Tepper

[PlanMaestro]

http://www.cnbc.com/id/100320120

 

> what's with that cliff counter… CNBC…

[Guest]

 

> what's with that cliff counter… CNBC…

haha. Epic!  8)

[Guest deepValue]

Tepper was being a douche. Interesting to get his thoughts though.

[Green King]

More Tepper

http://video.cnbc.com/gallery/?video=3000135863&play=1

[fareastwarriors]

Tepper was being a douche. Interesting to get his thoughts though.

 

I liked it. hahaha

[giofranchi]

PlanMaestro,

thank you very much for posting this: a lot of food for thought!

If I have understood properly what Mr. Tepper is saying, he believes the stock market is cheap, because of all the money the Fed is going on printing, and because it is keeping interest rates at zero.

 

Now, let’s go back a second to Sir John Templeton’s “Yale Plan”: the variations he advised to a typical 60 percent program are summarized in the following table:

 

6th zone above stock market normal: 10% maximum in stocks

5th zone above stock market normal: 20% maximum in stocks

4th zone above stock market normal: 30% maximum in stocks

3rd zone above stock market normal: 40% maximum in stocks

2nd zone above stock market normal: 50% maximum in stocks

1st zone above stock market normal: 60% maximum in stocks

Stock market normal zone: No change necessary

1st zone below stock market normal: 60% minimum in stocks

2nd zone below stock market normal: 70% minimum in stocks

3rd zone below stock market normal: 80% minimum in stocks

4th zone below stock market normal: 90% minimum in stocks

5th zone below stock market normal: Fully invested in stocks

 

So, now let’s look at the graph in attachment: it seems that right now the valuation of the stock market is in its 80th percentile. Which is like saying the stock market right now is in the 4th zone above a normal valuation: 30% maximum in stocks. At least that’s what history suggests.

 

Of course, it might be possible the Fed will succeed in making history irrelevant. But it surely takes Mr. Tepper, a much better investor than I am, to make such a call! It is extremely difficult for lesser investors, like myself, to play the Fed game and, in doing so, muster the confidence to disregard history! I think the “Yale Plan” is simple, straightforward, actionable, and will ultimately lead to at least a moderate amount of success. Instead, playing the Fed game is fraught with difficulties and uncertainties, even if it might give you the chance to book much larger profits.

 

I really would like to know what you think about this.

Thank you again,

 

giofranchi

[original mungerville]

I agree with your concept completely giofranchi - following the Fed will feel good until it doesn't.

 

The only adjustment I would make is that we are currently much closer to the 1929 peak in terms of valuations then that graph suggests. In the past century or more the following were the major peaks for the US stock market:

 

1. year 2000 by far the highest valuations

2. 1929

3. 2007

4. Right now

5. Sometime in the 1960s (I think)

 

In the last 12 years, we have had 3 of the top 5 highest valuations in US stock market history - due mainly to Fed policies. I think the Shiller 10-year P/E underestimates the severity of the over-valuation present in today's market. A better approach might be to compare the US stock market to GDP (as Buffett did in Fortune in both 1999 and 2000, and as Watsa did as well in this decade, along with Grantham) which demonstrates the more important level of over-valuation.

 

Having said all that, Tepper may be tactically correct for 2013. In the long-term, these levels of valuation are definitely not attractive. We could easily see US stocks at the same levels (or lower) in real terms 5 years from now. 

[original mungerville]

Tepper's point is valid that it may be a bit stupid to ignore the stimulus of $1 trillion in asset purchases in 2013, and another trillion in 2014 and another in 2015 - especially given similar policies in the EU and apparently Japan now. Also, he is saying relative to government bonds, stocks aren't that bad. I would add, high-quality stocks relative to stocks aren't that bad either.

 

So stocks are high, but the new safe haven may be high-quality stocks rather than gov't bonds (eg, in Spain the company which owns Zaras is viewed as a safe-haven investment, as much as or more so than government bonds - this could also happen with high-quality US stocks.)

[giofranchi]

Tepper's point is valid that it may be a bit stupid to ignore the stimulus of $1 trillion in asset purchases in 2013, and another trillion in 2014 and another in 2015 - especially given similar policies in the EU and apparently Japan now. Also, he is saying relative to government bonds, stocks aren't that bad. I would add, high-quality stocks relative to stocks aren't that bad either.

 

So stocks are high, but the new safe haven may be high-quality stocks rather than gov't bonds (eg, in Spain the company which owns Zaras is viewed as a safe-haven investment, as much as or more so than government bonds - this could also happen with high-quality US stocks.)

 

I am completely out of bonds right now. And I am 70% invested in high-quality stocks. Much more than the “Yale Plan” would suggest to be safe at the prevailing market valuations. The reason is that I also keep 8% in gold, and 22% shorting low-quality, cyclical stocks. My own adaptation of an hypothetical 30% stocks 70% bonds portfolio, in the age of “The Great Moderation”, is a long/short strategy. Results will be very lumpy, I know, and in the short run (2013) I clearly run the risk to lose money. But I really cannot get comfortable with any other strategy…

 

giofranchi

[original mungerville]

I too am applying the same strategy - I use options for asymmetry but they are costly and can lead to even bigger lumps over time!

[PlanMaestro]

It's an economy with tailwinds: housing and autos. – Tepper.

 

Gio, that's the key quote, and it's something that people that read CalculatedRisk and follow those sectors know too well. And when he explodes to the commentators at some point, saying that the FED is really helping to get those sectors moving, he is stating the obvious if you forget philosophy and just read the data.

 

Regarding QE affecting valuations, probably Tepper is just talking his book. I just know that we, the Corner of Berkshire and Fairfax board, are finding really cheap stuff in several sectors that would benefit greatly from a reversion to the mean in housing and autos.

 

Sometimes is obvious.

[bmichaud]

Tepper was being a douche. Interesting to get his thoughts though.

 

I liked it. hahaha

 

hahahah he was hilarious!! loved his jabs about them talking and not listening...

[enoch01]

It's an economy with tailwinds: housing and autos. – Tepper.

 

Gio, that's the key quote, and it's something that people that read CalculatedRisk and follow those sectors know too well. And when he explodes to the commentators at some point, saying that the FED is really helping to get those sectors moving, he is stating the obvious if you forget philosophy and just read the data.

 

Regarding QE affecting valuations, probably Tepper is just talking his book. I just know that we, the Corner of Berkshire and Fairfax board, are finding really cheap stuff in several sectors that would benefit greatly from a reversion to the mean in housing and autos.

 

Sometimes is obvious.

 

And sometimes the obvious needs to be bolded  :)

[ShahKhezri]

I had a buddy who subscribes to Fleckenstein send me this about a week ago, Fleck has two contributors Mr. Skin and LODM (Lord of Dark Matter), humor aside, Skin wrote something really interesting:

 

The LODM had excellent advice for ANY player in ANY market. When I was running OPM, our basic philosophy contained the Buffet concept of "cash as a call option". We often went to 75-100% cash when it seemed like trouble ahead (late 1972, summer 1987, etc.) However, we had very little complaint from clients because in those days (before indexing and consultants), clients were well aware of downside risks PLUS "cash" paid very well when "sitting there" (honest interest rates). AND, we had a top 1% "performance ranking over 5, 10, and 20 year periods so we were able to "get away with it".

 

As consultants came on the scene, with their arcane "models" and idiotic "advice" (many consultants were failed investors) they pushed the idea of benchmark measures of "success". Then, over time, terrified so-called "Professional Investors" (fearful of losing AUM) started hugging their benchmarks and buying into the idea that "cash is trash". That view of "cash" has always been pushed by brokers and others who derive no commission from "idle cash". Therefore, much of the investing public is constantly pressured to "do something - do anything" to avoid holding "idle cash".

 

The tragic irony of the "cash is trash" propaganda in today's markets is the fact that millions of formerly responsible investors are being deliberately pushed out on the risk curve. This includes the much abused Baby Boomers trying to retire, the ignored and maligned retirees having their CDs obliterated, the pension funds struggling with their actuarial assumptions, the insurance companies jacking rates to offset the repressed returns from traditional fixed income securities, etc. I just hope that one day, the lunacy and corrupt, arrogant monetary policies over the last 20 years will find their correct and rightful place in history. When that judgement day arrives, "cash" will no longer be viewed as "trash".

 

Point is, if you're not managing OPM, you can be fearful, max cash and that's fine.  You don't have a mandate.  Tepper used the word relative quite a bit...he's smart.  Relative to cash at 0%, a lot of things look cheap.  But, relative to cash with "honest" interest rates, not so much.

[giofranchi]

It's an economy with tailwinds: housing and autos. – Tepper.

 

Gio, that's the key quote, and it's something that people that read CalculatedRisk and follow those sectors know too well. And when he explodes to the commentators at some point, saying that the FED is really helping to get those sectors moving, he is stating the obvious if you forget philosophy and just read the data.

 

Regarding QE affecting valuations, probably Tepper is just talking his book. I just know that we, the Corner of Berkshire and Fairfax board, are finding really cheap stuff in several sectors that would benefit greatly from a reversion to the mean in housing and autos.

 

Sometimes is obvious.

 

And sometimes the obvious needs to be bolded  :)

 

Well, my firm already operates in the housing sector… I don’t want to invest there! Guess then I will have to look at the auto sector…  ;)

Thank you PlanMaestro and enoch01!

 

giofranchi

[giofranchi]

I had a buddy who subscribes to Fleckenstein send me this about a week ago, Fleck has two contributors Mr. Skin and LODM (Lord of Dark Matter), humor aside, Skin wrote something really interesting:

 

The LODM had excellent advice for ANY player in ANY market. When I was running OPM, our basic philosophy contained the Buffet concept of "cash as a call option". We often went to 75-100% cash when it seemed like trouble ahead (late 1972, summer 1987, etc.) However, we had very little complaint from clients because in those days (before indexing and consultants), clients were well aware of downside risks PLUS "cash" paid very well when "sitting there" (honest interest rates). AND, we had a top 1% "performance ranking over 5, 10, and 20 year periods so we were able to "get away with it".

 

As consultants came on the scene, with their arcane "models" and idiotic "advice" (many consultants were failed investors) they pushed the idea of benchmark measures of "success". Then, over time, terrified so-called "Professional Investors" (fearful of losing AUM) started hugging their benchmarks and buying into the idea that "cash is trash". That view of "cash" has always been pushed by brokers and others who derive no commission from "idle cash". Therefore, much of the investing public is constantly pressured to "do something - do anything" to avoid holding "idle cash".

 

The tragic irony of the "cash is trash" propaganda in today's markets is the fact that millions of formerly responsible investors are being deliberately pushed out on the risk curve. This includes the much abused Baby Boomers trying to retire, the ignored and maligned retirees having their CDs obliterated, the pension funds struggling with their actuarial assumptions, the insurance companies jacking rates to offset the repressed returns from traditional fixed income securities, etc. I just hope that one day, the lunacy and corrupt, arrogant monetary policies over the last 20 years will find their correct and rightful place in history. When that judgement day arrives, "cash" will no longer be viewed as "trash".

 

Point is, if you're not managing OPM, you can be fearful, max cash and that's fine.  You don't have a mandate.  Tepper used the word relative quite a bit...he's smart.  Relative to cash at 0%, a lot of things look cheap.  But, relative to cash with "honest" interest rates, not so much.

 

Thank you for posting this: very interesting!

 

giofranchi

[Guest rimm_never_sleeps]

I had a buddy who subscribes to Fleckenstein send me this about a week ago, Fleck has two contributors Mr. Skin and LODM (Lord of Dark Matter), humor aside, Skin wrote something really interesting:

 

The LODM had excellent advice for ANY player in ANY market. When I was running OPM, our basic philosophy contained the Buffet concept of "cash as a call option". We often went to 75-100% cash when it seemed like trouble ahead (late 1972, summer 1987, etc.) However, we had very little complaint from clients because in those days (before indexing and consultants), clients were well aware of downside risks PLUS "cash" paid very well when "sitting there" (honest interest rates). AND, we had a top 1% "performance ranking over 5, 10, and 20 year periods so we were able to "get away with it".

 

As consultants came on the scene, with their arcane "models" and idiotic "advice" (many consultants were failed investors) they pushed the idea of benchmark measures of "success". Then, over time, terrified so-called "Professional Investors" (fearful of losing AUM) started hugging their benchmarks and buying into the idea that "cash is trash". That view of "cash" has always been pushed by brokers and others who derive no commission from "idle cash". Therefore, much of the investing public is constantly pressured to "do something - do anything" to avoid holding "idle cash".

 

The tragic irony of the "cash is trash" propaganda in today's markets is the fact that millions of formerly responsible investors are being deliberately pushed out on the risk curve. This includes the much abused Baby Boomers trying to retire, the ignored and maligned retirees having their CDs obliterated, the pension funds struggling with their actuarial assumptions, the insurance companies jacking rates to offset the repressed returns from traditional fixed income securities, etc. I just hope that one day, the lunacy and corrupt, arrogant monetary policies over the last 20 years will find their correct and rightful place in history. When that judgement day arrives, "cash" will no longer be viewed as "trash".

 

Point is, if you're not managing OPM, you can be fearful, max cash and that's fine.  You don't have a mandate.  Tepper used the word relative quite a bit...he's smart.  Relative to cash at 0%, a lot of things look cheap.  But, relative to cash with "honest" interest rates, not so much.

 

valid for bullish mutual fund managers but not for guys like tepper. tepper does go to cash and often. and he can short. so he is managing lots of OPM and he goes to cash regularly and hedges his longs.

[giofranchi]

It's an economy with tailwinds: housing and autos. – Tepper.

 

Gio, that's the key quote, and it's something that people that read CalculatedRisk and follow those sectors know too well. And when he explodes to the commentators at some point, saying that the FED is really helping to get those sectors moving, he is stating the obvious if you forget philosophy and just read the data.

 

Regarding QE affecting valuations, probably Tepper is just talking his book. I just know that we, the Corner of Berkshire and Fairfax board, are finding really cheap stuff in several sectors that would benefit greatly from a reversion to the mean in housing and autos.

 

Sometimes is obvious.

 

And sometimes the obvious needs to be bolded  :)

 

You invest whenever you find a stock that’s selling 1/3 less your estimate of intrinsic value. And you say: “I don’t care about the macro. I ignore the macro.” You ignore what I call “the temperature” of the market. Then you are kind of acting as if the world is always the same. And the desirability of making investments is always the same. But the world changes radically, and sometimes the investing world is highly hospitable, when prices are depressed, and sometimes it is very hostile, when prices are elevated. And, I guess what you are saying is “well, we just look at the micro, we look at one stock at the time, and we buy whenever they are cheap”, and I cannot argue with that. On the other hand, it is much easier to make money, when the world is depressed, because when it stops being depressed, it is like a compressed spring that comes back. So, if you buy a cheap stock, when the market is high… it’s a challenge! Because, if market being high is followed by a general decline in prices, then for you to make money in your cheap stock, you have to swim against the tide. If you buy when the market is low, and that lowness is going to be corrected by a general inflation, then you and your cheap stock have the tailwinds in your favour. So, I think it is unrealistic and, maybe, hubristic to say: “I don’t care what’s going on in the world, I know a cheap stock when I see one.” And, if you don’t follow the pendulum, and understand its cycle, then that implies you always invest as much money as aggressively. That doesn’t make any sense to me. I have been around too long to think that a good investment is always equally good all the times, regardless of the climate.

- Howard Marks

 

If the market being high is followed by a general decline in prices, do you still believe the rebound in the housing and auto sectors will be unaffected?

 

giofranchi

[racemize]

It's an economy with tailwinds: housing and autos. – Tepper.

 

Gio, that's the key quote, and it's something that people that read CalculatedRisk and follow those sectors know too well. And when he explodes to the commentators at some point, saying that the FED is really helping to get those sectors moving, he is stating the obvious if you forget philosophy and just read the data.

 

Regarding QE affecting valuations, probably Tepper is just talking his book. I just know that we, the Corner of Berkshire and Fairfax board, are finding really cheap stuff in several sectors that would benefit greatly from a reversion to the mean in housing and autos.

 

Sometimes is obvious.

 

And sometimes the obvious needs to be bolded  :)

 

You invest whenever you find a stock that’s selling 1/3 less your estimate of intrinsic value. And you say: “I don’t care about the macro. I ignore the macro.” You ignore what I call “the temperature” of the market. Then you are kind of acting as if the world is always the same. And the desirability of making investments is always the same. But the world changes radically, and sometimes the investing world is highly hospitable, when prices are depressed, and sometimes it is very hostile, when prices are elevated. And, I guess what you are saying is “well, we just look at the micro, we look at one stock at the time, and we buy whenever they are cheap”, and I cannot argue with that. On the other hand, it is much easier to make money, when the world is depressed, because when it stops being depressed, it is like a compressed spring that comes back. So, if you buy a cheap stock, when the market is high… it’s a challenge! Because, if market being high is followed by a general decline in prices, then for you to make money in your cheap stock, you have to swim against the tide. If you buy when the market is low, and that lowness is going to be corrected by a general inflation, then you and your cheap stock have the tailwinds in your favour. So, I think it is unrealistic and, maybe, hubristic to say: “I don’t care what’s going on in the world, I know a cheap stock when I see one.” And, if you don’t follow the pendulum, and understand its cycle, then that implies you always invest as much money as aggressively. That doesn’t make any sense to me. I have been around too long to think that a good investment is always equally good all the times, regardless of the climate.

- Howard Marks

 

If the market being high is followed by a general decline in prices, do you still believe the rebound in the housing and auto sectors will be unaffected?

 

giofranchi

 

I would also point out that Marks has described the current market as neither high nor low. In any case, I have cash incoming for any drops in market prices, so I can be full in without too much of a concern for them.

[giofranchi]

I would also point out that Marks has described the current market as neither high nor low. In any case, I have cash incoming for any drops in market prices, so I can be full in without too much of a concern for them.

 

What kind of entity tricks its citizens into paying higher and higher prices to buy stocks?

 

The Baupost Group on the morality of the Fed

 

Fortunately, my firm also generates fcf that I can go on investing, whatever happens to the stock market. But, its yearly fcf is just 12% to 15% the capital I have invested in the stock market. I believe my firm’s investments will do significantly better than the market, should any correction come. But a 30% decline in general prices would anyway mean that the fcf generated by the work and efforts of an entire year will be wiped out… Not so sure my partners will enjoy the ride…

 

giofranchi

The_Baupost_Group_on_the_Fed.pdf

[enoch01]

It's an economy with tailwinds: housing and autos. – Tepper.

 

Gio, that's the key quote, and it's something that people that read CalculatedRisk and follow those sectors know too well. And when he explodes to the commentators at some point, saying that the FED is really helping to get those sectors moving, he is stating the obvious if you forget philosophy and just read the data.

 

Regarding QE affecting valuations, probably Tepper is just talking his book. I just know that we, the Corner of Berkshire and Fairfax board, are finding really cheap stuff in several sectors that would benefit greatly from a reversion to the mean in housing and autos.

 

Sometimes is obvious.

 

And sometimes the obvious needs to be bolded  :)

 

You invest whenever you find a stock that’s selling 1/3 less your estimate of intrinsic value. And you say: “I don’t care about the macro. I ignore the macro.” You ignore what I call “the temperature” of the market. Then you are kind of acting as if the world is always the same. And the desirability of making investments is always the same. But the world changes radically, and sometimes the investing world is highly hospitable, when prices are depressed, and sometimes it is very hostile, when prices are elevated. And, I guess what you are saying is “well, we just look at the micro, we look at one stock at the time, and we buy whenever they are cheap”, and I cannot argue with that. On the other hand, it is much easier to make money, when the world is depressed, because when it stops being depressed, it is like a compressed spring that comes back. So, if you buy a cheap stock, when the market is high… it’s a challenge! Because, if market being high is followed by a general decline in prices, then for you to make money in your cheap stock, you have to swim against the tide. If you buy when the market is low, and that lowness is going to be corrected by a general inflation, then you and your cheap stock have the tailwinds in your favour. So, I think it is unrealistic and, maybe, hubristic to say: “I don’t care what’s going on in the world, I know a cheap stock when I see one.” And, if you don’t follow the pendulum, and understand its cycle, then that implies you always invest as much money as aggressively. That doesn’t make any sense to me. I have been around too long to think that a good investment is always equally good all the times, regardless of the climate.

- Howard Marks

 

If the market being high is followed by a general decline in prices, do you still believe the rebound in the housing and auto sectors will be unaffected?

 

giofranchi

 

The Marks quote sounds great (I try not to miss what he writes), but then after you think about it for a while, it's really hard to know what to do with it.  For example:

 

How high is the market?  Too high?  Which market?

What is a general decline in prices?  Which prices?  Prices of everything?  Stocks?  Houses and autos?

What does it mean to say "unaffected"?

 

Now I agree that, probably, it is easier to make money when you find a really cheap stock when the overall market happens to be cheap too.

 

So maybe you are recommending to wait for:

(1)  A certain really cheap stock

(2)  A cheap overall market

Both (1) and (2) = great returns

 

But what about:

Either (1) or (2) = good returns

 

There's nothing wrong with focusing on (1), and letting (2) be an extra kicker, especially when you haven't the foggiest idea when or if you will get (1) and (2) together.

 

[giofranchi]

The Marks quote sounds great (I try not to miss what he writes), but then after you think about it for a while, it's really hard to know what to do with it.  For example:

 

How high is the market?  Too high?  Which market?

What is a general decline in prices?  Which prices?  Prices of everything?  Stocks?  Houses and autos?

What does it mean to say "unaffected"?

 

Now I agree that, probably, it is easier to make money when you find a really cheap stock when the overall market happens to be cheap too.

 

So maybe you are recommending to wait for:

(1)  A certain really cheap stock

(2)  A cheap overall market

Both (1) and (2) = great returns

 

But what about:

Either (1) or (2) = good returns

 

There's nothing wrong with focusing on (1), and letting (2) be an extra kicker, especially when you haven't the foggiest idea when or if you will get (1) and (2) together.

 

enoch01,

I agree with you! And I am always in the stock market! It is just that I am not always 100% in it with my firm’s capital. As I have already written in this thread, Sir John Templeton’s “Yale Plan” still makes a lot of sense to me. And it is a very easy and actionable way to “follow the pendulum”, like Mr. Marks is used to saying.

First, I want to know how much stock market exposure is reasonable and safe, then, with the capital I have decided to keep invested in the stock market, I look for bargains.

Furthermore, I do not believe only in the extremes. Anyone who has studied Sir John Templeton knows he advocated a gradual shift from stocks to bonds + cash, when general stock prices were increasing, and a gradual shift from bonds + cash to stocks, when general stock prices were declining. Because he never believed a second neither in speculation nor in forecasting.

 

giofranchi

[racemize]

This appears to be the excerpt from Templeton regarding the Yale Plan (Gio correct me, if not):

 

In simplest terms, the “balance” of the investment fund is shifted gradually step-by-step away from stocks and into bonds when the stock market rises and then subsequently back from bonds into stocks when the market declines. The result is a moderate growth in the invested funds over each completed market cycle, without the need for any predictions of trends or turning points. An investment plan incorporating these principles assures you that you will be ready and able to buy stocks in periods of gloom when others are selling and that you will be selling when prices are reaching new high levels and optimism abounds.

 

This of course seems the right thing to do, but properly identifying the rise and fall seems hard to do.  I tend to think Marks guidance is the most useful for this, and as I said above, each time he's been asked in the last few years, he's said, "neither too optimistic or too pessimistic", or something along those lines.  I tend to think that ignoring the macro is the thing to do, unless it is in the extremes (very high or low/very low)--if it is in the middle, stick with micro!

[giofranchi]

This appears to be the excerpt from Templeton regarding the Yale Plan (Gio correct me, if not):

 

In simplest terms, the “balance” of the investment fund is shifted gradually step-by-step away from stocks and into bonds when the stock market rises and then subsequently back from bonds into stocks when the market declines. The result is a moderate growth in the invested funds over each completed market cycle, without the need for any predictions of trends or turning points. An investment plan incorporating these principles assures you that you will be ready and able to buy stocks in periods of gloom when others are selling and that you will be selling when prices are reaching new high levels and optimism abounds.

 

This of course seems the right thing to do, but properly identifying the rise and fall seems hard to do.  I tend to think Marks guidance is the most useful for this, and as I said above, each time he's been asked in the last few years, he's said, "neither too optimistic or too pessimistic", or something along those lines.  I tend to think that ignoring the macro is the thing to do, unless it is in the extremes (very high or low/very low)--if it is in the middle, stick with micro!

 

racemize,

let’s think for a moment at the history of debt super-cycles and where we are today. As the Keynesian Endpoint I posted in the Macro “Musing” thread shows (I think very well), the last time we were so close to the “Detonation Rate” was 1941. Mr. Watsa has repeated many times that the last comparable period in modern history, to the period we are living trough, are the ‘30s and the ‘40s in America (or the ‘90s in Japan). Now, if you read “The Great Depression, A Diary”, you will find that almost nobody got the 1937 “extreme” right, probably because the 1937 extreme was way below the 1929 extreme. And on a 10-year cyclical-adjusted P/E basis the 1937 extreme was exactly where we find ourselves today!

I don’t mean to say the stock market will decline in 2013. Actually, I don’t believe that! Instead, it will probably still go up, like Mr. Tepper believes! Maybe a lot!

What, on the other hand, I want to say is that to get only the extremes right is very much difficult. Sir John Templeton didn’t believe he was able to do that. Remember Mr. Graham who has said: “anyone who wasn’t defensively positioned by 1925 would have been wiped out during the 1929 crash!”. Or something like that…

Mr. John Hussman keeps saying the market is in the worst 1% or 2% of all weekly observations in a century of data. Mr. Jeremy Grantham forecasts no return for US large caps and a negative return for US small caps for the next seven years… who really knows if we will get the chance to see even more extreme valuations?

Remember 1968: valuations were not much higher than they are right now, S&P Composite P/E10 of 24 vs. a P/E10 of 22 today. And we know that on an inflation adjusted basis the market declined 63% from 1968 to 1982.

I think it is very risky to call both a top and a bottom. Adjusting gradually, you might forfeit some gains, no doubt about that! But I think it is much easier and less risky to do.

 

giofranchi

 

[rjstc]

I would also point out that Marks has described the current market as neither high nor low. In any case, I have cash incoming for any drops in market prices, so I can be full in without too much of a concern for them.

 

What kind of entity tricks its citizens into paying higher and higher prices to buy stocks?

 

The Baupost Group on the morality of the Fed

 

Fortunately, my firm also generates fcf that I can go on investing, whatever happens to the stock market. But, its yearly fcf is just 12% to 15% the capital I have invested in the stock market. I believe my firm’s investments will do significantly better than the market, should any correction come. But a 30% decline in general prices would anyway mean that the fcf generated by the work and efforts of an entire year will be wiped out… Not so sure my partners will enjoy the ride…

 

giofranchi

 

And yet that would be the perfect time to add to your positions. I think a perfect example to point out to your partners is as bad as it was a few years ago look what a buying opportunity it also turned out to be if you had cash available. Are the partners family or private investors? Sophisticated or not?