I Worry About "The Shot Heard Around The World"

[Kraven]

Isn't one of the long standing rules if investing that you can either predict what or when something will happen....but not both? Why should we care when?

 

Because a prediction without some kind of timing parameters is virtually worthless.  Think of these predictions:  there will be another world war; someone you know will die; humans will walk on Mars; beam me up Scotty won't just be a line from Star Trek.  Is it really a prediction to say sometime in the future these things will occur?  Yes, the market will fall, but it will also rise.  What about a prediction that the market will go up some year 50%?  Is that a valid prediction if it occurs in 2019?

 

I stand by my earlier post.  If someone thinks we are going to crash imminently they should sell what they own right now and wait for the better prices that are right around the corner.  Sell it all.  I don't understand hanging on to BRK, FFH, MKL, etc.  They will all fall too, likely around the same amount or more than the market as a whole. 

[Parsad]

For all you budding Elaine Garzarelli's out there, tell us when the market will crash within one week of your prediction - and do it twice in a row - and I will be impressed.  The rest, to borrow a line from the one of the classic films of the past 30 years, Road House, is like putting an elevator in an outhouse.  It don't belong.

 

LOL!  Kraven, if you think Road House is a classic film, then that would make Footloose the 80's "Singin' in the Rain!"  Glad you invest and don't produce films!  ;D  Cheers!

[Kraven]

For all you budding Elaine Garzarelli's out there, tell us when the market will crash within one week of your prediction - and do it twice in a row - and I will be impressed.  The rest, to borrow a line from the one of the classic films of the past 30 years, Road House, is like putting an elevator in an outhouse.  It don't belong.

 

LOL!  Kraven, if you think Road House is a classic film, then that would make Footloose the 80's "Singin' in the Rain!"  Glad you invest and don't produce films!  ;D  Cheers!

 

No need to insult me. Everyone is quite aware that the 80s Singin in the Rain is either Grease 2 (with a young Michele Pfeiffer) or Staying Alive (which was essentially Saturday Night Fever 2 and had the added bonus of having Frank Stallone, Sly's brother in a starring role alongside John Travolta).

[bmichaud]

If the market was trading at 10x earnings with bargains coming out of our ears, then you easily could say there is a good chance of a 50% rise sometime in the future....but you just don't know when.

 

You logic is like saying it is dumb to short a stock that is 100% overvalued and likely to stop at least 50% within a reasonable period of time....or likewise it is dumb to buy baC at $5 because you don't know when it may return 100%....

[vinod1]

Because a prediction without some kind of timing parameters is virtually worthless.  Think of these predictions:  there will be another world war; someone you know will die; humans will walk on Mars; beam me up Scotty won't just be a line from Star Trek.  Is it really a prediction to say sometime in the future these things will occur?  Yes, the market will fall, but it will also rise.  What about a prediction that the market will go up some year 50%?  Is that a valid prediction if it occurs in 2019?

 

I stand by my earlier post.  If someone thinks we are going to crash imminently they should sell what they own right now and wait for the better prices that are right around the corner.  Sell it all.  I don't understand hanging on to BRK, FFH, MKL, etc.  They will all fall too, likely around the same amount or more than the market as a whole.

 

The way I see it is that it not a prediction as much as being aware of the environment you are in. We know there are times when it is more dangerous to drive a car, like when there is severe freezing snow. We do not know for certain we would get into an accident, but we know that the chances of getting into an accident is much higher when driving in freezing snow than when driving on a bright sunny day with low traffic. We would drive much more carefully and more slowly (20 MPH instead of 60 MPH).

 

Being aware of the various valuation measures is just similar. We know we are in a much more dangerous territory and we approach investments much more cautiously. Each of us have different tolerances for risk and choose to hedge/reduce allocation, etc at different levels of the valuation measures. I have chosen to position my portfolio very defensively when S&P 500 is around 1600. I have no strong particular view of how the market would behave going forward, just that we have entered a territory where the medieval cartographers used to mark as "Here be dragons".

 

Vinod

[ubuy2wron]

When the mkt was obviously undervalued  (to me) in the fall of 2008 and the winter of 2009 there was a consensus here that the mkt was cheap, the concern was however that it may or could get cheaper. I see a similar dilemna today the consensus which is by no means universal is that the mkt is not so cheap, the concern however which is correctly expressed is that it may get even less not cheap. This is ALWAYS the dilemna for anyone placing any overall valuation overlay on their portfolio management.

[merkhet]

be careful

 

http://www.sec.gov/Archives/edgar/data/1549575/000154692713000077/dalalstreet132013q1v3.txt

 

it looks like he has swap GM common for GM warrants

 

which is something that i done a little while ago

 

GM'B warrant is a long long term option, it a better way to leverage your GM shares, most of my GM investment are in warrants

 

EDIT: GM is pabari's second largest holding by value

 

Pabrai raising cash as well?  He sold GM last quarter.

 

http://www.dataroma.com/m/holdings.php?m=PI

 

I'd like to point something out -- and I'd like to state at the outset that it's not directed at jay21 or anyone in particular, it's just that jay21's comment made me reflect on something.  When the dataroma listing for Pabrai popped up, and we saw that GM had been completely sold, there were a number of things that could have happened:

 

(1) Pabrai is raising cash

(2) Pabrai recognized something wrong with his investment

(3) Pabrai believed GM was at fair value in the $30s

(4) Pabrai switched GM for GM warrants

(5) etc. etc.

 

I think that a given individual's pre-disposition might inform their choice on how they would interpret the action given the lack of guidance on the real underlying reason.  Our brains like to fill in the holes in the absence of anything concrete -- and they naturally fill in those holes given our overarching world views.

 

jay21 immediately went to the thought that Pabrai might be raising cash.

I started wondering whether Pabrai saw something that I didn't see in GM, because I think it's very cheap.

 

Just an interesting (to me) observation.

[giofranchi]

To your point txitxo -

 

Given the similarities between: the 1929 and 2007 credit-induced peaks, the deflation-induced 2007-2009 and 1929-1933 declines, and the debasement-induced 1933-1927 and 2009-2013 rallies, the 1937 peak appears to be a very relevant comp to the current period.

 

1937/2013: Schiller PE well over 20 with interest rates at multi-year lows and falling.

 

Schiller PE falls from well over 20 to around 15X in 1940 where interest rates bottomed at around 1.90%. Interest rates begin a multi-decade climb in 1940, but the market falls to under 10X, back up to 15X, then back under 10X in 1950 before initiating a huge secular bull run.

 

Would not at all be a surprise to see the 10-year rate bottom below current levels, given the massive amount of debt still outstanding (see the chart attached - yes there is a clear step up in the ratio, but the post-1929 deleveraging went on far longer than the current cycle).

 

We shall see if this time is truly different  8)

 

Hi bmichaud,

in your historical analysis you just forgot to mention that going from 1937 to 1949 we had to endure one of the bloodiest war in human history… Will we behave in a wiser manner this time? I really hope this time is different! Let’s pray it is so.

 

giofranchi

[giofranchi]

I stand by my earlier post.  If someone thinks we are going to crash imminently they should sell what they own right now and wait for the better prices that are right around the corner.  Sell it all.  I don't understand hanging on to BRK, FFH, MKL, etc.  They will all fall too, likely around the same amount or more than the market as a whole.

 

Kraven,

my point of view is different: I am always invested in productive businesses, I just try to “adjust” my defensiveness / aggressiveness according to the “climate” or the “pendulum”, paraphrasing Mr. Marks. The operating activities of the businesses my firm controls keep generating some cash: do I put it to work immediately, or do I wait for better opportunities? It depends basically on two things:

1) Do I see great bargains today?

2) How is the “climate” or the “pendulum”?

I just try to answer those two questions and act accordingly. That doesn’t mean I am out of business… as long as I can prevent it, I will never be out of business! ;D

 

Furthermore, I don’t understand why a lot of people think FFH stock price will decline with the market, if a correction comes… It is true that FFH stock price fell from January to March 2009, yet it is also true that FFH stock price appreciated +36% in 2008, while the market tanked –37%… So, who really knows? What I know for sure, instead, is that FFH shareholders will benefit from a market correction like the shareholders of no other company. :)

 

giofranchi

 

[bmichaud]

To your point txitxo -

 

Given the similarities between: the 1929 and 2007 credit-induced peaks, the deflation-induced 2007-2009 and 1929-1933 declines, and the debasement-induced 1933-1927 and 2009-2013 rallies, the 1937 peak appears to be a very relevant comp to the current period.

 

1937/2013: Schiller PE well over 20 with interest rates at multi-year lows and falling.

 

Schiller PE falls from well over 20 to around 15X in 1940 where interest rates bottomed at around 1.90%. Interest rates begin a multi-decade climb in 1940, but the market falls to under 10X, back up to 15X, then back under 10X in 1950 before initiating a huge secular bull run.

 

Would not at all be a surprise to see the 10-year rate bottom below current levels, given the massive amount of debt still outstanding (see the chart attached - yes there is a clear step up in the ratio, but the post-1929 deleveraging went on far longer than the current cycle).

 

We shall see if this time is truly different  8)

 

Hi bmichaud,

in your historical analysis you just forgot to mention that going from 1937 to 1949 we had to endure one of the bloodiest war in human history… Will we behave in a wiser manner this time? I really hope this time is different! Let’s pray it is so.

 

giofranchi

 

True, though the market corrected hard in the two years leading up to the war - 1937 to 1939 - and remained low for five years afterward - 1945 to 1950.

[Kraven]

If the market was trading at 10x earnings with bargains coming out of our ears, then you easily could say there is a good chance of a 50% rise sometime in the future....but you just don't know when.

 

You logic is like saying it is dumb to short a stock that is 100% overvalued and likely to stop at least 50% within a reasonable period of time....or likewise it is dumb to buy baC at $5 because you don't know when it may return 100%....

 

You've missed my point entirely.  I am making no assertions about the market whatsoever.  My only point is that predictions themselves are inherently flawed.  It's one thing to attempt to position yourself based on whatever factors, macro or micro, one deems important.  It's another thing to say there WILL be an imminent crash.  Many on the board are doing the latter.

[Kraven]

Because a prediction without some kind of timing parameters is virtually worthless.  Think of these predictions:  there will be another world war; someone you know will die; humans will walk on Mars; beam me up Scotty won't just be a line from Star Trek.  Is it really a prediction to say sometime in the future these things will occur?  Yes, the market will fall, but it will also rise.  What about a prediction that the market will go up some year 50%?  Is that a valid prediction if it occurs in 2019?

 

I stand by my earlier post.  If someone thinks we are going to crash imminently they should sell what they own right now and wait for the better prices that are right around the corner.  Sell it all.  I don't understand hanging on to BRK, FFH, MKL, etc.  They will all fall too, likely around the same amount or more than the market as a whole.

 

The way I see it is that it not a prediction as much as being aware of the environment you are in. We know there are times when it is more dangerous to drive a car, like when there is severe freezing snow. We do not know for certain we would get into an accident, but we know that the chances of getting into an accident is much higher when driving in freezing snow than when driving on a bright sunny day with low traffic. We would drive much more carefully and more slowly (20 MPH instead of 60 MPH).

 

Being aware of the various valuation measures is just similar. We know we are in a much more dangerous territory and we approach investments much more cautiously. Each of us have different tolerances for risk and choose to hedge/reduce allocation, etc at different levels of the valuation measures. I have chosen to position my portfolio very defensively when S&P 500 is around 1600. I have no strong particular view of how the market would behave going forward, just that we have entered a territory where the medieval cartographers used to mark as "Here be dragons".

 

Vinod

 

Yes.  See the post I just made.  I have no problem with what you said.  The issue I see is that many appear to believe they are a value investor in Elaine Garzarelli's clothing.  That's it.

[bmichaud]

It's one thing to attempt to position yourself based on whatever factors, macro or micro, one deems important. It's another thing to say there WILL be an imminent crash.

 

I am not arguing for the sake of arguing, I am really trying to understand....

 

So based on the above, if one were to position ones' self based on micro and macro factors that he or she believes will lead to a 50% decline in the market - perhaps not imminently, but within a 3 year time frame - whether you agree or not on those factors, you would not have a problem with said positioning?

 

It appears you have more of a problem with a fact-lite prediction of an 'imminent' 50% correction, correct?

[Kraven]

It's one thing to attempt to position yourself based on whatever factors, macro or micro, one deems important. It's another thing to say there WILL be an imminent crash.

 

I am not arguing for the sake of arguing, I am really trying to understand....

 

So based on the above, if one were to position ones' self based on micro and macro factors that he or she believes will lead to a 50% decline in the market - perhaps not imminently, but within a 3 year time frame - whether you agree or not on those factors, you would not have a problem with said positioning?

 

It appears you have more of a problem with a fact-lite prediction of an 'imminent' 50% correction, correct?

 

Here are 2 different statements:

 

1.  How can anyone possibly invest right now given the high levels of profit margins, market cap to GNP, unrest in the Middle East, Japan blowing up any day now, etc.?  Further, if you look at a graph of the stock market it mirrors exactly what happened back in 1929!  Therefore, it is obvious that the market will crash very soon.

 

Or,

 

2.  Given that profit margins are at historic highs, the market cap to GNP is high, there is unrest in the Middle East, etc, it is prudent in my view to allocate funds in a more conservative manner.  It is not clear exactly what will happen - it never is - but all I can do is prepare myself in a way that makes sense to me.

 

The first is a prediction.  The second is not.  Any talk of how much we will decline in exact numbers is a prediction.  That's fine if someone wants to do that, but in order to be correct there has to be a time frame on it.  Otherwise, you know, broken clocks and all that.

[Uccmal]

To add to part 2 of Kravens argument.

 

S&p goes to 2200 in the next two years.

 

A 50 % correction occurs.  Down to 1100.  It stays that low for two months while those who are busy making macro calls sit on their hands.  FFH sells their hedges at a LOSS.  I buy GE, AXP, SBUX, AAPL, and JPM. 

 

Really, I have no idea but that is as likely as any scenario.  My guess is if you are sitting on 50% cash right now, you will still be sitting on 50% cash during, before, and after a meltdown. 

 

I sell my Leap positions into their respective rallies, in measured doses, and rebuy when things get cheap again. 

 

A.

[bmichaud]

It's one thing to attempt to position yourself based on whatever factors, macro or micro, one deems important. It's another thing to say there WILL be an imminent crash.

 

I am not arguing for the sake of arguing, I am really trying to understand....

 

So based on the above, if one were to position ones' self based on micro and macro factors that he or she believes will lead to a 50% decline in the market - perhaps not imminently, but within a 3 year time frame - whether you agree or not on those factors, you would not have a problem with said positioning?

 

It appears you have more of a problem with a fact-lite prediction of an 'imminent' 50% correction, correct?

 

Here are 2 different statements:

 

1.  How can anyone possibly invest right now given the high levels of profit margins, market cap to GNP, unrest in the Middle East, Japan blowing up any day now, etc.?  Further, if you look at a graph of the stock market it mirrors exactly what happened back in 1929!  Therefore, it is obvious that the market will crash very soon.

 

Or,

 

2.  Given that profit margins are at historic highs, the market cap to GNP is high, there is unrest in the Middle East, etc, it is prudent in my view to allocate funds in a more conservative manner.  It is not clear exactly what will happen - it never is - but all I can do is prepare myself in a way that makes sense to me.

 

The first is a prediction.  The second is not.  Any talk of how much we will decline in exact numbers is a prediction.  That's fine if someone wants to do that, but in order to be correct there has to be a time frame on it.  Otherwise, you know, broken clocks and all that.

 

Roger that - thanks!

[ourkid8]

Tepper Makes 'Overwhelming' Case For Markets....

 

http://finance.yahoo.com/video/tepper-makes-overwhelming-case-markets-124100765.html

[giofranchi]

Tepper Makes 'Overwhelming' Case For Markets....

 

http://finance.yahoo.com/video/tepper-makes-overwhelming-case-markets-124100765.html

 

Wow!! To hear Mr. Tepper's case for markets really makes me feel like I am being cautious and conservative at the worst time possible… basically, it makes me feel like a fool! :(

 

giofranchi

[Parsad]

Really, I have no idea but that is as likely as any scenario.  My guess is if you are sitting on 50% cash right now, you will still be sitting on 50% cash during, before, and after a meltdown.

 

I think it would depend on the investor.  I remember being over 40% cash before the downturn in 2008, yet I was one of the few people on here who was fully invested by October 2008, and then again by March 2009 after the brief rally in late 2008.  I've been invested in the markets for the last three years, but I think investor's are paying far too much for their stocks today. 

 

There are bulls and bears in every market, but my opinion is that one has to focus on the margin of safety in an investment, rather than be categorized as a bull or bear.  This market is making less and less rational sense to me as prices continue to rise.  We're still about 65% invested, but that number will continue to fall and fall if risk premiums continue to shrink.  And that opinion has nothing to do with Warren Buffett or Prem Watsa, because I don't really care what either do...you have to decide for yourself if your own analysis is correct, and if you can't find many undervalued stocks, that should tell you something.  Cheers! 

[Cardboard]

Tepper is talking his book as usual. He said very clearly in 2010 that QE would work. Well so far, it hasn't if you consider that growth remains very low. He also said very clearly at the time that a few QE's was fine, but not forever as it had been done in Japan. Now, he has invested massively in Japan and thinks that the current $85 billion a month of QE in the U.S. which is much bigger than it was in 2010 and which has no limit is just fine!

 

He just seems to go along with the momentum and to change his tune as things evolve. One thing that I agree with him is that QE should be curtailed because if not we will see a 2nd half of 1999 again.

 

Cardboard

 

 

[fareastwarriors]

Tepper Makes 'Overwhelming' Case For Markets....

 

http://finance.yahoo.com/video/tepper-makes-overwhelming-case-markets-124100765.html

 

Wow!! To hear Mr. Tepper's case for markets really makes me feel like I am being cautious and conservative at the worst time possible… basically, it makes me feel like a fool! :(

 

giofranchi

 

He can trade in and out at any time. He's not really a traditional value buy/hold type.  He has a different style of play goign here.

[HJ]

Tepper Makes 'Overwhelming' Case For Markets....

 

http://finance.yahoo.com/video/tepper-makes-overwhelming-case-markets-124100765.html

 

Wow!! To hear Mr. Tepper's case for markets really makes me feel like I am being cautious and conservative at the worst time possible… basically, it makes me feel like a fool! :(

 

giofranchi

 

He can trade in and out at any time. He's not really a traditional value buy/hold type.  He has a different style of play goign here.

 

The big difference between him and the other CNBC guests is that he has a much closer look at corporate credits.  And from that window, he's exactly right.

[ERICOPOLY]

Tepper Makes 'Overwhelming' Case For Markets....

 

http://finance.yahoo.com/video/tepper-makes-overwhelming-case-markets-124100765.html

 

Maybe he shouldn't have sold his BAC when everyone panicked.

[Philip Morris IV]

This market is making less and less rational sense to me as prices continue to rise.  We're still about 65% invested, but that number will continue to fall and fall if risk premiums continue to shrink.  And that opinion has nothing to do with Warren Buffett or Prem Watsa, because I don't really care what either do...you have to decide for yourself if your own analysis is correct, and if you can't find many undervalued stocks, that should tell you something.  Cheers!

 

This part resonates with me.  I'm newer to this, but there's something about the availability of good opportunities that gives a vague feeling of pause vis-a-vis confidence.  At the end of last summer and going into October ('12), it seemed like there were plenty of options, and my problem was picking the best out of this handful.  For the past several months however, my problem has been finding options!  Back in the Fall, I put many stocks on my watchlist in the hopes they would get cheaper and make for good opportunities in the future.  8 months later, they're almost all up - some dramatically.  Bye-bye MoS.

 

Like you said, not to be bearish/bullish, but with my bargain bin dry, my gut says to sit around.

[Yours Truly]

Tepper Makes 'Overwhelming' Case For Markets....

 

http://finance.yahoo.com/video/tepper-makes-overwhelming-case-markets-124100765.html

 

Maybe he shouldn't have sold his BAC when everyone panicked.

 

I think in his case it's okay since he picked near the absolute bottom for the financials.. he probably sold due to other opportunities imo