Secular Bull?

[giofranchi]

bmichaud,

how does the reasoning about “bubble talk” fit with the picture in attachment?

It seems to me there is not much buying power still left unused…

 

Gio

[Packer16]

Sentiment does not tell you if there is pent-up demand.  It tells you short-term oversold/overbought conditions.  The % of investors assets in cash is a better measure of pent up demand.  The interesting thing about this market is that wealthy folks know stocks provide the best returns and have allocated a good amount of stocks.  The middle class investor is missing from this market and can provide some pent up demand.

 

Packer

[giofranchi]

Sentiment does not tell you if there is pent-up demand.  It tells you short-term oversold/overbought conditions.  The % of investors assets in cash is a better measure of pent up demand.  The interesting thing about this market is that wealthy folks know stocks provide the best returns and have allocated a good amount of stocks.  The middle class investor is missing from this market and can provide some pent up demand.

 

Packer

 

Yes! But what you say is also true for the “bubble talk” bmichaud referred to, isn’t it? In other words, the “bubble talk” and the % of bears both are arguments about sentiment, aren’t they? Therefore, my question: why do they seem to point in such different directions?

 

Gio

 

[Packer16]

I think bubbles probably do not exist if it is the consensus.  That does not mean that there is a short term amount of over-confidence.  Confidence is very volatile (see AAII sentiment indicator) so I would rely more on other indications (fund flows, % allocation to cash and "bubble" talk for example) for longer term sentiment trends.

 

Packer

[giofranchi]

Confidence is very volatile

 

Well, despite volatility, the fact remains that % of bears has never been so low since the beginning of the picture I posted: 1990. We are not talking about fluctuations in confidence… People have never been this confident in the last 23 years! Even during the internet bubble % of bears was higher than it is today… So, I don’t see how the consensus could be “we are in a bubble” and at the same time people could be so much confident… Except, of course, that consensus is not “we are in a bubble”! ;)

 

Gio

 

[bmichaud]

http://mobile.bloomberg.com/video/appaloosa-s-tepper-says-stock-markets-not-in-bubble-xsuYVJ46Qu6E52XtN0tX6w.html

 

Tepper says nowhere near a bubble. Could see another 30% next year.

 

With Yellen at the fed head, conducting the easiest money policy in history, for the longest duration in history, could we not be setting ourselves up for the most epic bubble in history? Could we not get to 35x $100 earnings in a tech bubble-like market?

[Valuebo]

Gio, go read Everything is Obvious fast! ;) I think it's highly relevant to many of the questions that you/we are all having.

 

http://www.cornerofberkshireandfairfax.ca/forum/books/everything-is-obvious-duncan-j-watts/msg56452/#msg56452

[giofranchi]

Gio, go read Everything is Obvious fast! ;) I think it's highly relevant to many of the questions that you/we are all having.

 

http://www.cornerofberkshireandfairfax.ca/forum/books/everything-is-obvious-duncan-j-watts/msg56452/#msg56452

 

Thank you, tombgrt! I have just purchased the book! :)

 

Gio

[Packer16]

I think you need to be careful on sources. The investor intelligence numbers are based upon newsletter sentiment, an indirect measure at best.  The AAII poll is a more direct measure.

 

Packer

[giofranchi]

The AAII poll is a more direct measure.

 

Ok, thank you! Do you have a graph by AAII that goes back to the early ‘90s? Does it tell a very different story from the one by The Investor Intelligence? If so, can you post it, please?

 

Gio

 

[Edward]

I would go with Hugh Hendry's observation that we are nearing a profound "Market Clearing" event (i.e. another crash) a la 1932/1982. However he opines that following this event a secular bull market is bound to begin - at which point you don't need to be smart, you just need to be long.

 

Starting from minute 22: http://www.youtube.com/watch?v=ZrBxZDvrNHY

[giofranchi]

I would go with Hugh Hendry's observation that we are nearing a profound "Market Clearing" event (i.e. another crash) a la 1932/1982. However he opines that following this event a secular bull market is bound to begin - at which point you don't need to be smart, you just need to be long.

 

I tend to agree… yet, 41 to 46… who really knows?! ???

What I believe is that I will make money in both cases! ;D ;D ;D

 

Gio

 

[Edward]

What I believe is that I will make money in both cases! ;D ;D ;D

 

Gio

Same here :)

[enoch01]

What do you guys think of Peter Lynch's "cocktail" theory on whether the market is going down or up? When Lynch went to parties with his wife, he said that when the market was overvalued, the dentist or the school teacher at the party were telling him what stocks to buy and when it was undervalued, nobody wanted to talk to him because they already lost all their money in the market. Has anyone done this research at any of there family parties recently? Maybe with the holidays coming, we can all observe this at the parties we go to and report back in the new year.

 

What do you say?

 

I think it's very hard to take any action based on things like things like "cocktail theories".  These are the types of anecdotes and rationalizations that gets everyone to nod their head when they read the book that explains, after the fact, how or why such and such crashed.  These anecdotes fit nicely into the story, but are only loosely correlated with individual returns.

 

If I can tell that something is cheap, I should buy it.  If I can't, then I shouldn't.  After the next crash, I'll be sure to order the Michael Lewis book.

[Valuebo]

What do you guys think of Peter Lynch's "cocktail" theory on whether the market is going down or up? When Lynch went to parties with his wife, he said that when the market was overvalued, the dentist or the school teacher at the party were telling him what stocks to buy and when it was undervalued, nobody wanted to talk to him because they already lost all their money in the market. Has anyone done this research at any of there family parties recently? Maybe with the holidays coming, we can all observe this at the parties we go to and report back in the new year.

 

What do you say?

 

I think it's very hard to take any action based on things like things like "cocktail theories".  These are the types of anecdotes and rationalizations that gets everyone to nod their head when they read the book that explains, after the fact, how or why such and such crashed.  These anecdotes fit nicely into the story, but are only loosely correlated with individual returns.

 

If I can tell that something is cheap, I should buy it.  If I can't, then I shouldn't.  After the next crash, I'll be sure to order the Michael Lewis book.

 

;) +1 That's exactly why I recommended Gio to read 'Everything is Obvious". I've stopped reading "basic" investing books that basically rehash old wisdom. All you need is 1-2 good foundation books and then focus on books on behavioral finance, psychology, ...

[txitxo]

I would go with Hugh Hendry's observation that we are nearing a profound "Market Clearing" event (i.e. another crash) a la 1932/1982. However he opines that following this event a secular bull market is bound to begin - at which point you don't need to be smart, you just need to be long.

 

 

Well, Hugh Hendry has officially thrown the towel:

 

http://www.investmentweek.co.uk/investment-week/news/2308814/i-cant-look-at-myself-in-the-mirror-hendry-on-why-hes-turned-bullish

 

 

[txitxo]

;) +1 That's exactly why I recommended Gio to read 'Everything is Obvious". I've stopped reading "basic" investing books that basically rehash old wisdom. All you need is 1-2 good foundation books and then focus on books on behavioral finance, psychology, ...

 

  I gave a quick look at "Everything is Obvious", in particular the section where he talks about Bill Miller, and I think the analysis there is quite wrong...he seems to say that everything is very noisy and subject to chance and therefore we will never know what depends on luck and what on skill. He recommends studying how people do things everyday and not trusting quantitative measurements. That's the anti-"Moneyball" approach: if the player moves right, walks right, has the right face, etc. hire him and damn the statistics. That does not work in practice. Humans are too gullible without quantitative measures.

 

To fight randomness you have to devise measurements which are robust with respect to the noise, that's what scientists do all day long when planning  observations or experiments (and what value investors do when trying to estimate  intrinsic value). For instance in the case of Bill Miller the relevant statistics should not whether he beats the market 18 years straight (the odds of doing that by chance are 2^-18, about 1/262144; if you multiply that by the number of managers in the US, which is certainly at least 10,000, there is a 4% chance somebody will do it, which is not such a rare event), but something like e.g. his accumulated over-performance over that same 18 year period (which I seem to remember was not so outstanding).

 

[Guest]

I would go with Hugh Hendry's observation that we are nearing a profound "Market Clearing" event (i.e. another crash) a la 1932/1982. However he opines that following this event a secular bull market is bound to begin - at which point you don't need to be smart, you just need to be long.

 

 

Well, Hugh Hendry has officially thrown the towel:

 

http://www.investmentweek.co.uk/investment-week/news/2308814/i-cant-look-at-myself-in-the-mirror-hendry-on-why-hes-turned-bullish

 

I first heard of this guy last year. I think it's funny that these guys are bearish at lower prices...but are bullish now. Nice.

[Packer16]

Have any of you guys seen Jeremy Segal's rebuttal for the use of CAPE?  I saw it today at the CFA conference and it was pretty convincing.  The main issue is the use of reported S&P earning which include goodwill and asset write-downs over the past 10 years that were not included in the data before 10 years ago.  If you adjust the data for these reporting differences the CAPE is at or below its historic average.

 

Packer

[Guest]

Have any of you guys seen Jeremy Segal's rebuttal for the use of CAPE?  I saw it today at the CFA conference and it was pretty convincing.  The main issue is the use of reported S&P earning which include goodwill and asset write-downs over the past 10 years that were not included in the data before 10 years ago.  If you adjust the data for these reporting differences the CAPE is at or below its historic average.

 

Packer

 

I agree, Packer. His arguments make some sense to me, too. This is a bit more about what you're referring to, I think.

 

http://www.morningstar.com/cover/videocenter.aspx?id=610115

 

I'm cautious on anyone though when Munger says he is demented. haha

 

http://www.valuewalk.com/2012/02/charlie-munger-i-think-jeremy-siegel-is-demented/"

[ERICOPOLY]

Have any of you guys seen Jeremy Segal's rebuttal for the use of CAPE?  I saw it today at the CFA conference and it was pretty convincing.  The main issue is the use of reported S&P earning which include goodwill and asset write-downs over the past 10 years that were not included in the data before 10 years ago.  If you adjust the data for these reporting differences the CAPE is at or below its historic average.

 

Packer

 

I was satisfied with the argument that you don't buy stocks today for their earnings 10 years ago.  You buy them for the next ten years' and beyond.

[twacowfca]

;) +1 That's exactly why I recommended Gio to read 'Everything is Obvious". I've stopped reading "basic" investing books that basically rehash old wisdom. All you need is 1-2 good foundation books and then focus on books on behavioral finance, psychology, ...

 

  I gave a quick look at "Everything is Obvious", in particular the section where he talks about Bill Miller, and I think the analysis there is quite wrong...he seems to say that everything is very noisy and subject to chance and therefore we will never know what depends on luck and what on skill. He recommends studying how people do things everyday and not trusting quantitative measurements. That's the anti-"Moneyball" approach: if the player moves right, walks right, has the right face, etc. hire him and damn the statistics. That does not work in practice. Humans are too gullible without quantitative measures.

 

To fight randomness you have to devise measurements which are robust with respect to the noise, that's what scientists do all day long when planning  observations or experiments (and what value investors do when trying to estimate  intrinsic value). For instance in the case of Bill Miller the relevant statistics should not whether he beats the market 18 years straight (the odds of doing that by chance are 2^-18, about 1/262144; if you multiply that by the number of managers in the US, which is certainly at least 10,000, there is a 4% chance somebody will do it, which is not such a rare event), but something like e.g. his accumulated over-performance over that same 18 year period (which I seem to remember was not so outstanding).

 

Yup. He managed to keep just a little ahead of the market averages by being a basic , but not outstanding value investor while adding a few idiosyncratic positions with inflated present values that captured what the market was doing at the time.  As value investing tailed off in popularity in the late 90's his small number of tech favorites like AOL and Dell caught the wave and kept him above the S&P average while other value investors trailed the averages.  Then, with a little rebalancing reducing his tech exposure, the majority of value stocks in his portfolio caught the value surge post Y2K.

 

It was easy to see the writing on the wall predicting his demise as his idiosyncratic positions became crappy value traps like Kodak and Financials or cyclicals ready to go bust as the credit cycle ran out of gas and turned south.

[twacowfca]

Have any of you guys seen Jeremy Segal's rebuttal for the use of CAPE?  I saw it today at the CFA conference and it was pretty convincing.  The main issue is the use of reported S&P earning which include goodwill and asset write-downs over the past 10 years that were not included in the data before 10 years ago.  If you adjust the data for these reporting differences the CAPE is at or below its historic average.

 

Packer

 

I'm not a fan, but he's got a point.  A ten year look back at average inflation adjusted operating earnings doesn't 't look so alarming: a PE 10 of a little over 20, I think.

[hyten1]

one thing about reversion to the mean i always wonder.

 

how and when do you know the mean have change.

 

i understand people bash "this time is different", but it is a mean after all, and they can theoretically change. seems like you will only know it after the fact, which isn't very useful.

 

an example, average height of humans have change over time etc.

 

 

just a thought :)

 

 

[Packer16]

The other point he made is the historical average includes periods of high interest rates.  These rates acted as magnets whenever stocks got too expense as the opportunity cost of cash/bonds was low.  Now it is much lower and if you exclude periods where IR are greater than 8% then the average forward looking PE increases to 18.9 versus 15 now.  I think his point was that the talk of bubbles now is premature based upon valuation.

 

Packer