Come on: If the world were "efficient," why wouldn’t everyone just follow the same canned model? Why would so many of us work so tirelessly? All we'd have to do is plug some analyst's expectations into a computer and simply calculate our "efficient frontier." And oh by the way - half your money sometimes disappears. Like now.

At this point, the academics like to say that you just experienced an "outlier event" - i.e. one not included in their models. So much for models, right?

Because, after all, once you've lost half your cash, the kind of arithmetic I can do on a cocktail napkin tells me I have to double my money just to get back to break-even. And trust me: Anyone who says he or she can double your money in a year is a snake-oil marketeer.

So where am I going with all of this? The first key to making money is not to lose it. I may have been unpopularly bearish for a while now - and frankly, I'd rather not be. It's much easier to be a blissful perma-bull and just love all things all the time. To be honest, that sounds like fun (if it weren't so damn dangerous).

I've seen the most complex models determine that "stocks were cheap" because they looked good versus risk-less Treasuries as a function of one model or other. But the truth is that I can buy GNMA pools around 6.25%.

So what risk premium would I have to receive to buy stocks with $48 of earnings in the S&P 500? I would need to earn at least 400 basis points more per year of return, which equates to a price/earnings ratio of 10 or so. A P/E of 10 equates to a price level of 500 or so on the S&P 500 - which is precisely the point at which this Great Bull Market began in 1995:

Logarithmic S&P 500 Since 1980

click to enlarge

There will be bounces along the way, but until credit markets behave -- and until we get to a positive part of the Presidential cycle and the Fed, ECB, Treasury, et al. stop intervening in our markets -- I will remain on the defensive.