Today I wanted tackle a couple of things from the media yesterday; one on TV and on from the LA Times.Two different commentators on CNBC said that stock valuations are cheap. I would urge caution there. We don't really know if valuations are cheap. For many companies we do not know the E in P/E we also don't necessarily know the book value for many companies either. We still have writedowns to come, credit card debt looms as a threat (so says Meredith Whitney) and if we are truly moving to a deleveraged world then ROE for many stocks could come down as well.
Most of the above obviously pertains to financial stocks but I do not think the cheap valuation argument is the best way to look at it.
However stock prices are low, not that they can't go lower but they are low. Selective stock picking at these prices (even 100 SPX points higher than here) will look like very good purchases at some point in the future. The dilemma is not that many companies go to zero, some will but it won't be hundreds, probably not even dozens, but that stock prices could go down another fill in any percentage that makes you uncomfortable is what creates fear. Even after the depression stocks came back. Some folks think this is a as bad as the depression, I do not, but either way stocks came back and made new highs eventually. I am not making a call to buy them with both hands here but major portfolio selling here is very likely the wrong thing to do given the market has already dropped 50%.
The other item was an article in the LA Times that questions whether long term investing works or not. For most people, the article says, 12 years is a long time referring to the fact that we are about where we were in March 1997.
The author makes a couple of group-think comments that belie a lack of some understanding. He asks;
What if the next 10 years are like the last 10 for stocks, or not much better, before some glorious new era of growth arrives in 2019?
He then sort of answers the question;
If you're 30, you can wait. If you're 60, it may be a bridge too far.
While the odds of this 12 year round trip to nowhere turning into a 20 year round trip to nowhere are slim its not like the S&P 500 will stay between 730 and 760 for ten years. After bottoming in July 1932 the Dow rallied from 40 to 78 in three months. Then it dropped back to 50 in four months before going to 105 five months later. After that the moves were smaller in a sideways pattern before going up more slowly for a couple of years. It then cratered from July 1937 to April 1938.
The article validates the decision to get out of stocks now. I have no idea if the author wrote about any sort of defensive strategy before things turned but as uncomfortable as it may be "Running away from stocks now is the safe thing to do if you can't bear the thought of another meltdown" is simply the wrong thing to do. Implementing a defensive strategy after a 50% decline is the epitome of selling low.
The point of all of those posts about the 200 DMA was to avoid the very predicament the author assumes people are in.
15 comments:
"The article validates the decision to get out of stocks now."
I don't know. That wasn't my takeaway. I actually thought the article presented a fairly balanced perspective. It did say:
The upshot, of course, is that if you can just hang on, the next 30 years in stocks should be OK, assuming history is a guide.
But leaving the market entirely exposes you to another risk: running out of money in retirement if the alternatives to stocks generate returns too low to cover your cost of living.
But if your financial future depends on earning, say, 7% a year for the next 20 years, you may be hard-pressed to keep stocks out of your portfolio.
Why do we keep coming back? Because in a capitalist society equities remain the easiest way for most people to make a bet on economic growth. If a company prospers over time, so should its shareholders. Simple concept, right?
Hardly "get out now and stay away forever" statements.
Truth is there are no guarantees. It is within the realm of possibility that we are the next Japan and the market goes nowhere for 20-30 years although I consider that so remote to not even be worth considering. It is also possible to get hit by a bus every day when you step out of your house. Life is about taking calculated risks. Equities are a much better calculated risk for the next 10-20 years today then back in October 2007.
On the subject of valuation and "stocks are cheap" Hussman and Bill Hester had some great stuff this week. The market could get much cheaper IF we bottom at previous RECESSION valuations and stay at structurally lower profit margins.
All of these kinds of articles talk broadly about buying "stocks" as if it's some monolithic, zero-sum decision when it's not. Unless one is stuck in a 401(k) with limited options, the choice isn't stocks or no stocks. It's which stocks in which sectors and at what weights, relative to the other investment options in one's portfolio.
Despite the naysayers, you were smart to get defensive at the 200 dma, but I don't think you give yourself enough credit for the other half of your strategy, Roger. You're good about avoiding SPY and EFA, over-weighting or under-weighting sectors, and including alternative investments in your portfolio.
The mainline media stories are getting tiresome and their advice is shopworn, but that's a good sign. Personally, I think it's time to look forward and focus on how to outperform. You're good at it.
While I also "hope" the market increases "x" percentage over the next several years; hope is akin to gambling. The United States is no longer the leader in many areas, as in prior history. Take a walk through some of our large cities and look around. The world looks to the US with cynacism from the Bush years AND from all the misteps we have made in the business world. Capitalism has been given a black eye due to financial shenanigans.
Does this seem like a bull market to you? Perhaps like the 30's, we will have a bull market for 6 years and then collapse.
Hussman is always a good read to let a little wind out of your sail.
anon 8:26, maybe I take credit around the dinner table?, TY for the kind word.
anon 8:27, the start of a bull market rarely feels like a bull market, ditto the start of a bear. Not to say a bull started at SPX 666 because I do not know but I do know that there will not be recognition of a new bull as it is starting.
as far as collapsing six years from now like the 1930s? haven't we had that 1938 "collapse" starting in late 2007--five years or so after that last one?
The answer to that might be no but it might be yes.
I have observed over the years that a low is not a bottom until it is successfully tested. Each of the "bottoms" this time around ( 780, 740, and now 660) have had their advocates claim that it is time to buy with both hands, only to be hurt. I certainly would not want to be a buyer (as opposed to a trader of something like SDS) until I see that 660 be successfully tested as a strong support level. This seems obvious, but it is a condition which I find widely ignored.
testing a low makes sense. i would not however fixate on the exact number. IMO 675 or 650 would be the same. do you disagree?
No I would not disagree. A few points either way doesn't make any difference to me, but a few hundred would. When one changes quantity enough, one changes quality, and to me a 300-400 point penetration of an old low is a qualitatively important signal.
BTW, I take great comfort from your blog. It is not just interesting, it is a real public service in the truest sense of the word.
thank you
I think its a bit silly for CNBC to say that stock valuation right now is cheap. Certainly a 10,000 DOW was a great bargain compared to 14,000. Also compared to historic prices we have some cheap stocks.
The market in general didn't think much about valuation when it was overvalued and to kept pushing up prices. Now that its fallen it would seem the same thing will happen in that the general masses wont be focusing on cheap valuation. The CNBC guys could well be right that these are great values. If everyone else disagrees and drives prices down further then who was really right?
I fully agree with the idea that if you have lost 50% its already too late to bail unless you are needing the money in 10 or so years. I read some of the responses over at seekingalpha to today's entry and had to chuckle.
Even if a new bull market comes I will need a 150% gain to get back where I was 18 months ago. I can't afford to be retired with only 300k now. Screw Wall Street and all these bailouts of the rich while I hold the bag.
ROGER- I WAS CURIOUS IF YOU ALLOCATED ANY DRY POWDER BACK INTO EQUITIES AFTER THE MARKET DECLINE TO SP667? I HAVE NOT SEEN ANY RECENT COMMENTS BY YOU AS TO YOUR RE-EQUITIZATION STRATEGY? I UNDERSTAND YOU FEEL THERE WILL BE A MASSIVE FEEL GOOD RALLY WHICH IT APPEARS WE ARE IN THE MIDST OF HOWEVER ARE YOU TRADING THIS AT ALL? THANKS FOR ANY INSIGHT.
Caps Lock is that little ole' button to the left of "A" identified by the words "Caps Lock".
Maybe anon@2:54 was just being solicitious of us old codgers with failing eyesight....;-)
Roger,
Sometimes its better to be lucky than good. On or about the first week of Sept. 2008 I went to 100% cash and into sort term C.D's 1, 3, and 6 month Cd's. At the time you advised against this move and I didn't really understand why. I recently have been moving back in slowly over the past two weeks. Now, I may be early and even wrong, but in hind site I don't believe I was wrong back in Sept. 2008. I do agree that I was lucky and I hope that my luck hasn't run out. Do you remember my post and your response. Believe me this is not a knock on you, since I have a great deal of respect for your wisdom. I just didn't understand why you were so against my suggestion back then.
I'm sorry I do not remember the post. For me this is a philosophical thing. I view 100% cash (for someone who participates in the stock market) as, IMO, a huge bet. That it worked out well doesn't change that.
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