Editor's note: Nearly 10 years into this bull market and stocks are... cheap?

Our colleague Steve Sjuggerud says so.

This weekend's Masters Series is excerpted from Episode 72 of the Stansberry Investor Hour podcast. In it, Steve chats with senior analyst Brett Eversole and host Buck Sexton about some of his previous "big picture" calls... what Steve and Brett learned from their first trip to China together... and why stocks aren't nearly as expensive as you might believe...

Believe It or Not, Stocks Are Still Historically Cheap

An interview with Steve Sjuggerud and Brett Eversole

Brett Eversole: What I've learned in the last eight or so years studying alongside you, Steve, is that to find really good investments, you've got to roll your sleeves up and do it yourself.

That's one of the advantages that we have. We're not based in New York, San Francisco, or another big financial hub. We're not around Wall Street guys all day. We're just sitting around coming up with our own ideas, and we don't get pulled into groupthink. It's a lot easier to be a contrarian and find those really good long-term ideas as a result.

Steve Sjuggerud: Yeah, and I think by learning that early, it gives you a big leg up. A lot of what happens in finance is guys parroting other ideas that they hear from someone else. There are only about 10 original thinkers, and everyone else is just borrowing those ideas and spitting them out somewhere else.

Brett: That's how you run into something like 85% of funds underperforming the market's returns, because everybody does the safe thing. If everybody else likes this stock, and I like it, too, and it goes down, I'm an idiot – but at least I have company.

Steve: Brett, you've been in the passenger seat when I've done some ridiculous things, like buying gold at the very bottom. A few years ago, I personally bought a huge portfolio of tiny gold stocks when it just seemed like the worst idea in the world, and I made a few hundred percent on those.

Brett: That was a perfect example. That was in late 2015, and gold had been in a bear market for four or five years at that point. And gold stocks – especially small gold stocks like the ones you were buying – were down 80%-90%. But you looked at the landscape and you saw this was about as contrarian a thing as you could do at that moment.

And you had the conviction to take advantage of the opportunity, because you've been doing it so long and seen these kinds of things play out over and over again. By having that experience, you're able to develop that kind of conviction. When an opportunity comes up, you jump on it and take advantage of it right then. Because oftentimes, those don't hang around long.

Steve: It's not just about investment opportunities. Brett, you've experienced firsthand that I do the same thing with people.

Brett: We've gone to China a few times together, and the first time you took me a few years ago, we got the king's tour from Peter and Tama Churchouse. You had been developing a relationship with Peter for 10 years. And it's not like you spoke to him often, but he loves you. You've gone out of your way to help him whenever you could. You've helped him with their publishing business as time went on. That's just one example, but they showed us everything and connected us with the right people in Hong Kong and Shenzhen. We couldn't have put that trip together ourselves.

That trip was incredible because we went over there with one idea and came away with a second idea that was much bigger.

We went over with this idea of this MSCI inclusion of local Chinese stocks, but we sat down at the first meeting and talked to an executive at a finance company and started picking her brain about the idea of mobile payments in China.

We had experienced it in the few days prior, where no one was carrying cash and there were "QR" codes on every stall, at every store, at every restaurant. And from that first meeting, the entire universe of what we were after in China on that trip completely changed. When we came back from that trip, we launched True Wealth Opportunities: China around the MSCI idea, but more about this big Chinese tech idea. Those positions have done better than anything else in that portfolio.

Steve: We went over there, and the woman we met with was indignant about spending cash. In China, they don't want credit cards or cash anymore. It's all paid on your phone. When I came home, I told people that China is more advanced than things in the U.S., whether you're in Beijing or Shanghai, with mobile payments and communications... the way people interact with each other. I'm not saying it's better or worse. It's just more advanced than what we do.

Brett: Steve, this goes back to a bigger investment idea you've talked about a lot, where you find a big discrepancy between perception and reality. That's what's going on in China. You've helped expose more people to that in the last few years. But like you say, nothing beats being on the ground and seeing it yourself.

Steve: What I look for is "the one overwhelming thing." In 2009, I said, "You know, the Fed is going to cut interest rates lower than you can imagine and keep them there for longer than you can imagine. That's going to cause asset prices like stocks and real estate to go higher than you can imagine."

That's the same theme I stuck with for the last decade. The one important thing was those ultralow interest rates. They overwhelmed any political or economic issues. That 0% interest rate was jet fuel for asset prices. In China, while we're experiencing political and economic issues, these hundreds of billions of dollars flowing into Chinese stocks due to the MSCI decision, in my opinion, will be the one overwhelming thing.

Back to U.S. stocks... Earlier this month, we had a rough couple of days in the markets. I got e-mails from some subscribers saying, "Steve, are you still on your Melt Up thesis? I mean, come on, this has been a ridiculous couple of days."

Just to back up briefly, the "Melt Up" thesis is my idea that all great bull markets in any asset class typically end with an extraordinary period of – to quote former Fed Chairman Alan Greenspan – "irrational exuberance."

We saw that irrational exuberance in bitcoin at the end of last year. This was not founded in any value. This was just pure greed at its core.

The same thing happened in the real estate boom that peaked in 2007-2008. It was crazy. And if you think back, it was irrational exuberance. People expected housing prices to go up 20% a year with the population growing 1% a year and incomes going up 2% a year. It was just pure greed and irrational exuberance, and that's the way booms end.

The Nasdaq boom of the 1990s ended this way, as we all know. The Nasdaq was up something like 100% in the last 12 months of the bull market, and biotech stocks were up a couple hundred percent in the last few months. It got crazy.

These booms end in what I've called a Melt Up. The thing is, nothing I'm seeing resembles a Melt Up in any way. Instead of irrational exuberance, we're seeing irrational fear. What we just saw was a small correction, really. I know it feels painful, but when you look back at history, you look back at that Nasdaq move of 100% in the last 12 months and you think, "Wow, that must have been a straight-up rocket ride higher."

The reality was that the Nasdaq actually fell 10% or more, five separate times in the final 12 months of that great bull market. So strap in for a rocky ride higher. This recent pullback was not extraordinary in the grand scheme of things. We've just gotten used to relatively low volatility. We could have more of these, and they could be even larger than this one before this Melt Up really takes off.

Buck, when you talk to people, do you hear irrational exuberance or foreboding, like it's just around the corner?

Buck Sexton: Oh, there's definitely a sense of dread. I know people, Steve, who don't want to invest in anything right now because their whole position is, "I want to wait for the bottom to drop out. I want there to be this 20% correction. And oh, after that I want to start picking stocks." I've been hearing that from people for the last six months or so.

Brett: I've been hearing that since 2013. It's so hard to get that timing right, and people end up on the sidelines for way too long as a result.

Steve: They've been on the sidelines for years. I wrote a DailyWealth essay where I talked about the last great boom in the 1980s and 1990s, leading up to the 1999-2000 peak.

Most people don't have any idea that the stock market went up every single year from 1980 to 1994, except for one year, which was only a 3% loss. You had 13 years where you essentially didn't lose money, and people thought, "Wow, this has to be approaching the end."

Then in 1994, stocks rose 20%-plus and reached valuations that we had only seen at the peak in 1929 and in the late 1960s, which also ended badly.

In 1995, guess what happened? Stocks went up 38%. It was outrageous. This was a formative time for me. I started investing in the early 1990s, and I thought it was ridiculous. In 1997, I was saying, "Well, look, any rational person would say we're clearly off our rocker. We're clearly beyond 1929 and the late 1960s. We're no longer tethered to Earth. Stocks are at stratospheric valuations."

But then in 1998, stocks soared again. The Nasdaq was up something like 40% in 1998 – crazy returns. At that point, I was thinking, "This is nuts." Meanwhile, all of my friends were quitting their real jobs and joining dot-coms and getting stock options. I thought, "I'm just the fool sitting here writing about investing, and all my buddies are millionaires overnight. What am I doing here like a bump on a log, warning people that the market is a little expensive out there?"

I didn't want to go through that again. I learned the hard way that stock valuation is a symptom of a top and a sign that the "patient" isn't healthy, but it's not what actually kills the patient. Ultimately, at the end of the day, it's about irrational exuberance.

When everyone is talking about and doing the same thing, there's no one left to buy. That's the way it was in real estate in 2008. That's the way it was in stocks in 1999-2000. We are not there yet.

In fact, we're in the opposite position. After this recent slide in stock prices, stocks are now below their average valuation of the last 22 years.

The price-to-earnings ratio is the primary valuation measure people use to look at stocks. When you look at the forward price-to-earnings ratio – which means analyst estimates for next year – stocks today are below their average valuation of the last 22 years.

How can that be possible? We've had 10 years of nonstop stock movement higher. How could stocks be lower than their 22-year valuation average after a 10-year move higher?

The answer is incredible earnings growth. Part of it is predicated on President Trump's tax cuts, but low interest rates are fuel for higher earnings as well.

I'm much less concerned than everyone else. Valuations are not extreme. Investors don't have the irrational exuberance that you see at stock market peaks. We'll see those coming in the Melt Up.

Editor's note: Investors are getting nervous. But Steve says that's great news – and a sign that his Melt Up thesis is right on track. Steve has a great track record of making huge market calls... like he did with gold in 2003, stocks in 2009, the housing boom in 2011, and the MSCI inclusion of Chinese stocks last year.

Today, he says you can make years' worth of investing returns in just months by investing in the right stocks. On Wednesday, October 24, he'll explain exactly how this is possible... and give away the name and ticker of a stock he says could return 1,000% over the next year. Save your seat here.