Doomsday talk ridiculous, be of good heart

[haha]

The above chart is from Andrew Smithers.

No matter what happens in the near term with all this crap out there, this chart tells us that this is a long term low risk time to entering the market, unless of course some totally new thing has grossly crippled the economy. Peak oil is the only candidate I can come up for this, so in my investments I will definitely favor fuel/energy/conservation producing or sparing investments over their opposite. But strictly on value relative to the past, this looks like a better time to invest than most of the past 20 years.

Ha

 

[Leonidas]

I haven't come across the Q-ratio before this. After researching it a bit my first thought was to wonder how accurate is the figure for corporate assets. But Wiki refers to a criticism that asserts that the Q-ratio doesn't accurately predict market reaction.

Doug Henwood, in his book Wall Street, argues that the q ratio fails to accurately predict investment, as Tobin claims. "The data for Tobin and Brainard’s 1977 paper covers 1960 to 1974, a period for which q seemed to explain investment pretty well," he writes. "But as the chart [see right] shows, things started going away even before the paper was published. While q and investment seemed to move together for the first half of the chart, they part ways almost at the middle; q collapsed during the bearish stock markets of the 1970s, yet investment rose." (p. 145)

 

[2B]

I haven't come across the Q-ratio before this. After researching it a bit my first thought was to wonder how accurate is the figure for corporate assets. But Wiki refers to a criticism that asserts that the Q-ratio doesn't accurately predict market reaction.

Hasn't everyone heard that past performance doesn't indicate future returns? You can look at the past and make your best plans against it as a range of likely outcomes al la FIRECalc or any Monte Carlo program. There is no predicting economic collapse, nuclear war, mass epidemics, interstellar invasion or anything else.

I've seen certain things before (not this one) and they usually fall apart pretty quickly. It's sort of like ever technical analysis technique I ever studied or used to my financial loss.

I am certain of one thing. We will all die some day. I just don't know when or how.

 

[Gone4Good]

Theoretically firm value should trend toward replacement cost "over the long run" (that pesky long run again). At lower values firms would not build new assets and at higher values competing firms would build like crazy . . . eventually driving values toward equilibrium.

Ha's chart gives an indication of how wide the deviation from "equilibrium" can be (as low as .5x to as high as 3x - Yikes!). And also how long the "long-run" can be (looks to be about 10 years).

I'd also be curious to know how much of the decline in the Q-ratio is driven by the extraordinary run up in commodity costs (steel, concrete, etc.). One's view of what the Q-ratio is telling us may well depend on the sustainability of high commodity prices in a contracting global economy.

Having said that, it is almost certain that investing at Dow 11,000 is less risky then investing at Dow 14,000 "over the long-run".

 

[Dawg52]

The above chart is from Andrew Smithers.

No matter what happens in the near term with all this crap out there, this chart tells us that this is a long term low risk time to entering the market, unless of course some totally new thing has grossly crippled the economy. Peak oil is the only candidate I can come up for this, so in my investments I will definitely favor fuel/energy/conservation producing or sparing investments over their opposite. But strictly on value relative to the past, this looks like a better time to invest than most of the past 20 years.

Ha

Hope your right Bubba. Maybe over the long haul I will break even.

 

[haha]

Doug Henwood, in his book Wall Street, argues that the q ratio fails to accurately predict investment, as Tobin claims. "The data for Tobin and Brainard’s 1977 paper covers 1960 to 1974, a period for which q seemed to explain investment pretty well," he writes. "But as the chart [see right] shows, things started going away even before the paper was published. While q and investment seemed to move together for the first half of the chart, they part ways almost at the middle; q collapsed during the bearish stock markets of the 1970s, yet investment rose." (p. 145)

To me this is no criticism at all. What good is a metric that tracks the average? If it is up, it tells you that the market is up. If it is down, it tells you that the market is down. Hooray! What can be helpful over the long term is a metric that is mean reverting, but has a variable pul back toward some central value.

Clearly a leveraged or short swing trader would want nothing to do with Q. It could be getting us in now at an early point, and as many of the board members have pointed to in the past, this and similar value metrics would have got us out in the mid 90s, a time of huge market gains. It is not for speculators.

I myself made some of my best investments when Q was high in the late 90s- but they were not the popular stocks. Some high quality companies were remarkably cheap when the S&P and NASDAQ were going wild.

Over time, value trumps all. If you are an individual stock investor, value is where and when you find it. But for index or CEF or mutul fund investors, just a look at that chart shows that a low Q is correlated with low risk and high return potential times for investing. I don't think it is near as good at announcing when to be out. Markets have natural bottoms. If things get cheap enough, management buyouts, LBOSs, strategic and foreign takeovers all tend to limit the low- since if you can buy something cheaper on Wall Street, whey go out and build it?

But there is really no limit to craziness on the upside, as those of us who were old enough to observe the 90s know quite well.

Ha

 

[audreyh1]

Good post Haha!

I just wish we were on the other side of the dip. Even though we're through the overvalued period it sure looks like the ratio can go below 1 for quite a while before recovering.

Oh well - well padded nest egg, diversification, keeping fingers crossed, etc. Best I can do. Great time for those in the accumulation phase. Those of us FIREd - oh well.

Audrey

 

[mews]

While my nest egg is not well padded, I shall be of good cheer.

My 2 cats have horked up no hairballs this week - See, life is good!

Ta,
mews

 

[unclemick]

Hmmm - back from nine days in Nags Head - ok ok so I cracked and watched Monday Night football and a few of the adult males plus Missy (just a few stocks mind you) took a market check break toward the end of the week. Smithers and Tobin's Q were some of the things I used to follow back in the 90's and my two file cabinet's of DRIP plan stocks.

And then there is Fiend's Superbear page - presiding over the end of the world since 96 or so.

Needless to say the Norwegian kept buying her dividend stocks and smiling.

heh heh heh - if you thought the market was interesting - I watched kite boarders or whatever they are called make some verrrry long leaps off the crests of waves at Nags Head. Friday the wind had the red no swimming flags out. .

 

[Finance Dave]

The above chart is from Andrew Smithers.

No matter what happens in the near term with all this crap out there, this chart tells us that this is a long term low risk time to entering the market, unless of course some totally new thing has grossly crippled the economy. Peak oil is the only candidate I can come up for this, so in my investments I will definitely favor fuel/energy/conservation producing or sparing investments over their opposite. But strictly on value relative to the past, this looks like a better time to invest than most of the past 20 years.

Ha

The word "unless" is the gotcha.

That said, I'm buying more now than I have been in years.

 

[Finance Dave]

Good post Haha!

Oh well - well padded nest egg, diversification, keeping fingers crossed, etc. Best I can do. Great time for those in the accumulation phase. Those of us FIREd - oh well.

Audrey

I agree with Audrey...except I don't believe in crossing fingers.

 

[haha]

I just wish we were on the other side of the dip. Even though we're through the overvalued period it sure looks like the ratio can go below 1 for quite a while before recovering.

Audrey, I agree completely. I just meant that Q has been above 1, and often way above 1, all during the existence of this ER board. Not many felt that they needed to avoid equity investment over this period.
Pehaps in the shorter term momentum trumps value, but given long enough I think the opposire is true.

Ha

 

[unclemick]

At least this thread reminded me of something I used to watch/take note of back in the day.

Heh heh heh - perhaps a few good stocks in October after the end of quarter adjustments.

 

[FinanceDude]

At least this thread reminded me of something I used to watch/take note of back in the day.

Heh heh heh - perhaps a few good stocks in October after the end of quarter adjustments.

As long as the Norwegian widow can still buy food and wine, all is good.......