Down goes the Dow

Sally V wrote:

My comment is to be wary of anything written or endorsed by David Stockman. His résumé is littered with investment losses including some rather large ones.

I'm reading a biography of reagan - let's just say that Stockman comes off as a loose canon with zero common sense yet the zeal of a fanatic. He started the GOP down that nutty path of tax cuts and ever higher deficits.

as for pointing at the Q ratio and saying that it is the one metric you should pay attention to...I don't think that makes much sense. it's one ratio - at a true market bubble/peak, all the indicators flash bright red not just one or two.

I'll put this one in my calendar to check on at the end of the year, with a bunch of other forecasts that are almost always wrong.

here's one such doomsday prediction that came out dead wrong - may 2013, Roubini, predicting a market crash over the next two years.

didn't happen.

huh!

Instead of a crash, the US is up 36.4% since may 2013.

http://finance.yahoo.com/news/roubini-bubble-stocks-burst-2-174801212.html

"It could go on for another year or two," he said, speaking from the SALT Conference in Las Vegas.

"I see frothiness going to end up in nasty boom and bubble in asset prices, followed by crash and a bust, not this year, not next year, two years from now."

(Read More: Dow, S&P Hit New All-Time Highs )

On "Fast Money," Roubini cited a couple of factors: "Growth is slow. Earnings growth is also slowing down. Top line and bottom line are not as good as they used to be, but margins are high. They could correct somehow over time.

"But you have the gravitational forces of a slow economy leading eventually to correction, but then the levitational forces of QEs, zero policy rates, more money coming in the market, not just from the U.S. but other economies, is going to levitate asset prices."

(Read More: 'Cash Is Trash Right Now': Strategist )

Roubini said that those conditions could lead to "a generalized credit and equity and asset bubble next year or two, followed by a crash."

But, he added, "as long as the economy grows between 1½ to 2 percent and you have easy money, this market can go higher."

"It could go on for another year or two,"

Read more:

http://www.letsrun.com/forum/flat_read.php?thread=5369837&page=284#ixzz3dtQauz3M

This thread just shows that all that investors think they know is complete BS...you get it wrong, the experts get it wrong, and an expert who gets lucky and gets something right one time will get it wrong the next time. There really is only one proven reliable way to invest, and that involves making sure your financial house is in order in ALL ways.

1) Eliminate debt as quickly as you can other than a mortgage or a BIG student loan if you are going to be a doctor or lawyer or some other profession where you can quickly attack it one day. If you DON'T have that kind of earning power, then you should NOT have racked up big student loan debt.

2) Create an emergency fund. Initially put about $1,000 in there.

3) Invest 15% or more of your income into diversified mutual funds. Should have small cap, mid cap, large cap, and international in there. 20-25% should be international.

4) As you continue to invest, plan to retire only when you are 100% debt free including owning your house outright. If you do not own a house, you need to retire with enough money to account for rent increases for the remainder of your life.

5) In retirement, either increase bonds to 30-50% of your holdings OR have all invested money in stocks and have enough in cash, CDs, or some other liquid account to pay for three YEARS of expenses in case the stock market crashes.

Waiting for market crashes before investing and trying to time the market just does not work. The REASON you eliminate debt is not only so that ultimately you pay less money in interest, but also so that if the market tanks you can survive on very little money while you wait for the market to recover -- BECAUSE YOU DON'T HAVE LOTS OF MONEY THAT IS EARMARKED TO PAY DEBTORS EACH MONTH. Two retired people without extreme circumstances who have zero debt and live in a paid for house (as long as it doesn't have HUGE property taxes) can live pretty cheaply for an extended period of time if they need to while they wait for the market to recover.

What you say has been appropriate for many, in hindsight, and in hindsight only.

You are doing the exact same thing you excoriate others for doing. You said it best yourself:

"This thread just shows that all that investors think they know is complete BS"

You rely on future predictions and projections every bit as much as the next guy. If you don't understand this, there is no point in talking to you.

For every monday morning quarterback like you, there is some guy who is every bit as successful, who day traded. Take the recent example of CR, for instance. He or she, and probably many others like them, don't "get something right one time" and then "get it wrong the next time", as you suggest. It appears that you project your own experience onto everybody else.

Your position is both stronger in some ways, and weaker in some ways, that I need not go into. It is in no way demonstrably "better". It has proven decent, IN THE PAST, for those who wish to remain almost essentially passive in their "investment" activities.

FAGP0LE wrote:

For every monday morning quarterback like you, there is some guy who is every bit as successful, who day traded. .

no, not by a million times, and that is most of FP's point.

Anyone can be a successful buy and hold investor and there is little skill involved. And you will almost for sure do very well over a lifetime.

But on the contrary,

virtually no one can be a successful market timer/day trader. Sure, it can be done - but it's like running a sub four minute mile - everyone tries but only a very small number of people succeed. It's an exceedingly rare skill.

I think CR would agree with that.

But you say that 'for everyone like FP there is a successful day trader'

In no way or shape or universe are there equal numbers of successful buy and holders and market timers/day traders.

I do not advocate market timing. However, I do think valuations are important and in the end you are buying an investment for the stream of cash flow it will provide. One can buy a ten year treasury bond today, that may provide better cash flow over the next ten years than a similar dollar purchase of VTI.

"Anyone can be a successful buy and hold investor and there is little skill involved. And you will almost for sure do very well over a lifetime."

No.

ALMOST anyone HAS IN RECENT HISTORY BEEN ABLE TO HAVE BEEN a successful buy and hold investor and there is little skill involved. And THEY HAVE HISTORICALLY BEEN ALMOST SURE TO HAVE DONE WELL OVER THIS PERIOD.

It's all backward-looking. You are trying to predict the future as much as anybody, and you know it. The only difference is that you believe that your projections are more solid, and that because they are made in the longer term, they are more likely to be true, because "history" tells us this is the case.

Rubbish. We are in a new era. You really think the status quo of the past 40 years will continue for the next 40 years? Are you kidding me?

Get real. And I don't really care what chemical reagent thinks, if he wants to he can tell us himself.

the most dangerous words in investing are 'it's different this time'

so have fun with that.

but sure - past performance is no guarantee of future success.

Allison Nathan: What should investors do when so many assets look expensive?

Robert Shiller: I am not an investment advisor. But I would say that the main implication for most people is that they should save more because their portfolio probably won't do as well as they imagined. And if they're saving for some distant goal like retirement, they might be disappointed. People have learned about the power of compound interest. But what they don't understand is that if interest rates are zero, you don't get any compound interest. I think that there is complacency among investors today. People have seen how well the stock market has done over the last century. But the market might not do so well the next time. So you have to consider whether you are saving enough.

And as a general principle, I think people should diversify across assets and geographies because there is no way to predict what any one asset will do with any accuracy. I've been talking down US stocks because of their high valuation, but I would invest something into US stocks; I would just put a heavier contribution in stocks around the world, where CAPE ratios look lower. I keep coming back to the theme that there are lots of places outside of the US to invest. And I would also own bonds, real estate and commodities. Commodities are overlooked by many investors but they are an important part of an investing portfolio.

The reality is that people are not very good at diversifying. This has been documented in studies. They tend to be distracted, and focus too much on one sector or one thing that they have heard. They also tend to focus on their own country. There's no reason why one should invest only in one's own country. Quite the contrary, some people make the extreme statement you should short your own country and invest only elsewhere. I wouldn't go to that extreme, but it is a plausible argument.

small caps are flying - up 3.2% in 6 trading sessions. That's unusual.

I believe that is bullish

the easy explanation is that the US economy is speeding up, but the large caps are being hurt by the higher dollar. Small caps generally have little currency exposure so they are neutral or positive to a stronger dollar.

A more likely explanation is big money is rotating in to hot stocks and churning the market higher.

Ghost of Igloi wrote:

A more likely explanation is big money is rotating in to hot stocks and churning the market higher.

+1

I think there are currently lots of momentum traders, even large institutions.

The sky is falling! The sky is falling!

Small caps leading is always bullish. The coming revision of 1Q GDP, expected to be +1.5%, is also bullish, as are all the shorts out there on the books, as I've pointed out recently.

From the longer term side (at least Flagpole and me), I'll put up some real numbers--no funny business, no mythical trades, everything above board and can be seen in this thread. The six stocks I listed many pages above, I purchased on 6/22/2009, the same day I went from being short to being long stock futures. I rotated from SP600 to SP500, but I am still long all of that, and these are the YTD percentage return for those six stocks:

A -3.27%

AAPL 15.08%

NFLX 99.41%

QRVO 22.85% (TQNT merged with RFMD on 12/31/2014 and is now QRVO)

LAMR 8.84%

ROST 7.24%

AVERAGE (25.02%)

I\'ll leave it for the Chicken Littles to explain how much they made this year by being out of the market.

And this is why you should not be too concerned when somebody says the market is "overvalued": I've known people who said the NASDAQ was overvalued at 1500. Back in the 1990s when I built up my retirement nest egg, I started to phase out in the fall of 1998 after Warren Buffett said in his comments to investors that year that he had stopped buying stocks because he could not find anything worth buying. I sold half in October 1998, half of what I had left in October, 1999, and the last 25% in April 2000 (when Yahoo, not IBM or GE or Chevron, became the market leader, you knew that it was going to end badly). In my last 12-`18 months in the market back then, I was probably making 100% returns on stocks that I had...but most of my money was not in the market. I left a lot of chips on the table. The lesson I learned from this was:

Ride that Tiger until he turns around and bites you.

You can go back on this site to 2007-2008 to some disagreements I had with Flagpole, when I pointed out in the Fall of 2007 that Private Bankers were advising wealthy clients to move from stocks into bonds (this was on CNBC), and it was still a few months after that when I went short the S&P in the first week of 2008. You had LOTS of time to get out if you wanted to get out after the bubble top happened. But as Alan Greenspan said, you can't call a mania until it's over.

George Soros and the Quantum fund made most of their money jumping into commodities after they went parabolic and riding them through the top. That's what you miss if you panic because somebody thinks the market's overvalued. It can be much longer than you think, and it can be a LOT of money that you don't get.

To say small caps leading is always Bullish is nonsense and not true.

I know that 'agip' has already responded to your nonsense but it is so patently wrong that perhaps it deserves to be pointed out again.

Regarding: "You rely on future predictions and projections every bit as much as the next guy. If you don't understand this, there is no point in talking to you."

This may well be true. But it is not true in the sense that many reading your post might assume. That is, the 'prediction' that Flagpole and others of his ilk are relying upon is not that the market's return will have essentially the same average and standard deviation in the future as in the past. Instead, the prediction, if you wish to call it that, is that society will continue to function, the economy will continue to grow, and businesses will continue to try to maximize their profits. These all seem like fairly safe predictions to me. Given these, the market WILL provide solid returns in the future. This is not a prediction. It is a fact. If you don't understand this, there is no point in talking to you.

Regarding: "For every monday morning quarterback like you, there is some guy who is every bit as successful, who day traded."

This one is terribly misleading at best. Essentially everyone who has taken the approach that FP advises has done very well. Among day traders, the percentage who have done very well over the long haul is miniscule. Sorry but this again is simply a fact.

Regarding: "It has proven decent, IN THE PAST, for those who wish to remain almost essentially passive in their "investment" activities."

Taken literally, this is true. However, what you are trying to imply is again a mix of misleading and simply false.

For one thing, remaining "almost essentially passive" is certainly a good thing for the vast majority. Most people have more fun doing other things rather than spending a great deal of time trying to figure out how to beat the market. So, while you might intimate that one should look down upon such "essentially passive" individuals, the truth is that they have better things to do with their time.

Further, if one is to look at "passive" investors and compare their aggregate performance with "active" investors, passive investors realize higher investment returns on the whole. Again, this is a fact. I am going to assume that you are as aware of this fact and its mathematical inevitability as anyone would be who has spent a few moments thinking about it.

Passive versus active investment performance is more a matter of the data set. That is, active managers have a shorter tenure and thus track record. Secondly, in a market that has moved in a straight line up since March of 2009 it would be very difficult for an active manager to outperform an index. I think you can find a several active managers that have outperformed the S&P 500 over the past 15 years. Lastly, I think with markets at record highs the active managers generally will have the best record over the next five years, primarily by their ability to reduce their weighting in a specific stock and their ability to hold cash, which an index cannot do.

That said, I think a balance of both active and passive investments have a role in one's portfolio.

Great post, coach d. Some of it is familiar given your earlier posts, but it certainly doesn't hurt to hear it again. Thanks for posting.