The Beauty of Samuelson Share

By Paul_Samuelson.gif: Innovation & Business Architectures, Inc. derivative work: Bender235 (Paul_Samuelson.gif) [CC BY 1.0 (], via Wikimedia Commons

Reading Lifecycle Investing by Ian Ayres and Barry Nalebuff and stumbling upon the Samuelson Share finally solved my dilemma of finding a market timing mechanism that could give me a signal of when to hedge with cash and when to leverage to invest.

This to me is important because many investors I admire (Charlie Munger, Howard Marks, Seth Klarman, Warren Buffett) all talk about the importance of holding lots of cash to take advantage of once in decades type investment opportunities.

Which if I were only dealing with the decision of deploying cash or holding cash, the Shiller P/E or Warren Buffett Indicator (Total Market Cap / GDP) would suffice.

The problem with either indicators is the inability to introduce leverage into the equation of investing. They can give you a signal that it’s a great time to leverage to invest, but they don’t give you a good specific number of how much to leverage to invest.

That’s where Samuelson Share comes into the picture. Samuelson Share indicates the % of your lifetime savings you should invest in at any given moment if you mix it in with Shiller P/E. Thus at the early stages of your life you’d most likely have to leverage to a maximum of 2:1 if you wanted to fit the bill with the Samuelson Share recommendation.

And the beauty of Samuelson Share if used with Shiller P/E is it gives a very good picture of when to invest or not, because it also utilizes the Volatility S&P 500 Index. So not only you have Shiller P/E giving you a proxy on valuation levels, you have Volatility S&P 500 Index giving you a proxy on whether all the panic selling has been done yet [1].

But I use the Samuelson Share indicator even more aggressively, I will go with the more aggressive allocation recommendation when comparing % of lifetime savings recommendation [2] with % of existing savings [3]. The rationale of using the more aggressive allocation is that if you are going to use leverage when the Shiller P/E and Volatility S&P 500 Index screams that it’s a once in decades type investment opportunity, you should go hard or go home. [4]

That’s why Samuelson Share is really beautiful in my eyes. At 16.5% Samuelson Share (24.56 Shiller P/E, 20.20% Volatility S&P 500 Index, 2 RRA), I just feel very comfortable holding 83.5% of my net worth in cash. I might look very stupid over the next few years for losing to the market due to a ridiculously high cash hedge, but as Charlie Munger says, “The way to get rich is to keep $10 million in your checking account in case a good deal comes along…There are worse situations than drowning in cash and sitting, sitting, sitting. I remember when I wasn’t awash in cash — and I don’t want to go back.” [5]


[1] Theoretically, the higher the Volatility S&P 500 Index, the more fear there is in the market, and the more panic selling there should be as a result. There is no point in being in a hurry to buy something that is fundamentally cheap if you’re sure it will get fundamentally cheaper because of market irrationality.

[2] (Samuelson Share % * Lifetime Savings / Years until Retirement)

[3] (Samuelson Share % * Existing Savings)

[4] Even though I’m going to go hard when it makes sense, the maximum leverage I’m willing to go is only 2:1 (Assets to Equity, which is equivalent to 1:1 Debt to Equity). This minimizes the chance of blowing up while taking advantage of the benefits of leverage.

[5] I’m nowhere close to having $10 million, and most people who are reading this are in the same situation, the same principles apply. If there’s no compelling time / opportunity to deploy your hard earned cash, hold it and be patient.


Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)


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