If you've ever been a fan of Grunge Music then the title of this post might make sense to you.Naked Capitalism links to 20 minutes worth of Jeremy Grantham interview. Along with the video is a little bit of commentary (did not watch the video did read the little bit of commentary).
On dipping a toe back into the market – and how a lot of people missed the huge surge in equities. “It’s a very uncertain world... But you can’t risk being left behind for years.”
The notion of investment managers who have missed the 40% rally and need to catch up gets a lot of mention but I am not sure how prevalent this is especially as the context seems to be that these same people sold everything low and then missed the rally.
This just doesn't seem likely to be widespread. But it would be reasonable that this happens to people occasionally and certainly for anyone who did sell out and then missed the rally the only thing that could bail them out would be another meltdown. But if they responded to the last meltdown by selling at precisely the wrong time why would they somehow handle the next meltdown differently?
The easy way to avoid this dilemma is to just avoid big bets. Selling everything is an enormous bet and is difficult to get right. If you sold everything on the way down at 750 in February what did you ultimately accomplish if you did not then get back in? You would have been "right" for a few weeks, missed a little bit of pain but the market is now up 25% from where you sold.
This dilemma is a big reason of why my approach is so gradualist. If you are going to participate in the stock market then you need to realize that occasionally the market will go down and thinking you can avoid any drawdown is unrealistic. All of my method around the 200 DMA is focused on going down less when the market looks like it will go down a lot. In that context selling everything is simply the wrong trade.
In the example above locking in a 25% lag could be disastrous. As the stock market averages 9-10% of gains annually over the long term that obviously includes big declines, big gains and everything in between. Just keeping up can at times be difficult but a 25% lag from selling at the wrong time is exactly the thing investment books and articles warn about but of course it does happen occasionally. If you never sell everything then you never have to confront such an extreme consequence.
29 comments:
"If you never sell everything then you never have to confront such an extreme consequence."
Roger, isn't it also true that "If you never sell anything then you never have to confront such an extreme consequence"? It seems to me that the argument presented also supports the buy and hold strategy. I may have been down 50% in March but have fully participated in this rally and am positioned to fully benefit in any future move upward, or downward. Admittedly, this is an excruciatingly draining approach on the downward slide, but it also seems to eliminate all the day to day decision-making tied to charts and indicators and "theories."
?
On a related note, I'm personally wrestling with the dissonance created by conflicting points of view among the experts.
Barrons.com, for example, has an interview up with "wealth management guru" Alan Lancz urging investors to take profits now and await a better buying opportunity. He is just one of many voices calling for a pullback, with some saying we're headed back to the market's lows. Will I regret not heeding the call if I give back a significant chunk of the recent gains???
I appreciate your admonition to proceed cautiously, Roger, since signals like the 200 dma are obviously at odds with calls like that.
I have to disagree with you. Housing and debt bubbles are excellent times to sell. The tech bubble was an excellent time to sell. Mr. Bubble (aka Greenspan) forced our hand and we had to sell.
Well the Fed may have "fixed" the tech bubble with the housing bubble but all they did was kick the can down the road. S&P 750 was a horrible time to sell.
Selling high still makes sense to me. If you miss selling high then I think you need to grin and bear it not sell. I bought back in to early last fall and ended up in the hold through the bottom period.
I think another selling opportunity is coming as This bubble will take years to fix (look at Japan over the last 20 years).
Now to contradict my self I think high dividend etf's are the future (preferably not US), but not now. When dividend yields peak in the next down turn I suspect equities will be a good buy and hold opportunity for many people.
SEG
On a related note, I'm personally wrestling with the dissonance created by conflicting points of view among the experts.
Well...I think the thing to realize here (which in my discussions with a few of my clients I realize some do not grasp) and fully accept and embrace is that NO ONE KNOWS WITH CERTAINTY how the future will exactly play out.
Not John Hussman. Not Jeremy Grantham. Not Barry Ritholtz. Not Alan Lancz. Not Louise Yamada.
Are we going to get a pullback? Are we headed back to the lows.?
I’d highly suggest reading these two Hussman weekly comments, and then really thinking about them, and internalizing the message.
http://www.hussman.net/wmc/wmc090608.htm
http://www.hussman.net/wmc/wmc090504.htm
Comfortable with Uncertainty
“In his book On Being Certain, neurologist Robert A. Burton quotes F. Scott Fitzgerald –“The test of a first rate intelligence is the ability to hold two opposed ideas in the mind at the same time and still retain the ability to function.” Buddhist teacher Pema Chodron calls it “being comfortable with uncertainty” – being willing to take every aspect of reality as the starting point, without wasting energy wishing things were different, without denying reality as it is (even if your next step is to work toward changing things), and without needing to know what will happen in the future. “The truth you believe and cling to makes you unavailable to hear anything new. The best thing we can do for ourselves is to be open to an unknown future.”
Science has given us the language and tools of probabilities. We have methods for analyzing and ranking opinion according to their likelihood of correctness. That is enough. We do not need and cannot afford the catastrophes born out of a belief in certainty.”
Then go read this blog post from David Merkel at Aleph Blog:
http://alephblog.com/2009/06/03/just-gimme-the-answer-will-ya/
” You mean there are no answers?
No, there are answers, but there are confidence bands around the answers, and the answers are subject to the overall well-being of the financial economy. We are playing a complex game here, because the boom-bust cycle is less than predictable on average.
cont...
In my view, the critical difference between an “expert” or at least a true expert or competent professional is that decision making is driven by a robust analytical toolbox grounded in both sound theory and a multitude of historical, empirical evidence. Anything else IMO is just fly by the seat of your pants emotion. That said, the market can do anything anytime and there is no guarantee that a particular pattern, indicator, or valuation level will “work” in the exact way it did in the past.
Circling back to the questions. Will we get a pullback? I think so, maybe a 10-15% correction which forms the basis of a head and shoulders bottoming pattern:
http://www.decisionpoint.com/ChartSpotliteFiles/090515_rhs.html
I certainly would NOT be making any big bets on that though (I’ll continue to hold roughly 30% cash until the 50 DMA crosses over the 200 DMA). We may be replaying 2003 here with a big move up off the Mar bottom into May, followed by a sideways consolidation in the summer, and another leg up later in the year.
Are we headed back to the Mar lows? Ultimately, I think we are, but it might be quite a chunk of time in between. Consider that the S&P 500 didn’t revisit the 2002 lows until November 2008, and that it doubled in between.
Here is a datapoint from dshort that I find instructive:
http://www.dshort.com/articles/2009/SP-Composite-pe-ratios.html
Where does the current valuation put us?
A more cautionary observation is that every time the P/E10 has fallen from the first to the forth quintile, it has ultimately declined to the fifth quintile and bottomed in single digits. Based on the latest 10-year earnings average, to reach a P/E10 in the high single digits would require an S&P 500 price decline below 600.
IMO, we could *easily* have a rally to 1200-1300 before some other “issue” down the road (dollar reserve status?, fiscal deficits? Double-dip recession?) sends the market back down to those Mar 09 lows or even lower. But that might not happen until 2012-2014.
I’ll end with saying I do think there might be some instances where “sell everything” is the right trade, at least if you have the patience to be “wrong” for maybe 1-2 years which is when that Shiller P/E is in the top 10-20% of values like 1998-2000, 2006-2007, 1928-1929. At that point, stocks are on a borrowed time and an eventual substantial move down is almost guaranteed. But one has to realize that selling the top is impossible except for sheer luck, and you might have to listen to nonsensical cocktail chatter about how much money everyone is “making” in that final parabolic move that you miss but that the talkers don’t retain.
Epistemic arrogance is what Taleb calls this, I believe. The sad thing is, the public thinks that these people MUST know. I try to explain it to people with a sports analogy. Do you think the people on ESPN can predict the outcome of a game because they're immersed in sports 24/7? Sometimes I get through to them, but most of 'em still end up trading Cramer picks :O
JimL, I think I has established a bit of a contextual thread that the building block is buy and hold and that any action taken (which I believe in doing) will either result in a worse return or better return than buy and hold. so this post is about trying to avoid much worse than buy and hold.
Seg you have established some track record here for selling early and having the stomach to buy when things are scary. Most people did not do that.
Roger- today's post is why prudent investors should seriously consider Harry Browne's permanent portfolio theory. Since 1972 this strategy has only had 2 losing years, average annual return of 10.0% and much lower volatility and drawdown versus a 50/50 stock bond portfolio. I truly do not understnad why anyone would do anything different, unless of course you are an advisor that earns fees basd on some other strategy that the firm you work for advocates.
for those interested check our crawlingroad.com as well as the Harry Browne discusion at bogleheads.org
I just wrote about the Permanent Portfolio the other day so I won't rehash that post here but I would challenge you on your use of the word prudent.
I've never met an investor, as differentiated from trader or speculator, who felt they were imprudent.
For some folks I imagine that the Permanent concept is the best way to go but no approach can be right for every single investor.
Harry Browne makes it clear, in his book, that the permanent portfolio is for money you can't lose . Not necessarily your entire portfolio.
Speculation money goes in a different pot.
You'd have to run the numbers, of coursem to see if you can retire on the returns that the permanent portfolio can provide.
The Permanent Portfolio Mutual Fund has an impressive equity curve until you hit Oct 2008, then SPLAT! Just like everything else. However, it has outperformed the major indexes handsomely over the last 10 years. 10%, while impressive, is less than the historical returns of the S&P 500. I tend to agree with SD, this is probably for the low risk side of the portfolio. I'm not sure if it outperforms the Ultimate Buy and Hold (holed? [snicker]) portfolio because there isn't a mutual fund to compare. I only have to take them at their word that portfolio 6 has annualized returns of 11.7% from 1970 through December 2008. At a minimum, the perm fund seems far more tax efficient than having to maintain your own allocations.
I personally like more exposure to foreign.
Ok now wait.
Browne's "permanent portfolio" concept we are referring to is NOT the Permanent Portfolio mutual fund. They are very different.
Browne's "permanent portfolio" return was positive last year, varying from 1.5% to 4% depending on what you use to track cash.
Returns on the "ultimate buy and hold" portfolio can be found on my website under "vanguard balanced buy and hold" or here at Marketwatch. It lost about 20% last year.
To tie it all in to Roger's methodology, if you sold the equity portions last year when the 200 DMA told you to, you'd have lost less. hahaha
SD, not according to the crawlingroad website that keeps getting mentioned. See the "The Permanent Portfolio Fund" heading under this article. But I also looked at the holdings and was going to take issue with the fact that there are things that don't quite jibe, like silver and individual stocks.
So I'm confused. It's not like I'm investing in it any time soon, but do tend to wonder why it would be promoted as a proxy for the perm portfolio.
I guess he's just giving it a short mention; you're right, he should be more specific about what it is. The mutual fund invests in a lot more equities and has odd stuff like Swiss francs. Browne specifically notes that it doesn't follow his concept in his book.
SD & Bill B- that is correct the perm mutual fund (PRPFX) is not the exact permanent portfolio which is outlined in HB's book.
I have yet to find any 60/40 or 50/50 portfolio allocation that is able to generate the same returns as HB's perm concept. Yes, the permanent portfolio as outlined by HB is conservative however one is also able to approximate the returns of a total equity portfolio with substantially less risk. so why not invest 100% of your non emergency fund into this strategy? Much better than a 60/40 portfolio, IMO.
While your point is valid, it is not necessarily true. You are quoting, I dunno, "estimated" returns. You need to pick ACTUAL funds or ETFs or whatever before what you are saying is really true.
For instance, one cannot simply buy gold and expect a good return. Why? One has to pay a BIG dealer markup. So I'm not sure how to reproduce the reported returns for gold.
Same for the cash portion of the portfolio. Your website (and I'm not pointing the finger at you, that's just what I was looking at today) reports a 6% return on cash. Note that the web page lists this as "short term bonds" when it's supposed to be cash, according to the book.
6% on cash? I mean man, I'd love to know how to reproduce that.
Roger,
Are we headed back to the June,July, and August of 2008 where oil starts to control the ups and downs of the market. Right now both markets are trading in tandom, but if oil continues to rise at the rate it is currently rising, chances are we will be back to this style of movement in the market. ( oil -up, market - down). What is your best guess where oil will be by the end of the summer and when do you think it will head downward?
Thanks,
bwjr
Stephen, I think some Permanent Portfolio investors use SHY for the 'cash' element which (from a quick look) looks like the combined capital and dividend income was around 6% level in 2008
http://uk.finance.yahoo.com/q/hp?s=SHY&b=31&a=11&c=2007&e=31&d=11&f=2008&g=m
Interesting, thanks. A 1 to 3 year bond as opposed to cash. Yeah, Morningstar lists 2008 performance as 6.61%.
All,
Another variation of the permanent portfolio is Swedroe's strategy of using low correlated equity sectors such as 12.5% in US small value and 12.5% in international small value and 70% in short term treasuries. This portfolio will have an expected return of 12% with much lower volatility, standard deviation and decent sharpe ratio.
Thoughts anyone?
Roger- I was curious what types of investment vehicles that you use for clients in order to capture the effect on the following asset classes:
-US small cap value
-International small cap value
-Emerging market small cap value
IMO, the above are a necessity for the LT investor.
individual stocks.
more precisely i manage the average cap size of the portfolio. i want to go smaller early cycle and larger later cycle.
Roger- is bogle whacked out against individual stocks and bonds or is he simply trying to push Vanguard?
http://www.cnbc.com/id/31190046
there are indexers and those who are not. each one believes what they believe and there is no shaking them. each side can point to data to support their case and so on.
Bogle's process involves indexing--anyone can still learn from his process.
Stephen
From the horses mouth http://harrybrowne.org/PermanentPortfolioResults.htm
"Cash results are for Treasury bills, assuming that a 1-year bill was bought at the start of each year"
I frequently hear references to " being under, over or neutral weight " in equities. What exactly is neutral weight? Does this vary with each individual, firm or advisor ?
tks.
jolo, weight versus the benchmark index, for me the S&P 500
Roger,
Please excuse my ignorance, but could you or someone please clarify the following.
I heard a representative of an investment firm say " we increased our stock weighting from neutral to 70%".
Does this mean he might have a normal weight of 55% stocks/45% other investments and he increased the stock side of the investment to 70%?
tks
don't know for sure.
it sounds like they had a target mix for stocks and bonds. it further sounds like the target weight (IE equalweight) for equities is some number less than 70%
Post a Comment