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If someone believed that the US stock market is 40% overvalued compared to its long term average valuation, then would it be prudent to sell most of your US stocks, and wait for a better entry point? Even if that entry point might be 5-10 years away?

FWIW, Of all the hundreds of stock tips and investing advice Jim gives us, hearing him say stocks are 40% overvalued seems to be the most important.

There is another guy that thinks this way. Prem Watsa. Maybe it is time to "sell it all" and buy a certain Canadian stock.

Well, the challenge with selling high and re-buying low is that 1) you need to do something with the proceeds and 2) there are many possible ways for an over-valued market to correct itself.

For first challenge, presumably you are speaking of dumping equities to hold high quality bonds. However, at current rates, it's hard to believe that bonds will be anything other than certificates of confiscation (ie, 1% or 2% nominal interest rate will probably be a negative real return after income tax and inflation).

For the second challenge, you are probably implicitly assuming that the equity market will correct through a draw down, or perhaps even a crash. However, that's not the only possibility. It is also possible that the market could go sideways for 7 years, which would give you a 2-ish dividend, but at the end of the 7 years the broad market would be roughly fair value. Or perhaps the broad market will INCREASE 2% per year for the next 15 years, meaning you'd get the 2-ish% dividend plus a small capital gain, and at the end of 15 years the broad market would be roughly fair value.

The strategy of selling equities to buy bonds is a real winner if the market correction is rapid and severe. But it could be a real loser if this thing drags sideways for a lengthy period.

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