During the past few days I did a little buying “around the edges” in low p/e ratio stock mutual funds as I feel they hold mostly assets that are currently out of favor. Time will tell if this was prudent. In the past I have found, at times, this has been a good strategy.
In following the market and a check of some of my references are now showing the markets in general are close to fair value while some parts of it remain over bought. I have linked Moringstar’s Market Fair Value graph below that reflects this. You can check the different sectors and see which ones have good value and the ones that are being reported as over valued.
http://www.morningstar.com/market-valuation/market-fair-value-graph.aspxIn checking the WSJ … P/E’s & Yields on Major Indexes … is reporting that the S&P 500 Index is now selling on a Trailing P/E Ratio of 17.61 and on Forward Estimates of 15.44. Many say that a good P/E Ratio range for S&P 500 stocks to trade is 14 to 16. However, notice that stocks found in the Russell 2000 are selling at a Trailing P/E Ratio of 102.19.
http://online.wsj.com/mdc/public/page/2_3021-peyield.html?mod=wsj_mdc_additional_ustocksPerhaps this, in part, explains the sell off and a rotation towards value stock funds. I have linked below the Lipper Indexes that reflects value is currently fairing better than growth stock funds ... and, bond funds are leading most stock funds.
http://online.wsj.com/mdc/public/page/2_3020-lipperindx.html?mod=topnav_2_3023In addition, I have linked a WSJ article that recaps this past week.
http://online.wsj.com/news/articles/SB10001424052702304058204579495221187828010?mg=reno64-wsj&url=http://online.wsj.com/article/SB10001424052702304058204579495221187828010.htmlMy well diversified portfolio seems to be performing well as it leads my benchmark the Lipper Balanced Index. For the week the Index was down -1.36% while I was down -1.15%. Year-to-date the Index is up 0.27% while I am up 1.08%. My three best performing sleeves for the week were my income sleeve which was up 0.02% followed by my hybrid income sleeve which was down -0.41% and was followed by my global hybrid growth & income sleeve which was down -0.95%.
Since we have just started the reporting of corporate earnings it remains a big question as to how the markets will fair during the coming weeks. Many analyst lowered their expectations during the past few weeks so it should not be too difficult for reporting companies to beat these lowered estimates. And, with this the stock market party might just continue for a while longer.
Have a good weekend … and, I wish all “Good Investing.”
Old_Skeet
Comments
I define FMV as the market level where stocks are set to return historical average returns for the next decade. By my calculations, that level is over 40% below where we are today. Many, many thanks to Mr. Bernanke for the huge run up. These last couple of years have been nothing but PE multiple expansion.
I am not in cash waiting for another bust. I wont play that game. I have nearly 40% equity exposure to value stocks in some accounts. But that is as far as I want to push the envelope here.
For the record I became defensive in 2005. I missed some of the gains in 2006-7, but had a field day in 2008 and 2009. I may be "early" once again but naturally, I am very protective of those gains.
No one needs to pay a whit of attention to what I say here. It's just my view. Everyone should do their own research and draw their own conclusions.
Have a good weekend.
Thanks for sharing your thoughts on the market. After all, it is the varied thoughts of many that make the market as for every seller there has to be a buyer. Those with the better thinking and have an investment strategy I feel will be rewarded with the higher returns.
You no doubt must be one of these.
Old_Skeet
MarkM
Appreciate if you would share the details of "by my calculations". How did you arrive at your valuation assessment for the US stock market?
I'm in the process of reading Benjamin Graham's The Intelligent Investor.
A lot of pros use a similar setup. It's shorter term, but yeah, it's tradable. The skill is still in managing the trade though.
rjb- No, it's proprietary. It's a long term valuation measure so I only have a couple of turns left at this wheel before I have to call it quits. It's similar to GMOs work but with some momentum concessions if that makes any sense. Might not if you are just beginning your studies. I am not really a trader. I am a manager of family money. Works for the family, so works for me.
When you have a dominant bull market all of them look like genius measures because the bull markets are very tolerant to mistakes and irrelevant calculations. When you have market crashes or bear markets, they all look useless.
What you may be able to count on though is the reaction to these markets in response to some of these measures in almost a self-fulfilling fashion just because so many trade automatically in response. A lot of technical indicators work this way and people may think they have inherent predictive powers somehow without realizing that it comes only from enough people following them and trading on them. The difference is that such a mass action can stop at any time or be swayed by events and sentiments.
It is like riding one large tandem bike and guessing where it is going to go.
My attempts at charting these two investments is not to seek perfection. Basically it helps me illustrate (mainly to myself) that allocations can get out of whack as a result of over and under performance. I also like to compare recent history as one possible outcome to consider.
For me, it seems like an appropriate time to reallocate profits from my US equity holdings and place these profits into my fix income vehicles or maybe other parts of my portfolio.
I do not have a lot of time to comment. I most often do when I feel a need to " correct the record" if you will. David does a fine job with this site. I appreciate his work for the mutual fund investor. I also share his fondness for Bea's Ho-Made pies.
Regards,
MarkM
Not sure what historical time frame you are picking. Maybe the '60-70s? The lost decade of the '00s?
Another 40% downward correction would certainly be brutal for those of us remaining long.
It would not be correcting then for perceived excesses of Mr. Bernanke, but for excesses of the past 15 years, or four administrations...maybe more. As if we were are still paying for the run-up of '80-90s?
The average cyclical bear market inside a secular bear market exceeds 38%. So what is it exactly about finding fair market value at approximately the bottom of that level that so shocks you? This isn't even prognostication, its market history.
1999 sounds about right to me though November sounds a bit late.
This is just the long term timing tool I have used to protect profits. I am not claiming everyone should adopt it. Frankly, its hard as hell to adopt this approach when the market moves away from you and hard as hell again when markets fall and there seems to be no good reason to place money at risk! I did the all or nothing thing (go to all cash) in one speculative, overvalued market and I will never do it again.
Regards,
MarkM
That is of course what makes it all interesting.
Sounds like you are using very long term history.
As long as you are not discounting the bull runs, like '80-90s, I'll say fair enough.
Fair warning Mark.
Thanks
(Although I sure do hope you're wrong...!
I fully understand why MarkM is reluctant to divulge his personal proprietary Fair Market Valuation (FMV) model. Given the uncertainties of the input parameters and the modeling formulation challenges that are needed to project a FMV, I too would surely hesitate to make a forecast, and would be doubly disinclined to describe my likely controversial approach. My enthusiasm disappears completely given a 10-year time horizon.
Equity Fair Valuation techniques have been made since the late 1930s. John Burr Williams published his initial effort to define future stock values in his classic “The Theory of Investment Value” book. Many variants of his original work have emerged over the decades including one from Benjamin Graham as described in his “The Intelligent Investor” tome.
If determining individual stock or market-wide Fair Valuations motivate you, I suggest you visit the MoneyChimp website. I have referenced this site in past postings for Monte Carlo simulations. The MoneyChimp resource also provides a relatively extensive discussion and calculation toolkit that permits a user to estimate Fair Value using a host of methods. It even includes a speculative section on how Warren Buffett probably completes this difficult task. Here is the Link to the MoneyChimp Valuations section:
http://www.moneychimp.com/articles/valuation/stockvalue.htm
The challenge to making an accurate FMV projection is self-evident from the inputs required. Earnings growth rates are needed. That means that an estimate of demographic and GDP trends must be made. Discount rates must be specified. A decision with regard to the consistency of these rates during the projection period must be attempted. All these factors contribute to the unreliability of the forecast. Reasonable estimates of the likely error bars around the estimated values typically lead to high double digit, and often triple digit uncertainty estimates.
All these various models do not inspire trust.
My personal perspective is that all these analyses are so compromised by uncertainties that, although they might be useful for professionals with unlimited resources, they are nonsensical for the bulk of amateur investors. This is a task I would choose not to do.
There are simpler less intense ways to make at least a general forward looking directional projection. The issue is complex, and no single indicator gives a totally reliable signal. If however, a single indicator is wanted, the P/E ratio is as simple as it gets when coupled to a reversion-to-the-mean philosophy. Here’s a Link to a Vanguard study that explored several optional signals. The limited success and the shortcomings of the P/E approach are fairly assessed in the report. Here is the referenced Link:
https://personal.vanguard.com/pdf/s338.pdf
Have fun and learn. I hope this is more helpful than confusing.
Best Regards.
You can be assured that there are more predictive timing methodologies out there (long term) than what would be disseminated freely by the website called MoneyChimp. Vanguards article does a fair number on some of the bad ones but doesn't really get into the topic fully.
Short term, it doesn't work. Intermediate term, it doesnt really work well enough to adopt. Long term it works but is very difficult to execute, and best in markets that have overshot to extremes. 2000 would be a fine example of the latter; 2007 less so. The "error bars" you speak of showed that positive (though low) returns from those levels could not be dismissed. I'd probably say the same here.
Regards,
MarkM
Thank you for your rapid response.
My overarching takeaway from your various replies is that you have discovered the magic elixir that permits a respectable estimate of market-wide FMV, at least one focused on longer-term projections. Even given your stated reservations, such a discovery deserves a substantial Wow exclamation. That’s an impressive accomplishment that warrants attention.
A reliable and reasonably accurate FMV methodology has eluded even the very best individual minds (guys of the caliber of Benjamin Graham and his student Warren Buffett) and institutional entities (Vanguard, JP Morgan, Morningstar) for decades. Congratulations.
Again from your posting, I realize that you have been hampered by some difficulties in fully implementing the approach. For example you stated that: “Frankly, its hard as hell to adopt this approach when the market moves away from you and hard as hell again when markets fall and there seems to be no good reason to place money at risk!” and later “Long term it works but is very difficult to execute.”
I’m puzzled by these comments. They certainly are suggestive of significant holes in your approach given these limitations. Also, why the procedure would be “difficult to execute “ totally escapes me. Could the mathematics be that gory? I doubt it. Most investors, including a high percentage of professional wizards, are actually mathematically phobic.
Additionally, it is worrisome that your FMV signal has a “momentum concession” given that you use it as a longer term forecasting tool. Momentum is a dissipative force. I’m uncomfortable with any momentum adjustment that is purportedly operative a decade into the future. Market momentum effects usually disappear in less than 3 years.
Your reservations seem to point to a highly idiosyncratic technique. I hope it is not that individual and distinctive. If it is so, I understand your unwillingness to discuss any of its details whatsoever. It offers little value to MFO members or an even wider audience.
Under these circumstances I would be circumspect about anticipating successful applications in the future. These types of formulations that have benefited from heavily restricted success have a dismal persistency record and are hazardous as projection tools. Professionals relearn this hard lesson time and time again.
However, if you judge the approach to not be idiosyncratic, I strongly urge you to consider formally documenting it. You could be “Famous by Friday” as California tennis coach Vic Braden often proclaimed. The investment world needs a semi-reliable 10-year forecasting tool. History will remember you if you develop such a tool.
I would not simply reveal the method specifics on this fine website. MFO has too limited a membership. Rather, I suggest you submit an outline to a respected financial and/or business journal. If accepted after peer review, your accomplishment will be widely circulated, enthusiastically received, and your contribution firmly acknowledged for all time.
Regardless of the present state of your still undefined, mysterious approach, and its general application, I wish you well in your forecasting efforts. If what you do is too complex or conditionally fragile, I would likely choose not to deploy it for my purposes. Everyone chooses their own investment poison.
I am a satisfied member of the simplicity is better cohort. That philosophy keeps my costs low, permits me to stay the course under challenging circumstances since I understand my strategy, and allows me to eschew risky investments that test foolish boundaries.
I wish you continued success and good luck in your future investments and all your financial matters.
Best Regards.
Been studying valuations a lot lately.
Pouring through texts and lectures by Aswath Damodaran, Graham and Dodd, and even John Burr Williams. Ha!
There are indeed so many variables.
Example, more than half of the net present value in a discounted cash flow valuation is based on terminal assumptions that one is trying to guess starting five years out. Can you believe?
It does seem crazy or "foolish" (your word) to think it will result in a more accurate prediction of the future value.
So, what's it about?
Again like you suggest, maybe it's more about having a methodology (and the many attendant assumptions) to help individual and institutional investors alike rationalize their investment decisions.
A tool to aid the decision, to help set the expectation, to finish the due diligence,
as best as one can do,
to backstop the "personal judgement call" on an investment.
That's not so bad.
I mean, I'd rather have a legitimate edge.
But short of that, I too will continue to conduct valuations, of one sort or another, as futile as they may be, like the other good folks on this thread have already pointed out.
Thank you for your response. If you are going to tell a person that you think they are full of sh@t, could you do it without so much gasbaggery and pretentious gobbledygook? Just get on with it. It would save all of us the time of wading through that. And it's not going to offend me.
If you got offended by my response and crafted this as your clever retort ( I'll show him!) well, I can't help you with that.
Perhaps you really don't believe that there are predictive market return forecasting tools on a ten year horizon. Ok, thats fine. A wide body of literature would disagree with you. So would a couple of very large institutional money managers who have designed their entire practices around the concept.
Anyway, I hope you feel better.
Mark
Whether it is fundamental indicators or technical charts, they all contribute towards what I call situational awareness. I think this is very under emphasized in investing.
Consider driving on a road in heavy traffic. The behavior of the traffic and individual drivers are not entirely predictable which is what causes accidents but they are not random either. Situational awareness around you is considered a good thing. It is not a guarantee of anything nor is it a predictor of accidents or clear roads. However, situational awareness can help increase the odds of avoiding accidents and finding clearer lanes. It doesn't mean you should drive like a maniac. The fact that many drive like maniacs isn't a strike against situational awareness.
Similar thing applies to investing as well. Fundamental and technical indicators can provide you with situational awareness for when you need to make decisions. Investing is never as simple as putting money in and waiting 30 years. You need to keep buying, rotating, withdrawing, selecting, protecting, etc over the lifetime of investing. There are no cruise controls for investing despite the assurances to the contrary from some faithful.
Situational awareness can help make better decisions. Should you put all if your money that you inherited in when the valuations are at historical highs? Should you sell a fund when it is approaching the bottom of the trading range? How can you tell if you don't know what the recent trading range has been?
This is why it is important to get a bit savvy and knowledgeable about both fundamental and technical indicators. And not attributing mystical powers to them.
When you do that, you will see that the market gyrations are a bit more predictable in a probabilistic fashion which is why most professional trading uses these rather than make blind guesses to be profitable. They are less predictable than what is needed for a mechanical trading system and so not a trading strategy that gets rid of the role of luck, judgment, intuition and skills.
I suspect this is what @MarkM OR @old_skeet have arrived at for themselves in different ways and I think that is a good thing, not something to be pompously derisive about.
And!
He knows pomposity when he sees it.
You noted: "Whether it is fundamental indicators or technical charts, they all contribute towards what I call situational awareness. I think this is very under emphasized in investing."
Thank you and yes..........tis under emphasized. I suspect some investors who pay attention do develop an intuitive sense about investments, as long as they continue to understand who they are emotionally.
Regards,
Catch
Cman, do you not use funds and fund managers? (honest question, not rhetorical or fightpicking)
Income levels and family sizes change requiring new allocation strategy or risk management, careers change with different constraints on investment choices available, global markets change providing different allocation choices and risk profiles, funds come and go, new fund types emerge, black swan events loom requiring caution and wondering whether it might destroy the retirement.
At any point in time, it may seem like there is a solution now that will be sufficient for the next 30 years and has been the solution for the last 30 in retrospect. But that is usually not the reality one deals with as life happens.
You need situational awareness for all of these decisions. The actual indicators used to get situational awareness depend on the Time zoom level you are using for decisions but exist at all zoom levels and decisions happen at multiple zoom levels.
... situational awareness depend on the Time zoom level you are using for decisions but exist at all zoom levels and decisions happen at multiple zoom levels.
Reminds me of the bandsaw lesson (woodworking is still taught to kids):
"Your hands rest comfortablly, to either side of the blade, supporting and guiding the material. As you cut the material your eye periodically checks in with your hand position relative to the 4" danger zone in front of the blade.
More often your eyes zoom in on the individual teeth of the blade as they whizz through the material at 60 teeth per second. In this way, your eyes can signal your hands to adjust the feed so that the material is precisely cut to the waste side of your cut line."
Thanks cman...
"Safety and Accuracy = Situational Awareness and Zoom"