RBS Warns: Sell Everything

[Guest Grey512]

Nobody will remember to come back and revisit in 3 years. Nobody will actually care either.

Most likely you will change your opinion about 5-10 times in those 3 years. (Not that anybody will care about this either).

 

I try to keep track of all errors of commission and omission (things that I passed on); positioning / sizing / portfolio management is a pretty big driver in an investor's long term performance. Without revisiting past choices and how they worked out, how can one hope to improve over time? Otherwise you have no idea whether you're succeeding (or failing) due to luck or something else.

So, to your first point - ehhmm.. no. I will come back and revisit in 3 yrs.

To your second point - that's true. I might flip my positioning many times in those years. And that's why people shouldn't ascribe too much weight to what they read in forums (I know I don't) or even 'superinvestor' 13Fs.

 

If you want to talk predictions, "Superforecasting" is the only way to handle it. Make prediction, get evaluated against others, then you can actually claim that in 3 years your Brier score is in 10th percentile or something like that. Otherwise, meh.

I have not read that book so I can't comment.

 

I'd probably hope that you're wrong, but then I'm pretty sure you'll change your position in next 3 months or so (whether crash happens or not), so whatever. ;)

If the facts change, I change my mind. The key thing to watch out for is the global liquidity and flows of capital. And right now, they flow is only one way - out.

 

[Patmo]

Its a lot harder to pick tops/bottoms then it is to find good companies priced at fair to (getting to good) prices. Im 100% net long and adding every month but also have ~30 years to retirement age.

 

I find it a lot less complicated to do this then figure out all the working parts of an economy and where it is going. How do you guys get to the point where you think you are able to predict/estimate this with a reasonable degree of certainty?

 

Don't predict anything, just study companies and buy things when they are clearly too cheap compared to their value. If stock goes down you get the option of buying more if you feel like it, simple process but not easy. An already cheap company could still go down 75%, that could mess with your head but that is why value investing is successful in the long run, it is very hard emotionally and lots of work if you are sharp/not lazy

[Guest Grey512]

In general, I am sympathetic to some of the views shared by others in this thread - that things are getting cheaper; that you are massively net long; that you don't short, etc. I respect that, especially if you're investing your own money, not other people's money. If you've been tasked with managing other people's money and are paid for doing so, then I would say that it behooves you to spend some time thinking about how to position to address the significant probability of a bear market up ahead. Everything else is just lazy.

 

[TwoCitiesCapital]

2008 was a generational event. A 50-60% market doesn't require another 2008 and 50+% declines happen multiple times over one's lifetime. Evidently, it can even happen twice in a single decade.

 

Contradict yourself much in one paragraph?

 

2008-2009 was 50% drop. So was it a generational event or not?

 

Let me clarify - a global financial crisis that cripples the majority of western economies at a single time is likely a generational event. My point is you don't need that for a stock market to fall 50%. There have been plenty of severe market corrections of 30%, 40%, and 50% that aren't accompanied by a complete global meltdown. I'm not banking on a complete global meltdown.

 

I'm banking that U.S. equities are the third most expensive they've ever been. They are significantly over valued on just about every single long-term metric. Just reverting to the mean would result in losses of 50-60%. You don't need a global financial crisis at this point to spark significant losses.

 

 

[giofranchi]

I'm trying to expand my skillset from pure fundamental analysis, and have initiated a very small short position in the Euro to play around and see what I can learn.

 

I thought your results as an investor have been quite good until now… Why do you want to change something that has worked very well so far?

 

Cheers,

 

Gio

 

[frommi]

Let me clarify - a global financial crisis that cripples the majority of western economies at a single time is likely a generational event. My point is you don't need that for a stock market to fall 50%. There have been plenty of severe market corrections of 30%, 40%, and 50% that aren't accompanied by a complete global meltdown. I'm not banking on a complete global meltdown.

 

I'm banking that U.S. equities are the third most expensive they've ever been. They are significantly over valued on just about every single long-term metric. Just reverting to the mean would result in losses of 50-60%. You don't need a global financial crisis at this point to spark significant losses.

 

I just built a diversified large cap blue chip portfolio with 45 names. None of them was overvalued. Maybe there are overvalued names in the indices, but at the current point at least half of the market is fair or undervalued.

And at the same time the sentiment is more negative then it has ever been in 08/09, thats the recipe for a big rally.

[rpadebet]

I'm trying to expand my skillset from pure fundamental analysis, and have initiated a very small short position in the Euro to play around and see what I can learn.

 

I thought your results as an investor have been quite good until now… Why do you want to change something that has worked very well so far?

 

Cheers,

 

Gio

 

Maybe because macro forecasting is fun even when you are wrong. Everyone should be allowed some entertainment

[blainehodder]

In general, I am sympathetic to some of the views shared by others in this thread - that things are getting cheaper; that you are massively net long; that you don't short, etc. I respect that, especially if you're investing your own money, not other people's money. If you've been tasked with managing other people's money and are paid for doing so, then I would say that it behooves you to spend some time thinking about how to position to address the significant probability of a bear market up ahead. Everything else is just lazy.

 

If you've been tasked with managing other people's money you should make big macro calls. Got it. Greenblatt might disagree.

 

In all seriousnes though if you are managing other people's money, the decision to make a macro call should be based on the client expectations. It isn't lazy to be 100% net long 100% of the time if that is what the client wants.

[Jurgis]

Greenblatt might disagree.

 

LOL. Sneaky reference man.  8)  ;D

[gurpaul88]

If the facts change, I change my mind. The key thing to watch out for is the global liquidity and flows of capital. And right now, they flow is only one way - out.

 

Just curious what you look at the identify these flows of capital. TIA

[TwoCitiesCapital]

Let me clarify - a global financial crisis that cripples the majority of western economies at a single time is likely a generational event. My point is you don't need that for a stock market to fall 50%. There have been plenty of severe market corrections of 30%, 40%, and 50% that aren't accompanied by a complete global meltdown. I'm not banking on a complete global meltdown.

 

I'm banking that U.S. equities are the third most expensive they've ever been. They are significantly over valued on just about every single long-term metric. Just reverting to the mean would result in losses of 50-60%. You don't need a global financial crisis at this point to spark significant losses.

 

I just built a diversified large cap blue chip portfolio with 45 names. None of them was overvalued. Maybe there are overvalued names in the indices, but at the current point at least half of the market is fair or undervalued.

And at the same time the sentiment is more negative then it has ever been in 08/09, thats the recipe for a big rally.

 

I don't know how things are at where you're at, but sentiment is nowhere near where it was in 08/09. I work for a large investment manager that is still recommending credit allocations because they do not see a recession on the near horizon and credit spreads have blown out to levels not seen in years. In 2008/2009, people were literally talking about the end of the financial system and markets as we knew them. "Buy credit" <> "End of financial system" when it comes to sentiment.

 

Secondly, you only think blue chips are cheap because their profits are inflated. Margins could drop 30% and still be above their historical average - what happens to your P/E when your profits fall 30%? Your P/E increases 50%. Stocks you thought you were buying for 15x earnings now trade 22x earnings. And that's if we stop ABOVE the historical average margin level.

 

I can't predict when or what will cause the change in margin or if it will be a confluence of higher wages, higher dollar, lower demand, etc. etc. etc. but I do know that margins have always reverted and I cannot buy an argument that suggests they'll stay 50% above their long-term average into perpetuity. On top of this, general multiples on those margins are elevated.

 

The stock market has massive convexity relative to changes in margin at this price point - collapsing margins on collapsing multiples is a recipe for equity disaster and is what I've been concerned with for the last year or two. We're living in a time where equities were priced for perfection - high margins, high multiples, and low inflation. There's literally only 1 scenario where we could hope equities continue to do well - another massive lapse in valuation judgment like what occurred in 2000. Otherwise, I can't imagine a scenario where profits and multiples keep going up. All it takes is for one of those to fall to get mediocre results. If both fall, beware.

 

Reasons to short:

High margins (which have started to decline)

High multiples (which appear to be declining)

Liquidity leaving the system and interest rates rising

The best inflation environment you could ask for - price stability. (i.e. it can only get worse from here)

Relative value in other countries is huge

Global growth is slowing

Commodities flashing massive warnings signs

 

and now you have technicals moving to favor bears. That's a lot of current to be swimming against.

 

 

 

 

 

 

[frommi]

 

Reasons to short:

High margins (which have started to decline)

High multiples (which appear to be declining)

Liquidity leaving the system and interest rates rising

The best inflation environment you could ask for - price stability. (i.e. it can only get worse from here)

Relative value in other countries is huge

Global growth is slowing

Commodities flashing massive warnings signs

 

and now you have technicals moving to favor bears. That's a lot of current to be swimming against.

 

Perhaps you should really look at some stocks. WMT,KO,JNJ,PG,CL for example (this where just the first 5 stocks i had in my mind). All have declining or stable margins in the last 5 years.

Even for AAPL the margins are pretty stable.

Commodities going down is what they have done the last 250 years.

Global growth slowing - yes ok thats a valid point, and the USD apprecation is not helping. But its a temporary problem.

 

Market technicals - nothing to worry about at the moment. If we take out the August 2015 lows we are in a different game.

 

Reason not to short:

Wrong time. I never short in the winter months, you are just playing against the odds. Most corrections in winter are over very fast. But who knows, maybe i am wrong. The market is sometimes a bitch.

[John Hjorth]

frommi,

 

Any european names among the 45 picks? I hope you will share with us, thanks in advance.

[frommi]

frommi,

 

Any european names among the 45 picks? I hope you will share with us, thanks in advance.

 

Nestle and Unilever. I will not make 15% on these stocks, but solid 7-10%. Better than cash. www.suredividend.com is a pretty good site for these type of stocks.

[TwoCitiesCapital]

 

Reasons to short:

High margins (which have started to decline)

High multiples (which appear to be declining)

Liquidity leaving the system and interest rates rising

The best inflation environment you could ask for - price stability. (i.e. it can only get worse from here)

Relative value in other countries is huge

Global growth is slowing

Commodities flashing massive warnings signs

 

and now you have technicals moving to favor bears. That's a lot of current to be swimming against.

 

Perhaps you should really look at some stocks. WMT,KO,JNJ,PG,CL for example (this where just the first 5 stocks i had in my mind). All have declining or stable margins in the last 5 years.

Even for AAPL the margins are pretty stable.

Commodities going down is what they have done the last 250 years.

Global growth slowing - yes ok thats a valid point, and the USD apprecation is not helping. But its a temporary problem.

 

Market technicals - nothing to worry about at the moment. If we take out the August 2015 lows we are in a different game.

 

Reason not to short:

Wrong time. I never short in the winter months, you are just playing against the odds. Most corrections in winter are over very fast. But who knows, maybe i am wrong. The market is sometimes a bitch.

 

That's what makes markets. Only time will tell which one of us ends up being right.

[John Hjorth]

frommi,

 

Thanks for sharing!

 

TwoCitiesCapital,

 

There is a different investor sentiment on this side of the pond. Perhaps it's currency related.

 

Conditions are worse in the southern part of Europe compared to the northern part of Europe. It seems to me that a lot af US investors don't have an eye for that.

[ni-co]

I don't know how things are at where you're at, but sentiment is nowhere near where it was in 08/09. I work for a large investment manager that is still recommending credit allocations because they do not see a recession on the near horizon and credit spreads have blown out to levels not seen in years. In 2008/2009, people were literally talking about the end of the financial system and markets as we knew them. "Buy credit" <> "End of financial system" when it comes to sentiment.

 

Secondly, you only think blue chips are cheap because their profits are inflated. Margins could drop 30% and still be above their historical average - what happens to your P/E when your profits fall 30%? Your P/E increases 50%. Stocks you thought you were buying for 15x earnings now trade 22x earnings. And that's if we stop ABOVE the historical average margin level.

 

I can't predict when or what will cause the change in margin or if it will be a confluence of higher wages, higher dollar, lower demand, etc. etc. etc. but I do know that margins have always reverted and I cannot buy an argument that suggests they'll stay 50% above their long-term average into perpetuity. On top of this, general multiples on those margins are elevated.

 

The stock market has massive convexity relative to changes in margin at this price point - collapsing margins on collapsing multiples is a recipe for equity disaster and is what I've been concerned with for the last year or two. We're living in a time where equities were priced for perfection - high margins, high multiples, and low inflation. There's literally only 1 scenario where we could hope equities continue to do well - another massive lapse in valuation judgment like what occurred in 2000. Otherwise, I can't imagine a scenario where profits and multiples keep going up. All it takes is for one of those to fall to get mediocre results. If both fall, beware.

 

Reasons to short:

High margins (which have started to decline)

High multiples (which appear to be declining)

Liquidity leaving the system and interest rates rising

The best inflation environment you could ask for - price stability. (i.e. it can only get worse from here)

Relative value in other countries is huge

Global growth is slowing

Commodities flashing massive warnings signs

 

and now you have technicals moving to favor bears. That's a lot of current to be swimming against.

 

Another post I almost completely agree with. Only one thing: I don't see any negative market scenario in which inflation is going to pick up (aka stagflation). Where should inflation come from? Money supply? Not with this huge credit contraction going on.

[ScottHall]

I'm trying to expand my skillset from pure fundamental analysis, and have initiated a very small short position in the Euro to play around and see what I can learn.

 

I thought your results as an investor have been quite good until now… Why do you want to change something that has worked very well so far?

 

Cheers,

 

Gio

 

Because there's always room for improvement. It may turn out - and is likely probable - that I can develop no additional skill this way, but with a miniscule amount of capital it's worth trying. If I stopped trying to improve when I was "good enough," I wouldn't have 20% a year since 2008 (between all private and public securities I own). I've more or less hit a wall when it comes to improving with pure fundamental analysis; I could probably get better, but not that much better. If I can tackle a concept I know essentially nothing about successfully, I'll begin to improve at a much faster rate.

 

And yes, macro forecasting is fun, even when you're wrong. ;)

[TwoCitiesCapital]

frommi,

 

Thanks for sharing!

 

TwoCitiesCapital,

 

There is a different investor sentiment on this side of the pond. Perhaps it's currency related.

 

Conditions are worse in the southern part of Europe compared to the northern part of Europe. It seems to me that a lot af US investors don't have an eye for that.

 

I guess I should also clarify that the majority of my negative sentiment is targeted to American equities which are ridiculously pricey. I've been in European, EM, and commodity related equities for the last year or so given the relative value there. I can definitely see the negative sentiment in Europe to some extent as Santander is down 50+% from its highs even as profits have improved. Leaves me scratching my head and I'm still adding to that.

 

I don't know how things are at where you're at, but sentiment is nowhere near where it was in 08/09. I work for a large investment manager that is still recommending credit allocations because they do not see a recession on the near horizon and credit spreads have blown out to levels not seen in years. In 2008/2009, people were literally talking about the end of the financial system and markets as we knew them. "Buy credit" <> "End of financial system" when it comes to sentiment.

 

Secondly, you only think blue chips are cheap because their profits are inflated. Margins could drop 30% and still be above their historical average - what happens to your P/E when your profits fall 30%? Your P/E increases 50%. Stocks you thought you were buying for 15x earnings now trade 22x earnings. And that's if we stop ABOVE the historical average margin level.

 

I can't predict when or what will cause the change in margin or if it will be a confluence of higher wages, higher dollar, lower demand, etc. etc. etc. but I do know that margins have always reverted and I cannot buy an argument that suggests they'll stay 50% above their long-term average into perpetuity. On top of this, general multiples on those margins are elevated.

 

The stock market has massive convexity relative to changes in margin at this price point - collapsing margins on collapsing multiples is a recipe for equity disaster and is what I've been concerned with for the last year or two. We're living in a time where equities were priced for perfection - high margins, high multiples, and low inflation. There's literally only 1 scenario where we could hope equities continue to do well - another massive lapse in valuation judgment like what occurred in 2000. Otherwise, I can't imagine a scenario where profits and multiples keep going up. All it takes is for one of those to fall to get mediocre results. If both fall, beware.

 

Reasons to short:

High margins (which have started to decline)

High multiples (which appear to be declining)

Liquidity leaving the system and interest rates rising

The best inflation environment you could ask for - price stability. (i.e. it can only get worse from here)

Relative value in other countries is huge

Global growth is slowing

Commodities flashing massive warnings signs

 

and now you have technicals moving to favor bears. That's a lot of current to be swimming against.

 

Another post I almost completely agree with. Only one thing: I don't see any negative market scenario in which inflation is going to pick up (aka stagflation). Where should inflation come from? Money supply? Not with this huge credit contraction going on.

 

I'm in the deflation camp, but realistically inflation can move either direction from where it's at now and it's likely negative for asset prices. Look into Crestmont's Y-chart - equities do well when there is price stability (from 0-2%) but suffer when inflation get's outside of that range on either end of the spectrum. We're solidly in that 0-2% range.

[John Hjorth]

... I guess I should also clarify that the majority of my negative sentiment is targeted to American equities which are ridiculously pricey. I've been in European, EM, and commodity related equities for the last year or so given the relative value there. I can definitely see the negative sentiment in Europe to some extent as Santander is down 50+% from its highs even as profits have improved. Leaves me scratching my head and I'm still adding to that. ...

 

Based on your elaboration I agree with you. Most of the money to invest in the coming months for my part is staying in Europe, with the exemptions of a few US stocks that I want to own or buy more of.

 

[With regard to SAN I also agree with you, but I'm not scratching my head, I just keep on buying. To me, this is the most misunderstood global [almost] bank. Perhaps I will post more about it in the separate SAN topic in the investment ideas forum.]

[Jurgis]

I guess I should also clarify that the majority of my negative sentiment is targeted to American equities which are ridiculously pricey.

 

Yeah, right: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/cheap-stocks/

 

And before you start to sing the "historically high margins" song again - I've heard it, no need, most of these companies don't have historically high margins. Also a lot of them already had declining sales last year, so no, not cycle top.

 

Have fun

[John Hjorth]

I guess I should also clarify that the majority of my negative sentiment is targeted to American equities which are ridiculously pricey.

 

Yeah, right: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/cheap-stocks/

 

And before you start to sing the "historically high margins" song again - I've heard it, no need, most of these companies don't have historically high margins. Also a lot of them already had declining sales last year, so no, not cycle top.

 

Have fun

Jurgis,

 

What do you consider as your investment universe, as a base of your post above?

[Patmo]

In general, I am sympathetic to some of the views shared by others in this thread - that things are getting cheaper; that you are massively net long; that you don't short, etc. I respect that, especially if you're investing your own money, not other people's money. If you've been tasked with managing other people's money and are paid for doing so, then I would say that it behooves you to spend some time thinking about how to position to address the significant probability of a bear market up ahead. Everything else is just lazy.

 

I manage some family members' money, I just do the plain old vanilla value portfolio management strategy of allocating cash to equities if I think the market price is dislocated from underlying value, holding cash otherwise. It's a natural hedge against bear markets, as in an overvalued market there will be less money allocated, etc etc you know the idea. Maybe it's lazy but it works, and why not KISS. Working hard makes you look good but doesn't bring any other value as far as this topic goes imo

[Jurgis]

I guess I should also clarify that the majority of my negative sentiment is targeted to American equities which are ridiculously pricey.

 

Yeah, right: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/cheap-stocks/

 

And before you start to sing the "historically high margins" song again - I've heard it, no need, most of these companies don't have historically high margins. Also a lot of them already had declining sales last year, so no, not cycle top.

 

Have fun

Jurgis,

 

What do you consider as your investment universe, as a base of your post above?

 

Can you clarify your question? I invest in everything. :) Some preference to high ROE "Buffettology" stocks.

[Guest Grey512]

If the facts change, I change my mind. The key thing to watch out for is the global liquidity and flows of capital. And right now, they flow is only one way - out.

 

Just curious what you look at the identify these flows of capital. TIA

 

It's more of a mosaic than any single metric.

-loans for LBOs

-foreign currency reserves in EM countries

-flow of funds at asset managers (many are publicly listed)

-interest rates relative to consumption and unemployment

-asset price volatility

-budgets in Gulf countries

-asset allocations among large pension funds, sovereign funds

 

In addition, there's ISM (correlates well with S&P) and some of the things mentioned by TwoCitiesCapital.

 

It's sort of like what these guys are doing, though my method is just reading and keeping things in my head instead of using automated spreadsheets

http://www.liquidity.com/Docs/Global_Liquidity_Indexes_(GLI)_2014_Data.pdf