Stock Market - Ben Graham's comments on the market appropriate today

agip wrote:

Bigfoot - I've always liked the way you write/think - that was an excellent cut the bs reply.

I'm curious - how old you are you?

(Flagpole and I are in our mid 40s)

Hi agip. I am in my early 50s.

BTW - I am a big fan of yours based in no small part on the fact that you are one of the very few people on these boards who readily admits when he makes a mistake and seems to honestly enjoy learning new things (even if that implies that someone else knows more than you about a particular topic [oh, the horror!]).

Cheers

Agip,

Thank you for the very thoughtful reply. I missed it the first time around, and just saw it now.

Please allow me to read the link and re-read your post before replying.

If Graham did that complete 180, it is extremely interesting and I'm not sure where that would leave me. That's pretty huge. It seems the majority of his "disciples" that I've read/listened to disagree with his revised opinion, and their investment returns seem to support his original belief.

Let me get back to you.

First, let me just check - 'Just might be unconventional' and 'wait a second' are one and the same person? I think that I am gathering that from your post but would like to be corrected if I am mistaken. I prefer to (sort of) know who I am chatting with.

Second, as far as demanding "clear evidence", I am completely at a loss as to what you are referring to. I do not remember saying anything about "clear evidence" in any of my posts. Please feel free to point out if I am overlooking something here.

But, on you your question: "In your experience with investing, how much opportunity is there typcially in following what the large majority are doing &/or recommending?"

I am not a big believer in concerning myself with what a "large majority" are doing. Nor, for that matter, with what some special insider group is doing. I would even take it a step further to say that I really don't concern myself with what some demigod thinks, is saying or has said (whether or not it is taken out of context or whether it was what he/she thought when they were young and foolish or his/her last words on their death bed). That goes for Ben Graham, Warren Buffet, Peter Lynch, Jack Bogel, or anyone else you wish to name.

Indeed, I have seen more than one of these experts rave about the wonders of dollar cost averaging - a concept which I have thoroughly debunked here on these boards more than once.

Everybody who lives past the age of two years old is sometimes right and sometimes wrong.

What I do concern myself with is concepts, facts, mathematical certainties and probabilities. The question that you posed has to do with what the large majority are doing. My question concerning this is, "doing about what?" If the large majority are invested in stocks then I will have no problem doing what the large majority are doing. If they are invested in baseball cards then I will wish them luck but refrain from doing so myself.

If the large majority of ordinary people, institutions, billionaires and so forth are invested in stocks that does not imply that stocks are not a good investment at that time. Nor does it imply that they are.

The best strategy for the vast majority of folks for whom stock investing makes sense is to put in what you deem reasonable given your financial circumstances and goals, keep putting money in continuously, and keep it in through all the ups and downs that are inevitable (as well as through all the 'sky is falling' pronouncements that you will easily be able to find every single day of your life).

In my experience I have seen only two times when public sentiment was so dramatically skewed that it impacted my own investment decisions. Once, in the early 80s as I was just getting started, there had been so many years of very little vertical motion in the market that the general public became bored with the whole thing. Basically the only time when I ever heard anyone talk about it was to besmirch the entire notion of investing in common stocks as just one giant scam. To me it was so extreme that, in retrospect (always a dangerous thing) the market was screaming "BUY ME NOW!" I did buy as much as I could but that amounted to a few thousand dollars.

The second time that I have seen public sentiment so skewed was during and following the dot com bubble. At that time everyone and their brother was talking about the stock market. Friends that I had not seen in six years, when we finally got together the first thing out of their mouths was some sort of stock tip (or request for a tip). This was the clearest signal that I have ever seen that stocks were WAY overvalued and it was a good time (the only time in my investment lifetime) to get out of the market and wait to get back in.

The fundamental problem with trying to time the market (and this is the same thing as concerning oneself one way or the other with what "large majorities" are doing) is that the market in general goes up. What that means is that every time you are out of the market you are playing a losing hand. You have to be almost miraculously good at such timing to come out ahead of that boring (everybody is saying the same thing) strategy of buying and holding.

I for one readily admit to falling far short of miraculously good. As a result I stay in the market day in, day out, year in, year out. And I completely ignore current market trends, predictions... I really am the investor who puts his money in and then doesn't expect to even bother to check on it for twenty years. All those crazy ups and downs that I miss in the interim - well I really don't miss them. They are not relevant to me. And what the large majority are doing at any one time - I couldn't care less.

So, I would say to you and anyone else who is considering investing this - Unless you consider yourself to be roughly on par with God in picking out market highs and lows, just ignore the whole thing. Put your money in and forget about it.

Please feel free to refine your question as you see fit. As I said, I am happy to attempt to answer whatever question you have. And if I missed on this attempt I can only say it was an honest attempt to address the query at hand.

Oh, now I see your reference to "clear evidence" in my sarcastic response. My apologies for the sarcasm. But I would have imagined that it would be obvious that I was not actually looking for (or demanding) clear evidence.

Cheers

Agip - do you have a link for the original source of that Graham quote? That would save me some searching time.

If I have learned anything from observing Buffett's quotes being taken out of context on CNBC it is that context and going to the original source can be critical.

Randy Oldman wrote:

I don't agree

http://www.ritholtz.com/blog/wp-content/uploads/2012/07/qa44.png

Point taken. I was referring to the shorter term trends that I believe the other poster was referencing. I don't think it makes sense to try to predict bear/bull markets based on historical trends.

Pay attention wrote:

Randy Oldman wrote:

I don't agree

http://www.ritholtz.com/blog/wp-content/uploads/2012/07/qa44.png

Point taken. I was referring to the shorter term trends that I believe the other poster was referencing. I don't think it makes sense to try to predict bear/bull markets based on historical trends.

Your user name might be a good reminder for you!

I didn't refer to any shorter term trends. And I certainly wasn't predicting... there is a big difference between saying something "wouldn't surprise me" and predicting or making decisions from it.

I merely pointed out that the bull market since 1982 (or 1974, depending on how you measure) was so severe compared to the one Graham referenced (1949-1966) that it wouldn't surprise me if it took longer to correct. (Flagpole was pointing out 20 year & 30 year performance following 1966) Very long-term perspective.

And, there is value to looking at valuation trends. Bear mkts have historically ended with the 10-year PE in single digits. That has historically been cheap. We're 13 years into this and we're nowhere near "cheap".

In fact, we currently sit at the PEAK valuation of the 1966 top.

If every investor and money manager implimented Ben Graham's basic principles, there would be no bubbles.

that appears to be a transcript of a 1:1 discussion with Graham toward the end of his life - not much context to work with I'm afraid.

wait a second... wrote:

Agip - do you have a link for the original source of that Graham quote? That would save me some searching time.

If I have learned anything from observing Buffett's quotes being taken out of context on CNBC it is that context and going to the original source can be critical.

wait a second... wrote:

And, there is value to looking at valuation trends.

What value would that be for someone like you who is not making predictions?

The capitalist system, infected with Zion*sm, is circling the drain.

WWJCD wrote:

wait a second... wrote:

And, there is value to looking at valuation trends.

What value would that be for someone like you who is not making predictions?

To understand historical behaviour, of course. For context, which expands my own experiences (which for investing are limited to my adult lifetime).

It's helpful to me to see how stocks tend to cycle over long periods between undervaluation and overvaluation.

How cheap have stocks every gotten in the past? Well, for many of us, we have NEVER seen a long-term cyclical bottom with 10-year PEs in the mid single digits. Even Bigfoot above, was just starting his career in the early 80s so he technically saw it, but didn't get the full experience of investing through the 70s to get there.

There is value to me in understanding that.

That doesn't mean I blindly take the valuation trend and make the assumption, bet or prediction that history WILL repeat. It might repeat.

There is value to thinking. Buying stocks on autopilot regardless of the price or value (refer to Graham's quote) is not thinking. Making a prediction strictly from a valuation trend would also not be thinking. I try[i/] to think.

'trying to think' leads to chronic underperformance. Trying to think leads to the sad, sad fact that at least 70% of actively managed funds lag their benchmarks.

it sure sounds good - thinking works in most professions...but in investing, the dumb money will often win - the money, like Bigfoot says, that is invested and forgotten for 20 years.

(with the exception that thinking does work in extreme, rare situations like 1999)

Buffet has a great bet going - he bet $1 million that the SP 500 would beat an index of hedge funds of funds over 10 years, money goes to charity.

We are 5 yrs into it, and the 'thinkers' are flat. The dumb index fund, even after weathering the financial crisis drubbing is up 9%.

http://finance.fortune.cnn.com/2013/01/24/buffett-hedge-fund-bet/

actually that was in January 2013 - I suspect the numbers are something like

SPX: + 15%

HFF: +4%

but that is just a guess

The market goes up, the market goes down. Repeat.

So agip, what would you do right now if you had $500K sitting on the sidelines?

agip wrote:

http://www.bylo.org/bgraham76.html

that appears to be a transcript of a 1:1 discussion with Graham toward the end of his life - not much context to work with I'm afraid.

wait a second... wrote:

Agip - do you have a link for the original source of that Graham quote? That would save me some searching time.

If I have learned anything from observing Buffett's quotes being taken out of context on CNBC it is that context and going to the original source can be critical.

Agip, first thanks a lot for the link.

Second, did you read the entire interview? There is a ton of context in there, and I honestly don't see how a thoughtful person could read it and say Graham says there is no advantage to paying attention to value.

Graham doesn't make a complete 180 on value. As I suspected, each word was chosen carefully. He no longer supports "elaborate techniques". Elaborate being the key word. Later, same answer, "to that very limited extent I'm on the side of the efficient market..." (very limited extent being the key words).

Throughout this interview, Graham essentially says pay attention to value, but keep it simple.

One example from the link you posted:

"Q: What general approach to portfolio formation do you advocate?

A: Essentially, a highly simplified one that applies a single criteria or perhaps two criteria to the price to assure that full value is present and that relies for its results on the performance of the portfolio as a whole--i.e., on the group results--rather than on the expectations for individual issues

He elaborates in decent detail.

I think the fundamental difference here is that you guys are pushing the index, it's-never-a-bad-time-to-buy-stocks, to avoid the pitfalls that the average person falls victim to. I get that. That's great, and probably ideal for the average person. (Graham tells us how to be above average, though, which would also guard against those pitfalls).

I still suspect that today matches up pretty well with the over-valuation level to the late 60s, which Graham was referred to in the original quote. Hence the thread.

As a result, I suspect Graham would not have a large allocation to stocks at today's valuation levels.

Cash is King wrote:

So agip, what would you do right now if you had $500K sitting on the sidelines?

That's not enough info - I don't know enough about you to give you any advice of value.

But in general, if you don't need the money for 5 years, build some kind of appropriate low cost, tax efficient, diversified portfolio appropriate to your risk tolerance and time horizon.

If you do want to try to outthink the market, then own stocks only when they are above the 200 day moving average. That way you let them bounce around, but you might avoid the big falls like in 2000-2 and 2008.

Obvi there are risks to the 200 day stratetgy- failure to execute, taxes if in a taxable account, friction, etc. But If done correctly, it will help avoid catastrophe.

no, I actually didn't read the whole interview.

So maybe buying value indices or something like that would make sense to Graham.

I do like the magic formula funds, which use a quant model of cheap high ROE stocks. Has been doing well over a short time. FNSAX.

I do think that buying cheap stocks over expensive stocks will win over the long run...the problem is the human mind not executing on strategy. And value will underperform growth for year after year after year...until regaining its longterm lead.

How are you valuing the stock market? What makes you think it is so expensive?

here's a chart, but it is 'normalized' with some kind of secret sauce, so not reliable. It suggests we are moderatly expensive here.

The problem with valuations over time is that they aren't always apples to apples - accounting rules change, interest rates change, etc. Price to sales is probably the least manipulable ratio - I'd be interested to see what it says about today's market.

earnings are so variable and a matter of opinion. I have no doubt that with tougher accounting rules today, a dollar of earnings is worth more than it was in 1969.

Sales are more stable and defined.