPO syndicate — they agree is froth, not fraud. But one real case surfaces: in the run-up to the SpaceX listing, special purpose vehicles stacked inside special purpose vehicles, Russian dolls, people believing they held shares and waiting on life-changing money when they held nothing of the sort. That happened two months ago.
Going further
”Every headline says bubble. Should I be cutting back?”
This thought surfaces in my own head every few weeks, usually while scrolling.
The axe problem is that once you’ve settled on “this is a bubble,” everything queues up to serve as evidence: someone’s capex plan, someone’s coin, some absurd valuation story. Those items exist every single day, in bull markets and bear markets alike. Which makes “I’m seeing a lot of bubble signs” close to information-free — it tells you what you’re looking for, not what the market looks like.
The fix in this episode isn’t sharper judgement. It’s a different question: not what am I seeing but where is the distribution. How many companies trade above 40x forward? What share of the market sits in each bucket? Those have answers, and the answers don’t move with your mood. You can disagree with Matt’s conclusion, but you have to stand in front of the same numbers first.
The mistake I’ve made is the mirror image: treating cheap as safe. A low multiple has two possible causes — the market hasn’t noticed, or the market has noticed and is right. The guys joke about this themselves: the sub-10x bucket is mostly full of junk. Distribution tells you where the market has priced things. It doesn’t tell you whether the price is correct.
One more thing worth writing down before you use any of this: when does the read break? Multiple compression rests on earnings holding up. If earnings roll over, the same share price becomes a high multiple without the stock moving a cent. That’s what Michael’s gaps-get-filled instinct is pointing at. Today’s cheapness is built by the denominator. Break the denominator and the conclusion flips.
”I bought the brands I use every day. How am I down this much?”
If you hold Nike, Lululemon or Netflix, this part stings a little.
Lynch never said “buy the tickers you recognize,” and Michael takes a moment to defend him. The actual idea is closer to: notice what you consume, because it might be the start of a lead — maybe other people are like you. The start of a lead. All the weight sits in those words, and a long stretch of homework sits after them.
What homework? Getting from “I use it” to “I should own it” takes at least three steps. One: usage is rising for people other than me. Two: the company converts that usage into profit rather than buying growth with discounts. Three: the price doesn’t already reflect all of it. Step three gets skipped most often, because familiarity feels like research. I’ve slipped there myself — I liked a company, and I let the liking stand in for the work.
The inverse doesn’t hold either. Sean’s warning is the right one: you can’t flip this into “never own anything you recognize,” because Apple, Airbnb and Monster are household names doing beautifully. Michael’s line closes it — there are no ironclad rules in the stock market. Familiarity is neither a reason nor a disqualification. It’s a place leads come from.
”The bad news is printed on the calendar. Do I need to dodge it?”
The SpaceX lockup segment handles this well. Everybody spent weeks worrying about the unlock. Matt overlays Google search interest on the price — the peak in search interest lines up with the bottom in the stock, which then ran from $118 to $154.
The principle: a known risk gets priced the moment it’s known. The date is on the calendar, the terms are in the prospectus, anyone can look it up, so it goes into the price. What moves the stock afterwards is how that known information changes. They use Apple as the analogy: if everyone expects a great announcement and the announcement is great, the stock may not budge. Miss slightly, and it matters.
Michael doesn’t let the principle run unchecked, though. He brakes on himself: pricing in 900 million shares is not the same as pricing in 5 billion. “It’s priced in” has a magnitude ceiling — push enough supply through and absorption breaks. That reversal is the most honest stretch of the episode. Same person, first using evidence to overturn his own panic, then marking the edge of the overturning.
Worth a look
- The Compound and Friends, WAYT episode, September 8, 2026
- Peter Lynch, One Up on Wall Street — the actual argument is far more careful than the slogan
- chartinmatt.com, if you want to follow the charts from this episode
The one thing to take away
One idea: once you’ve reached a verdict, the evidence lines itself up. This doesn’t require you to be dishonest. It happens while you’re being careful, because you never notice you’re only searching in one direction.
Here’s something I’ve tried that has nothing to do with stocks, if you want to borrow it. Pick a person you’ve already made up your mind about — a colleague, a relative, a neighbour. Write your verdict on one line, exactly as you’d say it: “he’s unreliable,” say. Then underneath, list the concrete facts you remember from the last three times you were with them. What they said, what they did, when. No impressions. Only things a camera would have caught.
Then count. How many support the verdict? How many are unrelated and you skimmed past them? Is there one that points the other way, and you only remembered it just now?
The first time I did this, of the four things I could list, exactly one supported the sentence. The other three were background noise I’d been treating as agreement. The axe was in my own valley.
This article is an educational discussion of investment method. It is not advice to buy or sell any individual security, offers no target prices, and does not analyze any current holding. Investing carries risk; make your own decisions or consult a qualified professional.