Go all in or easy does it?

[NYCGuy]

As for the 43% market decline in recessions, that is not my research. I was quoting from John Mauldin:

"My studies show that the stock market drops an average of 43% before and during a recession. I think the next big leg down in the stock market will be precipated by a recession. Could we see the market drop another 40%? The short answer is yes." The rest of his piece is here:
http://www.2000wave.com/article.asp?id=mwo022803

I haven't checked it. Would be interested to know the result if someone does check it.

>>Everyone's a trading genius.

Once again, market timing does not necessarily mean trading although we have all been conditioned to believe that. I am using market timing to mean staying out of the equity market while the P/E of the S&P remains above historical norms. I believe that it will regress to a point below historical norms in the next few years. Then it will be ok to buy and hold again.

>>Just look at all the active fund managers that have beaten their benchmarks for 10 years or more.

This is a befuddled comment. Active fund managers mostly means equity managers. They are not trying to time the market, but are trying to outperform by security selection. They can't try to time the equity market as a whole because they can't go out of equities or they will have no product to sell.

>>If all bear markets were like your "current long term bear market", I want lots more of them. I don't know if you have looked lately, but in the last 3 years, the S&P500 is up more than 60%, the EAFE index up 113%, and the Russell 2000 index up 109%

I don't know if you have looked lately, but in the last 6 years the S&P500 is down 13%. You would have made (a lot) more money in T-bills.

One of the basic assumptions of asset allocation is that market are usually mean-reverting. That's the basis for buying and holding: it will come back. So, if markets are mean-reverting why wouldn't it be possible to identify historically overvalued markets and get out of them and let someone else ride them down to the mean, or below?

And if the equity market is indeed overvalued we would expect some of the best investors to be sitting on the sidelines in cash waiting for a better opportunity. Like Buffet who is sitting on about $42 billion in cash, if I remember correctly, saying there is nothing to buy now.

In my opinion, the following markets are bubbles inflated by the liquidity and credit bubble that has been going on since 1996 and, more dramatically since 2001. I expect them to revert to historical valuation levels, possibly at the same, painful time:

1. US equities
2. US housing
3. gold
4. oil
5. bonds
6. USD

In this I agree with the OP whose reservation about investing now is that everything seems expensive. Well, it is.

 

[cute fuzzy bunny]

I've never read anything from John Mauldin, but if thats what he said, i can sure save some time.

Grab your favorite charting tool. Pull up the dow from "all dates". Several go back to prior to the depression. Look at the nice smooth line with a couple of short lived divots in it.

Invest accordingly.

As far as a "reversion" in housing, historically few areas have seen more than a single digit decline in a year, although a few have had a number of sequential single digit down years.

As far as equities go, according to many measures they're as cheap as they've been in years.

Gold, oil and bonds seem a little peaked.

Nobody knows whats going to happen with currency.

People sitting in cash or in short bonds are punting on first down. Best of luck to them...they already decided to lose the game, but hope to keep it close...

 

[grumpy]

As for the 43% market decline in recessions, that is not my research. I was quoting from John Mauldin:

"My studies show that the stock market drops an average of 43% before and during a recession.

NYCGuy,

I've got to call you on this one. You did not quote John Mauldin, you misqouted him. Your initial post said: "The average stock market decline during a recession is 43%." Let's at least debate the right question. Even with the correct quote I still don't trust that statistic.

Grumpy

 

[cute fuzzy bunny]

Maybe for a 15 minute period "the market" (whatever that means...the dow? the s&p? TSM?) might have dropped a good solid double digit amount. But there were no sustained double digit down markets excepting a very few, some coinciding with recessions/depressions, some not. Many recessions without large sustained down markets of any kind.

I didnt like the markets from 1999-early 2005. Didnt mind them before that. Dont mind them now.

 

[Cool Dood]

>>Everyone's a trading genius.

Once again, market timing does not necessarily mean trading although we have all been conditioned to believe that. I am using market timing to mean staying out of the equity market while the P/E of the S&P remains above historical norms. I believe that it will regress to a point below historical norms in the next few years. Then it will be ok to buy and hold again.

Yes, and if the rate at which the market is growing, is itself growing? Then you're suckering yourself out of many thousands of dollars. Even if it just continues to do its thing, which seems like a good baseline bet, you're suckering yourself out of many thousands of dollars.

>>If all bear markets were like your "current long term bear market", I want lots more of them. I don't know if you have looked lately, but in the last 3 years, the S&P500 is up more than 60%, the EAFE index up 113%, and the Russell 2000 index up 109%

I don't know if you have looked lately, but in the last 6 years the S&P500 is down 13%. You would have made (a lot) more money in T-bills.

http://finance.yahoo.com/q/bc?s=^GSPC&t=my
http://finance.yahoo.com/q/bc?s=^DJI&t=my

Now tell me which side of the market you want to be on..........

In this I agree with the OP whose reservation about investing now is that everything seems expensive. Well, it is.

Well, we all know you are spewing a crock of sh*t. But, whatever, do your thing.... good luck with that!

(Let us know how it goes..... I'm sure we'd all love to see your new way of making money by outsmarting the market... Who knows, maybe you could even show everybody up?)

 

[Nords]

I've never read anything from John Mauldin, but if thats what he said, i can sure save some time.

I think we've found the source of the problem-- reading John Mauldin.

Mauldin's column has more guest writers & quoted authors than it does Mauldin's original work. He claims to write an investment letter for accredited investors but apologizes in every third column for not sending them a letter that month. In between he'd tell us how far behind schedule his book is and how angry his publisher is with him, but then he'd tell us how he's going to spend the weekend enjoying quality family time. Great work-life balance, but where the @#$% is the financial, economic, & investing analysis? He's built an entire reputation in the last six years off the phrase "muddle through". If I'd told any of my working bosses, or my spouse the investments supervisor, that I planned to handle the current situation by "muddling through", how credible do you think they'd assess that?

You go right ahead & time that market, NYCGuy. But you don't time the market by getting out of it-- you time the market by putting your assets into the classes that are making more money. That's rarely a money market! Claiming that everything is overvalued, or that the world is about to go to end, is a sign that additional research is merited...

 

[Texas Proud]

Once again, market timing does not necessarily mean trading although we have all been conditioned to believe that.  I am using market timing to mean staying out of the equity market while the P/E of the S&P remains above historical norms.  I believe that it will regress to a point below historical norms in the next few years.  Then it will be ok to buy and hold again.

One problem with your thinking on this.. with any ratio, you can change it by changing either variable... so, for P/E, you assume prices to drop... well, it could be that earnings go up. Then your timing example does not work.

 

[cute fuzzy bunny]

Isnt the historic PE of the S&P 500 around 16, and the current PE around 17? Doesnt sound too badly overvalued to me.

Especially if you consider that the "modern PE", that over just the last 3-4 decades, has been pretty well up there...

 

[HFWR]

PE is not high by historical standards, but yield is lower...

 

[ats5g]

Since we're talking about RTM + market timing, I thought I'd throw this beast out there:

Mean Reversion, Forecasting and Market Timing

I like the "Common Sense" and "Homework Problems" sections.

- Alec

 

[cute fuzzy bunny]

I stopped reading when I got to the part where they said "stock market investing is not the same as flipping a coin, but its similar".

No, it isnt.

 

[NYCGuy]

But you don't time the market by getting out of it-- you time the market by putting your assets into the classes that are making more money. That's rarely a money market! Claiming that everything is overvalued, or that the world is about to go to end, is a sign that additional research is merited...

Additional research is going on. But I think avoiding losing money is just as important as making money, sometimes more so.

One problem with your thinking on this.. with any ratio, you can change it by changing either variable... so, for P/E, you assume prices to drop... well, it could be that earnings go up. Then your timing example does not work.

You're right in principle, but I think it is more likely at this point that earnings will go down than up. Here's a quote from John Hussman's weekly commentary of 12/5/2005:

"The chart below updates S&P 500 earnings (net trailing) as of the most recent data. Notice that the latest data point takes earnings right up to the peak of that 6% growth line, an event that has historically been associated with a) roughly zero growth in S&P 500 earnings over the following 5 years and b) on average, a price/earnings ratio for the S&P 500 of about 12 – the current multiple is 19."

The rest of his article is here: http://www.hussmanfunds.com/wmc/wmc051205.htm
It includes a good graph tracking S&P earnings against the long term trendline of 6% growth. The current P/E for the S&P is 18.70.

As far as a "reversion" in housing, historically few areas have seen more than a single digit decline in a year, although a few have had a number of sequential single digit down years.

I frequently read this real-estate-prices-never-went-down-across-the-country line, usually quoted from real estate agents. The answer is that we haven't had a national (indeed, international) real estate bubble before. I doubt whether Japan had had a national housing bubble prior to the 1980's, but they did, followed, as we know, by loss of 60% to 80% of value over fifteen years. The cause of the Japanese bubble of the 80's and the current bubble in the US is the same: credit expansion. Deflation in US housing may not be as severe as Japan, but who knows? Take a look at Robert Shiller's graph of the housing market in real terms from 1890 to 2005 and see if you find historical comparisons very comforting: (Only the graph is by Shiller. The commentary is the blogger's.)

http://bigpicture.typepad.com/comments/2005/06/shiller_on_the_.html

 

[cute fuzzy bunny]

Huh. I'd tend to think that a broad based "bubble" would hold better than a regional one. If a region gets too expensive, people go to other regions. If most of the desirable regions are overpriced, then you cant. That logic therefore escapes me.

Ohyeah. We're also not Japan, where they have a multitude of economic issues including a stock market stagnant for decades, perpetual recession etc.

Like I've said before. You can add up all the scary reasons to avoid investing and make a nice case for it. Same could be said for any other period in history.

As far as losing money not being as important as making it, either you better be loaded, or you'll be meeting our friend, Inspector Inflation...sooner or later...

As unpleasant as it would be for many of us, a big downturn could happen. I wouldnt be betting my investing future or my ER on that happening, or standing around holding a lot of cash instruments waiting for it...

You're going to lose. You're just going to avoid a small chance of losing big.

 

[Cool Dood]

You're going to lose. You're just going to avoid a small chance of losing big.

Hey, did you steal that from my reasoning on health insurance?

 

[cute fuzzy bunny]

I may have never have had a unique or creative thought in my life.

Except that thing earlier about the huge underwater penis.

 

[Cool Dood]

I may have never have had a unique or creative thought in my life.

Except that thing earlier about the huge underwater penis.

No, I think that may have been in an episode of Flipper

 

[cute fuzzy bunny]

DAMMMIT! FLIPPER! WHY DO YOU TORMENT ME SO!

 

[brewer12345]

Bear in mind this is a thread titled "go all in or easy does it".

 

[cute fuzzy bunny]

Theres a lubrication joke around here, but my lack of creativity and originality are inhibiting me from putting it together.

 

[Outtahere]

I keep expecting to open this thread to find some kind of joke, don't dissappoint me.

 

[cute fuzzy bunny]

Sorry, our joke department has been oursourced to India. "Bob" will be with you in live chat shortly to determine your joke requirements.

 

[Nords]

Except that thing earlier about the huge underwater penis.

I keep expecting to open this thread to find some kind of joke, don't dissappoint me.

Sorry, our joke department has been oursourced to India.  "Bob" will be with you in live chat shortly to determine your joke requirements.

Hello, I am Rashid I mean "Bob", how may I be helping you today?

Ah, submarine jokes.  I see.  One moment please.

Uh, I am reading to you, "long and hard and full of seamen".  Does that answer your question?  You have the happy day now, good-bye.

(Edited to remove all subtlety.)

 

[Outtahere]

Humm some how I missed that part.

 

[haha]

Yes, and if the rate at which the market is growing, is itself growing? Then you're suckering yourself out of many thousands of dollars. Even if it just continues to do its thing, which seems like a good baseline bet, you're suckering yourself out of many thousands of dollars.

http://finance.yahoo.com/q/bc?s=^GSPC&t=my
http://finance.yahoo.com/q/bc?s=^DJI&t=my

Now tell me which side of the market you want to be on..........

Well, we all know you are spewing a crock of sh*t. But, whatever, do your thing.... good luck with that!

(Let us know how it goes..... I'm sure we'd all love to see your new way of making money by outsmarting the market... Who knows, maybe you could even show everybody up?)

This post is the best sign I can point to as to why NYC Guy is probably right, and the US stock market as a whole is in for some tough sledding. I especially like the over-the-top sarcasm bordering on invective in the last section. I can only hope that Cool Dood has the courage of his convictions.


Ha

 

[Cool Dood]

This post is the best sign I can point to as to why NYC Guy is probably right, and the US stock market as a whole is in for some tough sledding. I especially like the over-the-top sarcasm bordering on invective in the last section. I can only hope that Cool Dood has the courage of his convictions.


Ha

I saw a bunch of red flags -- unlikely speculation, quoting dumb-sounding "experts," far-fetched pattern recognition, etc. -- and maybe bit too early. After posting that I read a bunch of NYC Guy's other posts, and it turns out he's actually bright (I guess there aren't too many people who post here and who aren't bright), but really it's a safe bet in most cases where you see that to be a bit dismissive.........

At any rate, it's a toss-up as to whether or not the US markets are in for a very near-term drop -- and I don't think NYC Guy offered any evidence that it's actually more likely to drop than not -- and in a few years the markets will undoubtedly be at almost exactly the same place regardless of whether they first rise or fall.

As such, yes I do have the courage of my convictions......... 8)