Copyright © 2012 MoneyHoneyBlog. All Rights Reserved. Snowblind by Themes by bavotasan.com. Powered by WordPress.
Unlike the economy, which is at the early stages of its comeback, with a shaky path ahead, the stock markets have come roaring back. After the strong rally since March, cries of too much too fast have been multiplying. Trouble is, these are much the same voices who have been advising investors to be cautious and wait before returning to stock market investing. It seems very many have now missed the rally… in particular the retail investors, many of whom rushed to sell in the panic of late 2008 and early 2009.
So has the market gone too far and are we in for a big correction? Well, here are two reasons why I disagree:
1. The doom-mongers are forgetting that the (US) stock market has lost more than half of its value between October 2007 and March 2009. So while the market is more than 60% up from its March lows, it is still 30% below the late 2007 highs.
2. Prices are justified by fundamentals: the consensus earnings per share estimate (S&P 500) for 2010 is approx $77. That is less than 15 times valuations, which is lower than the 50 year average of 16.5 and 25 year average of 17.8. So, in my view, fundamentals fit in quite nicely with the price levels.
While it’s true that equities have come a long way in a fairly short time, and current valuations may not be as compelling as a few months ago, I remain bullish from a long term perspective.
Sure, we may – and probably will – see occasional pullbacks, 5% or so would be my guess, but that’s normal market behaviour. Anyone who’s been sitting on their hands waiting for a large correction is, it would seem, well on the way to miss on one of the best investment opportunities of the last few decades.
Of course, if you know what you’re doing, there are still plenty of good companies to be had at extremely attractive valuations. With zero return on cash and continuing uncertainty in global property markets, equities are at present easily the most attractive long term investment.
December 11, 2009 at 10:56 pm
I bought in March (all in on Man Group at 198p) results came out and it shot up (as planned), I sat on my hands, it went down a bit, I sat on my hands, it went down more, I read to many of the doom-mongers, I sold only 10% up – gutted!
All in funds now, leave it to the pros.
December 12, 2009 at 4:44 am
Steven, that’s more common that you’d think. It’s hard to avoid listening to opinions and comments from ‘experts’ and analysts, and as a result many investors (even many professional investors!) panic and sell (or buy) at exactly the wrong time.
My approach has always been to do my own analysis and only take action once I am satisfied that it’s the right time, price and type of action to take. Once invested (talking about long term investment now, not trading), I don’t take any further action on those holdings unless something has fundamentally changed in the underlying company or the price has reached my pre-determined exit level, etc.
As most investors & traders I listen to market news, commentators, etc (unavoidable) but I have trained myself to not take their opinions into consideration when it comes to my investments. It has served me well. And, once you realize that many of the ‘experts’ had it wrong and you were right, you will never again be anxious about what they say next.
Funds are a whole other issue… there are many reasons why professional fund managers almost never outperform the market (and in fact most under-perform after fees). But unless you have the time and ability to pick your own stocks, funds – and especially low cost ETFs – are still the best choice for most investors.
December 21, 2009 at 4:33 am
Petra,
You mention factors such as; no significant corrections coming, fundamentals support current values, etc.
Many top notch experts who manage hundreds of billions of dollars would certainly disagree with you including some of the following: Hugh Hendry, Doug Kass, Jeremy Grantham, and John Hussman just to name a few. Let alone that Bill Gross, the largest fixed income private money manager in the world has been moving much more to cash since October/09. All of the above have excellent research and commentary supporting their professional opinions on their websites.
If you truly believe that “fundamentals” support current valuations, then we would suggest that you check out Doug Short’s free website at dshort.com Doug presents many factual charts and comments which are quite informative and helpful. Not the least of which is his PE10 comparisons (Schiller 10-year historical PE’s). Of note is that the March/09 market lows still did not fall to “historical PE lows” that have always happened in prior market bottoms. Of course, one can always argue that “this time it is different”, but then again it has never been different in the past, so there really is no factual basis to believe that it will be different this time. As such, the probability is that real market lows have yet to be reached this time either. The real question is when, not if, another significant correction will occur.
The real reasons for the recovery rally since March/09 (in our opinion) have primarily to do with the following 4 factors: 1) massive Fed liquidity, 2) large dollar devaluation, 3) ultra low interest rates, and 4) massive prop. trading desk and HFT control of trading volumes (many reports show that these traders account for less than 2% of all traders yet they have consistently accounted for as much as 50-70% of all exchange trading volumes). None of these conditions are: normal, sustainable, and certainly none of them have anything to do with fundamentals, historical metrics, valuations, or any other historical market metrics.
Investing is an unbelievably complex and risky process. Literally affected by thousands of interacting variables. The best example we can think of is Long Term Capital Management (LTCM) back in the late 1990′s if you remember them. LTCM was supposedly the best of the best of the best with 3 Nobel Prize winning Finance professors, and the best of Wall quants, traders, finance geeks, etc. They supposedly developed the best algorithms in the world. And they made a fortune for about 3 years, far outperforming the market. Then all of a sudden in Year 4, they started losing. And lose they did. In fact they darn near crashed the market, and bankrupted everyone in the company. They literally lost tens/hundreds of billions in less than a year. The Fed had to strong arm all the major bankers into bailing them out and unwinding their positions over several years. Otherwise we would have had 2008 in 1998.
Some questions for you to ponder:
1) Why are insiders selling in record numbers and there is little to no insider buying? How does this compare to previous market tops?
2) Why are funds flows running 20:1 from equities to bonds, and have been virtually all of 2009? If investors are reluctant to buy equities at lower prices in Mar/Apr/09 then why would they buy at much higher prices in 2010?
3) Deleveraging – if US and European households have continued to pay of debt as fast as possible and continue to do so, where is the credit expansion that drives all rising markets going to come from? Heretofore, it has all come from the government. Do you think this can continue?
4) Interest rates – where can interest rates go but up? How do rising interest rates affect markets?
5) Japan – Japan has had ultra low rates and numerous structural issues for decades now. Somewhat similar to the US and Europe now. How has the Japanese market done over the last 2 decades?
6) Debts – have you looked at the US charts showing the coming commercial real estate, option ARM resets, rising credit card default rates, etc projected for 2010 and 2011? Presumably it is almost as bad in Europe if not worse.
7) Stock holding periods – according to reports the average holding period of US stocks has declined over the past few decades from about 6 years then to about 7 months now. Clearly the markets have changed to one dominated by traders as opposed to LT investors.
Just some food for thought, that you might want to consider. As you might infer, we disagree with your conclusions that the markets represent any type of reasonable value at this point in time. We would expect some very significant downward corrections sometime in 2010 or 2011 at the latest. But that’s just our view and we view these markets primarily as trading opportunities, not investing opportunities. The time for investing will come, but it’s just not now in our view.
December 21, 2009 at 1:38 pm
Hi Corey, I have no idea whether the market will go up or down in the near future. I do not think the others know, either. I guess we mix here two viewpoints. The difference between me (us) and the “Many top notch experts” is, that they manage money for others. They are afraid that they underperform S&P 500 and clients will go somewhere else.
I manage my own little money (and those are really small amounts) that I actually do not need short term. Thats the one advantage of “small investors” like me. What I try to do is to buy a good companies for a reasonable price, over time. Than, you dont have to worry about the market as far as the companies pay dividends. And my companies do pay dividends. I certainly prefer stock over cash/bonds, today. Cash I dont trust, due to all the money printing all over the world. Those doom sayers are right, its way too much printing and government spending.
You quite rightly ask: “If investors are reluctant to buy equities at lower prices in Mar/Apr/09 then why would they buy at much higher prices in 2010?” That is a good question and I believe the general answer would be: Because they are greedy now, while back then they were afraid like hell.
To all of you I wish nice christmas and many buying oportunities in the future.
December 21, 2009 at 5:57 pm
Corey, thanks for your comments. I don’t disagree with some of the good points you make. The Fed liquidity has certainly played a role, and there is always a chance that once rates start to rise (later in 2010?) we could see another contraction. That said, I believe it’s generally agreed that the economy will be better in 2010 than in 2009. As you know, stock markets do bounce back ahead of economic recovery.
I’d be very careful to invest based on what any experts and fund managers say or do. Let’s face it, they don’t know what will happen any better than you or me. (If they did, the vast majority of funds wouldn’t have been caught by surprise last fall and their clients/investors wouldn’t have lost money.) That’s why the majority of managers under-perform the benchmarks, while some individual investors actually beat them.
Most investment ‘professionals’ tend to to stick together – it’s easier for them to be wrong in a crowd than risk being (right or wrong) alone. It’s rarely the best for their clients though. The best times for investors to go into stocks have historically been the times after a crash, when everyone was ridden with fear. Those standing on the sidelines eventually pile back into stocks, after seeing a sustained period of market gains. Of course they miss a significant part of the rally, just as they have this year.
The vast majority of experts, professional managers, commentators etc have been telling us until recently (and many still do) it’s not yet time to be in stocks. But investors who (wisely, I’d say) don’t base their decisions on ‘experts’ opinion have done very well in 2009. I could show you a rather long list of stocks that presented intelligent buying opportunities earlier this spring; only now over the last few weeks and months – and after they’ve risen by 30-50+% – have analysts raised them to ‘buy’ or ‘conviction buy’. Better now than never perhaps, as many still have a long way to go as the economy recovers, but why do you think the experts & analysts thought them to be a ‘sell’ in March/April 2009, when they should have been buying? Just as most investors buy high and sell low, so does a large part of professional managers, sadly.
You mention LTCM; I’m actually rather familiar with that part of our financial history, but fail to see what it has to do with the spring 2009 being a good buying opportunity.
Finally, let me mention that all the above is purely my opinion, based on my knowledge and experience as an individual investor (and no, I’m not an ‘expert’ or guru of any sort, though I’ve seen ‘experts’ do worse). None of the opinion here is to be seen an advice of any sort. (By the way, I’m curious as to who the ‘we’ are you are referring to throughout your comment. Perhaps it might offer some additional insight to readers.)
December 22, 2009 at 12:04 am
Corey, you may find this of interest, since you stated managers are moving into cash instead of equities. It’s from http://www.cnbc.com (21 Dec 2009):
“U.S. fund managers rebuilt their equity holdings to their highest level this year. Based on 11 U.S.-based fund management firms, firms held an average of 65 percent of their assets in equities, compared with 62.6 percent a month earlier. They decreased cash holdings to an average of 2.1 percent of their assets, compared with 2.7 percent in November, while they scaled back exposure in bonds to 29.5 percent.”