Is The Bottom Almost Here?

[dealraker]

 

So although I didn't bring it up my investment club finally bought AJ Gallagher in Jan of 2016 and they did an excellent job of making the buy call both in timing and price, it was $36 and something and the PE was 13.5 or so with a divy of almost 4%.  Two other insurance brokers are in the club, neither said a word, as nor did I.  I was amused because I knew where this was going.

 

Wasn't long, sometime in 2018, the "value investor expert" in our club, well he pulled up the perfectly clear 15 times earnings line/stock price, said "Gallagher is well above this here 15 times earnings line so its price is baking in a few years of the future, the price has gotten ahead of earnings, and thus we need to sell it."  We sold in the $80 range, it was 20 times earnings or so.

 

The all-round valuation expert in my club claimed his turf just as does Shiller, Grahtham, and all the rest.  Models or indexes, whatever it takes, use something- anything-  to sell your expertise based on history.  Make it simple so it can be spread easily and something that you can be identified by or with. 

 

If you don't have your own model?  Hell, use someone else's, preferably a 2/20 famous hedgie or a CNBC regular hero, anyone whose power can overcome the little people vulnerable to such.

 

In any event I struggle to find wealthy people who do this in-and-out just-in-time shit  ---  and I also have to look at the value investor expert in my club each meeting with a straight face...without calling him the fucking idiot that he actually is.  

 

I like to stay as far away from generalized expertise as I possibly can.  It ruins my day, it rips my soul out, I despise the crap and I think it is worthless.  I do, on the other hand, love specific business analysis.  Fun stuff, delightful stuff, keeps the mind young and thriving for another day.  

 

 

 

Edited January 8, 2023 by dealraker

[Gregmal]

 

@frommi

So in 4 days did you fund this directionally bearish purchase by:

 

1) selling an existing position…IE it’s fundamentally different today vs 4 days ago 

2) with existing cash, ie the decision had the same fundamental basis as 4 days ago and nothing to do with your individual investments

3) using margin because it balances the portfolio without impacting the stuff you like

 

Two of these make no sense, one of these is basically how the pros do it so they stay fully invested. A stark contrast to the market timers who will claim that $17 is rich but $15 is cheap so this way they can retain a high cash balance or negative bias even though it’s a common sense fluctuation.

 

 

Edited January 8, 2023 by Gregmal

[Xerxes]

47 minutes ago, dealraker said:

 

So although I didn't bring it up my investment club finally bought AJ Gallagher in Jan of 2016 and they did an excellent job of making the buy call both in timing and price, it was $36 and something and the PE was 13.5 or so with a divy of almost 4%.  Two other insurance brokers are in the club, neither said a word, as nor did I.  I was amused because I knew where this was going.

 

Too bad we dont have a AJ Gallagher thread

 

 

[aesophawk]

4 hours ago, dealraker said:

In any event I struggle to find wealthy people who do this in-and-out just-in-time shit  ---  and I also have to look at the value investor expert in my club each meeting with a straight face...without calling him the fucking idiot that he actually is.  

 

I like to stay as far away from generalized expertise as I possibly can.  It ruins my day, it rips my soul out, I despise the crap and I think it is worthless.  I do, on the other hand, love specific business analysis.  Fun stuff, delightful stuff, keeps the mind young and thriving for another day.  

 

 

 

 

Well said. I find this thread to be both entertaining and practically useless. Sort of like my family gatherings when my cousin gives me a horoscope reading. There's always something to do and there's always value to be found even in expensive markets.  

[IceCreamMan]

On 1/7/2023 at 10:00 PM, Dinar said:

These figures are NOT accurate.  Ben Graham/Shiller's P/E has earnings adjusted for inflation.  Take a look at S&P 500 EPS over the last decade, adjust for inflation and do the calculation.  You do not get 28.48.

 

Shiller's data is here:

http://www.econ.yale.edu/~shiller/data.htm

[IceCreamMan]

7 hours ago, StevieV said:

 

That's a single backward-looking data point and the 15 threshold picked with the benefit of hindsight.  Even if you use the whole history, there are just very, very few data points.

 

2009 was very close to not hitting 15 and triggering the "buy".  There is no guarantee that the next low will hit the 15 threshold.  We could go another 20, 30, 40 years  without hitting 15 again.  That's just way, way, way too long of a timeframe to be of any use.  I can't imagine someone deciding they were going to wait to invest in stocks until a Shiller PE 15 signal hits when it could be literally decades.

 

Investing at that price is probably great.  Waiting for it to happen is tremendously risky IMHO.

 

Hussman attempted to use valuations systematically as an input for equity allocations-- for anyone that's interested in that sort of thing:

https://www.hussmanfunds.com/research/strategic-allocation-white-paper/

[gfp]

Interesting data on put option activity from today's WSJ -

https://www.wsj.com/articles/higher-rates-tech-selloff-fuel-options-boom-11673214152?mod=hp_lead_pos1

 

 

Comments on the spike in the Put-Call ratio from the end of the article:

"

Despite the appearance of fear, other indicators suggest that options protecting from market turmoil are in low demand. The Nations TailDex, which measures the cost of put options that would pay out in a major S&P 500 decline, recently hit a near-decade low.

“Common thinking is that high readings in the Cboe equity put-call ratio suggest fear is rampant, because traders are purchasing a large number of puts,” Mr. Kochuba of SpotGamma said. “Occasionally, this can be correct. In this case, it is not.”"

Edited January 9, 2023 by gfp

[Spooky]

20 hours ago, ValueArb said:

 

Depends on how you use it. Theoretically if you got out of equities entirely every time it broke a 30 PE and waited till it got back to 15 before getting back in, you would crush the market.

 

I'm always 100% invested whatever the Shiller PE because I'm mostly doing special situations. But anyone thinking that this year the S&P 500 has a greater than 50% likelihood of an up year isn't just ignoring Shiller, they are ignoring the Fed's stated intentions to keep raising rates.

 

Here is the distribution of annual S&P returns over 151 years. Just going by history as a proxy the baseline probability that the S&P will be up in any given year is 68.9%. Obviously, history doesn't necessarily repeat.

 

 

If you start looking at multi-year periods the probability that the S&P is up at the end is even higher.

 

Source:

https://themeasureofaplan.com/us-stock-market-returns-1870s-to-present/

 

[ValueArb]

43 minutes ago, Spooky said:

 

Here is the distribution of annual S&P returns over 151 years. Just going by history as a proxy the baseline probability that the S&P will be up in any given year is 68.9%. Obviously, history doesn't necessarily repeat.

 

 

If you start looking at multi-year periods the probability that the S&P is up at the end is even higher.

 

Source:

https://themeasureofaplan.com/us-stock-market-returns-1870s-to-present/

 

 

How often was the S&P up on years when the market price was significantly higher than its intrinsic value? 

[dealraker]

Speaking of "bottoms almost here" --- thanks to Parsad for dragging us (me included) longer term Meta "whiners" through the abyss into "now I have a nice profit" status.  Yea, began buying Facebook at $11 and eventually had a loss for a while.

 

LOL, I wasn't ever going to sell it, but damn did I whine like a stuck pig when the price went down...held nose bought more at $96.  The bottom was at $96, as the topic says, "almost here."

[Gregmal]

2 minutes ago, dealraker said:

LOL, I wasn't ever going to sell it, but damn did I whine like a stuck pig when the price went down...held nose bought more at $96.  The bottom was at $96, as the topic says, "almost here."

If you ever wanna venture down the rabbit hole of “short term trading”, at least in any manner that would be successful, most of it is simply about capturing those sort of feelings, realizing that they are what “everyone is feeling/acting off of/doing”, and then find the most appropriate way to bet against that consensus. 
 

[changegonnacome]

1 hour ago, Spooky said:

Here is the distribution of annual S&P returns over 151 years. Just going by history as a proxy the baseline probability that the S&P will be up in any given year is 68.9%. Obviously, history doesn't necessarily repeat.

 

Absolutely the correct default posture is bullish.......ALL the time.....a coin toss with 70% probability of coming up heads requires you to bet heads EVERY time

 

Edited January 9, 2023 by changegonnacome

[Gregmal]

3 hours ago, gfp said:

Interesting data on put option activity from today's WSJ -

https://www.wsj.com/articles/higher-rates-tech-selloff-fuel-options-boom-11673214152?mod=hp_lead_pos1

 

 

Comments on the spike in the Put-Call ratio from the end of the article:

"

Despite the appearance of fear, other indicators suggest that options protecting from market turmoil are in low demand. The Nations TailDex, which measures the cost of put options that would pay out in a major S&P 500 decline, recently hit a near-decade low.

“Common thinking is that high readings in the Cboe equity put-call ratio suggest fear is rampant, because traders are purchasing a large number of puts,” Mr. Kochuba of SpotGamma said. “Occasionally, this can be correct. In this case, it is not.”"

When the market went up and this happened with calls  it was because things were euphoric…remember all that?

 

Wonder if those people feel the same way now? That it’s too pessimistic? Or perhaps their agenda was to be bearish so now this sort of lopsided mess is warranted or course…

[Spooky]

1 hour ago, changegonnacome said:

 

Absolutely the correct default posture is bullish.......ALL the time.....a coin toss with 70% probability of coming up heads requires you to bet heads EVERY time

 

 

Correct as long as you have a longer time horizon of 5 or more years or are not at retirement age where the short term volatility can kill you.

 

This is basically my investment philosophy - 95% always invested in a concentrated stock and real estate portfolio with 5% in bonds and money market funds. As Gregmal pointed out above, it's all about asset allocation and position sizing. This lines up with David Swensen's philosophy at the Yale endowment fund from whom I have taken a lot of inspiration - it's all about asset allocation:

 

 

 

 

 

 

[changegonnacome]

For sure assuming everybody here has some long run way to go being fully invested makes total sense and in fact is the only rational thing to do

 

- but you know not even clear to me at age 60 (as long as you have the stomach for it and have spent a lifetime learning to love volatility) that you shouldnt really down shift your equity allocation......of course all dependent on circumstances.......but as I think about heading towards 60 I can't see my equity allocation shifting too much at all.....now around that fully invested posture and for the first time ever in my investing career have I put some bearish hedges they served me well in 2022 and I dont see much reason to take them off........yet..........but we are getting closer

Edited January 9, 2023 by changegonnacome

[TwoCitiesCapital]

4 hours ago, Spooky said:

 

Here is the distribution of annual S&P returns over 151 years. Just going by history as a proxy the baseline probability that the S&P will be up in any given year is 68.9%. Obviously, history doesn't necessarily repeat.

 

 

If you start looking at multi-year periods the probability that the S&P is up at the end is even higher.

 

Source:

https://themeasureofaplan.com/us-stock-market-returns-1870s-to-present/

 

 

4 hours ago, ValueArb said:

 

How often was the S&P up on years when the market price was significantly higher than its intrinsic value? 

 

ValueArb has a point here. Blind probabilities assume we're also somewhat average in the distribution of historical earnings and multiples. 

 

But we weren't. The only time multiples (1-year P/E or the 10-year CAPE) has been where they were at in 2021 was basically the tech bubble and the preceding the Great Depression. And earnings? Had just been goosed by trillions in stimulus and record high corporate margins. Both will likely normalize. 

 

So we don't have a ton of observations, but certainly not 'average' in terms of earnings or multiple. Also inflation is historically high AND liquidity is contracting AND PMIs negative. 

 

I imagine if you limit your look to historical terms to timeframes where any one of those things were true you'd find returns to be quite a bit less attractive - let alone all them being true together.  

[Paarslaars]

18 hours ago, Gregmal said:

If you ever wanna venture down the rabbit hole of “short term trading”, at least in any manner that would be successful, most of it is simply about capturing those sort of feelings, realizing that they are what “everyone is feeling/acting off of/doing”, and then find the most appropriate way to bet against that consensus. 
 

But it takes balls... not easy to do.

Have been personally more successful using that sentiment to 'sell high' rather than 'buy low', for some psychological reason, selling just feels safer.

[dealraker]

20 hours ago, Gregmal said:

If you ever wanna venture down the rabbit hole of “short term trading”, at least in any manner that would be successful, most of it is simply about capturing those sort of feelings, realizing that they are what “everyone is feeling/acting off of/doing”, and then find the most appropriate way to bet against that consensus. 
 

Something I sense you are pretty good with Greg.  I tend to buy  decent businesses at decent prices and that's about it for me.  

[dealraker]

On 1/9/2023 at 12:08 PM, Spooky said:

 

Correct as long as you have a longer time horizon of 5 or more years or are not at retirement age where the short term volatility can kill you.

 

This is basically my investment philosophy - 95% always invested in a concentrated stock and real estate portfolio with 5% in bonds and money market funds. As Gregmal pointed out above, it's all about asset allocation and position sizing. This lines up with David Swensen's philosophy at the Yale endowment fund from whom I have taken a lot of inspiration - it's all about asset allocation:

 

I'd somewhat counter that by saying if you invest long enough and learn to hold stocks of decent businesses you don't have to worry about downturns or low stock prices.  As I say often, you are not (correction) selling everything within a five or even ten year period and thinking every downturn is 2009 is going to pretty much ruin any enjoyment of life you have at any time.

 

 

 

 

 

Edited January 10, 2023 by dealraker

[Spooky]

18 hours ago, TwoCitiesCapital said:

 

 

ValueArb has a point here. Blind probabilities assume we're also somewhat average in the distribution of historical earnings and multiples. 

 

But we weren't. The only time multiples (1-year P/E or the 10-year CAPE) has been where they were at in 2021 was basically the tech bubble and the preceding the Great Depression. And earnings? Had just been goosed by trillions in stimulus and record high corporate margins. Both will likely normalize. 

 

So we don't have a ton of observations, but certainly not 'average' in terms of earnings or multiple. Also inflation is historically high AND liquidity is contracting AND PMIs negative. 

 

I imagine if you limit your look to historical terms to timeframes where any one of those things were true you'd find returns to be quite a bit less attractive - let alone all them being true together.  

 

I agree with most of this - but my point is that almost everyone in the mainstream is seemingly only focused on the risk of further declines from here and consensus is for a recession / further pain which is potentially under weighting the probability to the upside.  

 

One thing that you are overlooking in your analysis are psychological factors such as optimism and pessimism that affect prices in the short term. It is not necessarily the fundamental data that moves things in the short term but people's perception of these factors. For instance, we saw a total 180 from euphoria to despondency with sentiment reaching lows not seen since the financial crisis (when the financial system was on the verge of collapse). This extreme pessimism was not warranted based on the facts available at that time - that is they key: is to figure out when sentiment / markets have diverged significantly from the underlying facts. Now, you have seen some things recover to a more reasonable posture - it looks to me that what is being priced in is a mild recession which does not seem that out of line.

 

I'm also not blindly advocating buying the market overall - need to pick your spots. It was clear for a while that a segment of the market was in a bubble (talked about by Grantham and Dalio).

 

1 hour ago, dealraker said:

I'd somewhat counter that by saying if you invest long enough and learn to hold stocks of decent businesses you don't have to worry about downturns or low stock prices.  As I say often, you are selling everything within a five or even ten year period and thinking every downturn is 2009 is going to pretty much ruin any enjoyment of life you have at any time.

 

This is my view as well - I am trying to find the handful of wonderful companies out there, buy them at a reasonable price and then sit on my ass and do nothing. In the presentation from Swensen he talks about how from 1925 until the time of the speech if you held small cap stocks you would have made 12,000% returns. However, during that timeframe your holdings would have declined by 90% at one point so you have to be able to hold on through those periods.

 

 

 

[UK]

This discussion reminded me one good book on this short vs long or market vs companies aproach subject. He tried a lot of ways untill basically discovering this system of dealraker, which is also a system of WB, which is also maybe the ultimate way to make money long term:)

 

https://www.amazon.com/Keynes-Market-Economist-Overturned-Conventional/dp/047028496X

 

This book traces his evolution from "momentum trader" and a speculator in currencies to his post-crash persona as a "value investor." As a trader, Keynes had great success but came to disaster in the Depression, where he transformed to an investor in common stocks of "intrinsic" value very similar to the Graham-Buffett approach to the market. When he died in 1946, Keynes estate totaled about $30 million in today's dollars. Along the way, he managed his college's endowment into a five-fold increase and participated in the affairs of several insurance companies and investment trusts - all this while serving his country in a variety of economic posts such as negotiating loans from the U.S. to Britain and providing significant guidance at the Bretton Woods monetary accord. While it is not a "how to" book, Keynes and the Market clearly shows the way Keynes developed his investment technique and succinctly states a number of principles and guidelines useful for today's investor.

Edited January 10, 2023 by UK

[SharperDingaan]

4 hours ago, Paarslaars said:

But it takes balls... not easy to do.

Have been personally more successful using that sentiment to 'sell high' rather than 'buy low', for some psychological reason, selling just feels safer.

 

Not really .. it just takes confidence in your view - right or wrong. If you think something is going to go down, but are not willing to back your conviction by taking action, you have no business doing this.

 

SD

[formthirteen]

Asness' opinion: https://www.aqr.com/Insights/Perspectives/The-Bubble-Has-Not-Popped

 

 

Ian D'Souza's (ABC Funds) opinion:

https://abcfunds.com/media-centre/investment-commentaries/abc-perspective-january-2023/

 

 

My opinion: I have no idea and if I had one I wouldn't know what I'm talking about.

[Spooky]

34 minutes ago, UK said:

This discussion reminded me one good book on this short vs long or market vs companies aproach subject. He tried a lot of ways untill basically discovering this system of dealraker, which is also a system of WB, which is also maybe the ultimate way to make money long term:)

 

https://www.amazon.com/Keynes-Market-Economist-Overturned-Conventional/dp/047028496X

 

This book traces his evolution from "momentum trader" and a speculator in currencies to his post-crash persona as a "value investor." As a trader, Keynes had great success but came to disaster in the Depression, where he transformed to an investor in common stocks of "intrinsic" value very similar to the Graham-Buffett approach to the market. When he died in 1946, Keynes estate totaled about $30 million in today's dollars. Along the way, he managed his college's endowment into a five-fold increase and participated in the affairs of several insurance companies and investment trusts - all this while serving his country in a variety of economic posts such as negotiating loans from the U.S. to Britain and providing significant guidance at the Bretton Woods monetary accord. While it is not a "how to" book, Keynes and the Market clearly shows the way Keynes developed his investment technique and succinctly states a number of principles and guidelines useful for today's investor.

 

I read most of this book, it was pretty interesting. WB was influenced by Keynes.

 

[Gregmal]

40 minutes ago, UK said:

This discussion reminded me one good book on this short vs long or market vs companies aproach subject. He tried a lot of ways untill basically discovering this system of dealraker, which is also a system of WB, which is also maybe the ultimate way to make money long term:)

 

https://www.amazon.com/Keynes-Market-Economist-Overturned-Conventional/dp/047028496X

 

This book traces his evolution from "momentum trader" and a speculator in currencies to his post-crash persona as a "value investor." As a trader, Keynes had great success but came to disaster in the Depression, where he transformed to an investor in common stocks of "intrinsic" value very similar to the Graham-Buffett approach to the market. When he died in 1946, Keynes estate totaled about $30 million in today's dollars. Along the way, he managed his college's endowment into a five-fold increase and participated in the affairs of several insurance companies and investment trusts - all this while serving his country in a variety of economic posts such as negotiating loans from the U.S. to Britain and providing significant guidance at the Bretton Woods monetary accord. While it is not a "how to" book, Keynes and the Market clearly shows the way Keynes developed his investment technique and succinctly states a number of principles and guidelines useful for today's investor.

Yup. Markets are dynamic. They are constantly evolving. One of my favorite aphorisms is something along the lines of “it’s always true until it’s never true”. You just can’t short this market is true, until it’s not. Stuff like that. To successfully trade you need to be plugged in, obsessively, 24/7. Everyone thinks they can do it because short term, right or wrong, something either goes up or down and your odds of being right short term are close enough that you can confuse your strategy, most likely a strategy that’s neither unique or long term viable, as having merit. Same way my friend did when gambling in his 20s cuz he won a lot until he didnt. Same things the Reddits did with GameStop cuz they knew it was going up due to its bright fixture! Same thing the so called smart money did last year with many individual companies. I was bearish and the stock went down therefor I knew it! 

 

However to be a successful investor, as dealraker notes, you don’t really have to do all that much besides using some common sense and discipline.