Trade the Trees. Respect the Forest.

Most of us traders live in the trees: today's tape, this week's earnings, the next Fed meeting. That's fine. But one chart shows exactly when the trees stop mattering.

Bank of America's quant team measured how much of the S&P 500's return you can pin on its starting normalized P/E, going back to 1987. Normalized P/E is price versus smoothed-out, through-the-cycle earnings. Over one year, almost none. Single digits. Over five years, a bit over 40 percent. Over 10 years, about 80 percent.

Yeah, I know. The market's been "expensive" for years and keeps going up. That's exactly what this chart says should happen. Valuation is a lousy timer. Over a year, flows, positioning and momentum set the price. That's the noise. It's also the raw material every option premium is made from, which is why we trade it.

But valuation is a ruthless judge. Over time, it all comes out in the wash. At the end of 1999, the S&P 500 traded at a record multiple of normalized earnings. Over the next 10 years it delivered a negative total return, dividends included. Microsoft (MSFT) more than quadrupled its sales, and the share price still didn't get back to its 1999 peak until 2016. The company did its job. The price did the damage.

Which brings me to the dog. Most of us have owned one: the stock that started as a trade and became a "long-term hold" the day it went against you. That new label is really a new game. You got in on the one-year clock, where valuation barely registers. Now you're scored on the 10-year clock, where it's almost all that counts. If you overpaid, time won't rescue you. It'll grade you.

So match your homework to your holding period. For trades measured in weeks or months, trade the chart and respect your exits. For anything you plan to own five years or more, the entry price is most of the answer. The only thing that rescues a rich one is earnings growth big enough to grow into it. That's why I'd rather pay up for genuine scarcity than for a good story.

Trade the trees. Respect the forest. And before any trade quietly retires into an investment, ask the one question the next decade will care about: what did I pay?

It doesn't matter until it does. Know what you're trading.

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This material is for educational and informational purposes only and is not investment advice or a recommendation to buy or sell any security. Options involve risk and are not suitable for all investors. Past performance does not guarantee future results.