Life often seems safest when, in fact, it’s not. I was reading the January 12, 2004 issue of the New Yorker magazine, which had an article written by Malcolm Gladwell. If you are not familiar with Malcolm’s work, he wrote a book called The Tipping Point. I consider his book to be one of the better books I’ve read. If you have time, check it out from the library and let me know what you think. Malcolm’s article was titled, “Big and Bad: How the SUV ran over Automotive Safety.” His article covers reasons behind the rise in popularity of the SUV.

One top reason expressed by consumers for buying the mega-sized SUVs is their safety, or should I say, perceived safety. People bought Cadillac Escalades, Ford Expeditions and the like because they were perceived as safe. Makes sense: If you want a safe vehicle, buy a 5,000 lb monster that sits three feet higher than the rest of the cars out there and, if needed, could plow over anything in its way. Without looking up statistics, the majority of the public, including me, would agree that these vehicles would be safer than, say, a Porsche sports car.

These SUVs are massive. But because they are based on truck standards, and not car standards, they don’t have to meet the safety requirements for automobiles. In addition to meeting lower safety standards, these SUVs, because of their weight, lack the ability to dodge an accident. It’s hard to move 5,000 lbs out of the way of something coming at you fast. The weight of an SUV literally resists you when you try to move it in a certain direction. In his article, Malcolm compared the Mega SUVs with Porsche Boxters.

The public would probably consider a Porsche less safe because of its size. It’s small, sits low to the ground, and would not do well in an accident with an Escalade. But here’s the detail: a Boxster can get out of the way of an on-coming car, truck or Escalade. Therefore, statistically, it is a safer vehicle to drive because the driver has a better chance of avoiding accidents.

This flies in the face of conventional wisdom. The Porsche is smaller, and if hit head-on by a truck, it would get squashed. The paradox is that Porsches don’t get hit head-on (or from any side) as much as Escalades because their drivers are more aware and their vehicles are more agile. Porsche drivers are more aware because of the naturally reduced feeling of safety when driving smaller cars. SUVs are less safe because they make their drivers feel safe. And feeling safe means not having to pay as much attention to what’s going on around you. “When we feel safe, we tend to be passive.” And passive means not paying attention. Not paying attention means not being safe. It’s a vicious cycle.

Compare this to the stock market. When people feel safe about their investments, they become very passive about the safety of their money. Most people believed that the stock market was very safe during the drop of 2000, 2001 and 2002, so they stayed invested through the entire drop. You could say that most people were in the “Escalade” investment mode, and because of the perceived safety of the market, they fell asleep at the wheel and got themselves into a financial accident.

Smaller cars like the Porsche are safer because they make their owners feel less safe. If you feel less safe, you pay more attention to what is going on around you. If you feel safer, you will pay less attention. As Malcolm states, “It’s that feeling of safety that is the problem.” People are starting to feel safe being in the stock market … again. This blows my mind. I’m already hearing people talk as if they are driving the Escalade investment plan. People are talking about how they are going to make up their losses and still try to get to their financial retirement goals within only a year or two. This is very dangerous talk. We are not in safe times, even if the market is going up full strength.

We sit today at historic valuations. The S&P 500 has a P/E ratio of 29. This is where trends end, not begin. In 1982, when the market started its historic bull trend, the S&P 500 had a P/E of 8. The trend ended in March 2000 with a P/E ratio of 38. By the way, the historic average of the S&P 500 is 17. We are close to doubling that as we speak. Don’t fall asleep at the wheel. There just might be something massive in our future that will need to be dodged. I’m not saying sell everything and put your money in cash. Don’t do that. What I am saying is become agile and get ready to dodge what is ahead. I don’t know when that dodge will be necessary, but the worst is far from over.

The markets could go up for another nine months, or 18 months, or two weeks, but they are absolutely not going to go up for another 18 years. That I do know. Stick with this insane upward trend for now, but don’t fall in love with it, and be prepared to dodge the next correction (downturn). Read between the lines and set up stop losses.

Here’s to riding the wave as it gets bigger and getting out of the way when it crashes.

To sound investing,