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

wait a second... wrote:

agip wrote:

yeah, so am I. call me a hypocrite, accurately.

Ha! No worries.

I did notice that you recommended someone tweak their bond allocation since bonds were expensive.

How do you reconcile doing that with bonds, yet you recommend buy & hold regardless of price with stocks?

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bonds are different than stocks - stocks can and will climb forever. Bonds have mathematical limits. At least as long as there is the chance of some inflation at some point in the future.

Realistically, interest on bonds will approach zero but never get there (again, assuming inflation). That puts a cap on how much a bond can be worth. So while I am comfy owning stocks, understanding that they can climb forever, I will stand away from bonds at times like this, because they can't do that.

unless we have severe deflation.

1) Neither, really. I was saying it is likely a symptom of an overvalued market. When stocks get cheap (below historical average P/Es), it will be due to (and cause) more fear. At those times, the average "investor" will be fearful, and less apt to blindly invest (essentially the "guys" will sell at the wrong time, and the "women" will hang in there). We are moving in that direction. I'd guess we are barely halfway through the long process of multiple compression, which seems likely to take 15-20 years (since 2000).

Regarding your approach to stocks - Exactly... you track your prices, but you don't evalute value before you buy, nor let some measure of stock valuation (price relative to earnings, book value, sales, etc...) guide your investing decision. If the stock market was at an 80 p/e ratio and stayed there the next 15 years, you would keep buying stocks every month. You care nothing about Graham's margin of safety. Most average "investors" today take the same approach (or claim to).

2) You misunderstand. Yes, I wish everyone saved, and invested. I'm not ok with our dismal savings rate - I hate it! But - I wasn't commenting on that.

My point, knowing that human emotions tend to affect many in investing, is evaluating people's current complacency with stocks. Complacency (or greed in extremes) = overvalued market, or high P/Es. Whereas fear = cheap market, or low P/Es.

I believe most people are still showing high levels of complacency in stocks. As you point out, it is coming down. But it is still very, very high. Let's see how high:

52% of adult americans own stocks. But what percent save ANY money at all? 73% at best? (

) My point is, of those that save ANY money at all, a HUGE percentage currently invest in stocks... 71% using those numbers. (52%/73% = 71%). But it gets even more extreme...

If that article is correct, only 24% of Americans have enough savings to equal 6 months of expenses. Yet 52% of Americans own stocks!!!!! At that current savings rate, no more than 24% (probably less, since they should also be debt free other than a mortgage) should even be considering stocks (if I remember your financial rules). 52%/24% = 217% of the people that should possibly consider stocks, based on current savings rates, actually own stocks!!! That is a complacent public.

That's what I see - very few people are fearful of stocks. Most blindly purchase, without question. Therefore, this market is likely nowhere near cheap.

This all is a qualitative exercise, to think about where we are in the market cycle, after reading the origianl Graham quote that I posted. Interestingly, it agrees with quantitative measures of value like 10-year P/E, P/Sales, etc which also show a significantly overvalued market.

I hope this helps clarify.

*by the way, do you know if the 65% stock ownership (guessing 2007/8) was an all-time high, or was it higher in 1999/2000?

65% was an all-time high.

I see what you're saying. I could agree that 52% in stocks is a big percentage of those who save at all, but it's all still sad and too low in my opinion.

Hi wait, thanks for the post. You've said quite a lot so I'll break a response into parts for the sake of me being able to keep track.

Regarding: "So, you don't attempt to do it. But, you admit there is some value, at least at times (your observations in 1999 and 1982). You noticed it both times without even trying to tune in to it. Imgaine what you might notice if you paid attention"

There were two times when it seemed to me that there was a near universal negative/positive opinion regarding the stock market. I did benefit from noting this at these two times. However, a few things should be noted about this:

1) A sample size of two is not statistically significant. While I did in some sense "trust my gut" at these two times and that turned out to be a positive for me I would not consider this to be conclusive evidence of much of anything.

still,

2) If trusting one's gut at such times and going against a pure buy and hold through all ups and downs makes some sense (and a sample size of two is not sufficient for me to advise anyone else of anything) it does not necessarily follow that what you seem to be implying by your statement " Imgaine what you might notice if you paid attention" makes sense. Indeed, I would argue exactly the opposite. That is, I would argue that one of the following is true:

a) It is impossible to time the market with sufficient precision to gain over a buy and hold strategy

or

b) There may be a VERY few times when a market mania/depression is so severe that one can benefit from moving out/in to the market at a key point with fairly predictable results but that these times are very few and far between (you can count them on one hand over an entire lifetime of investing - thus far I am up to a grand total of two after 30 odd years).

If b) is to be taken as a reasonable model then one would be well advised to NOT pay attention. The once-every-few-decade storms will come to one's attention with no effort expended looking for them. And looking for them will likely cause one to find 50 opportunities for every 2 that are real - definitely not to your advantage.

As for the rest of the anecdotes from your life experience, I really have no comment. They are anecdotes. And, as I have stated here, I do not even put that much weight into my own anecdotes let alone on those of others. This is not meant to be disrespectful toward you and your experiences. Just that it would be absurd for me to argue that "No, you did not experience what you say that you did". It would be equally foolish for me to be convinced of anything based on your few experiences.

Finally, regarding the fact that you find the psychology of markets fascinating - I do as well. However, my advice to anyone (including you, although I am quite confident that you will not take it) is that it is fine to be interested in the psychology of the markets. But when it comes to placing your bets you are better off trusting mathematics over psychology.

wait a second... wrote:

Bigfoot Investments wrote:

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).

Are you describing what I've done with Graham, or is this your sarcasm (not to be taken seriously) again? Serious question. It's hard to tell. It feels like a putdown. If it's sarcasm, it adds no value, and is very distracting.

Anyway, perhaps you don't study the best investors in history because you are not attempting to outperform the market?

I've found that studying the best is a great way to learn. In any endeavor.

First, let me assure you that I used up my sarcasm quota earlier in the thread. So, no sarcasm. But also no putdown.

I will note one thing here. The fact that I do not concern myself with what some demigod thinks or has said does not imply that I have not studied "the best investors in history". Please do be careful not to put words in my mouth. This is not something that I have a great deal of tolerance for.

By not being particularly concerned with what expert X has to say I only mean that I understand the underlying mathematics of the stock market sufficiently such that better decisions are made by basing actions on math and probability than on what I would describe as "cute quotes".

People trying to make arguments about what will happen next and the correct action to take in the stock market based on these cute quotes remind me far too much of those that try to interpret societal trends and individual actions (leading naturally to their own decisions) based on arguments that always lead back to biblical quotes. One can "prove" any point one wishes by pointing to selective quotes. Better to simply look directly at the matter at hand and not go back to "Well, Peter Lynch said...".

wait a second... wrote:

Bigfoot Investments wrote:

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.

Not alone, but if the large majority of ordinary people are blindly investing in stocks, AND p/e, p/s, etc ratios are high compared to historical averages, it implies stocks are not a great investment at that time.

As I have pointed out elsewhere, the right question is not "Are stocks likely to provide returns at or above their long term trend lines?" but rather "Are stocks likely to provide returns at or above those of the currently available alternatives?"

I have no way of being certain which asset class will perform best over the next 1 year or 5 years... I can only make bets based upon mathematics, probability and an understanding of investment classes. Betting on an inert lump of medal over companies whose raison d'etre is to make money is to be playing a losing hand. Likewise, betting on debt over equity is also playing a losing hand for obvious reasons. So, in general, I would prefer to play on the winning side. And the winning side in general is that of equities.

Now as far as "the large majority of ordinary people are blindly investing in stocks" - I simply do not get the sense that we are in any kind of mania. I do not hear anyone talking about the stock market in day to day conversation. Relative to interest rates we are not at any sort of extraordinary high water mark for P/Es etc. So, if you wish to make this bet, well you will obviously do what makes sense to you. But no, I would not advise anyone to get out of the market today for anything other than individual reasons (need money for a house, approaching retirement...).

wait a second... wrote:

How do you figure today's valuations are below average? Honest question - I'm curious about how you reached that conclusion.

Looking at the S&P 500, the average PE is around 15. That's what I would consider average, so maybe it's not below average, but certainly not above average either. My below average sense likely came from my own portfolio: AAPL 9, CSCO 13, INTC 12, etc. But I see some in the low 20s too, so I guess I was wrong about PE being below average.

As stated above, two data points do not a statistically significant sample make.

Now, again you seem to be implying that I am saying something that I am not. Or perhaps you do not mean to imply these things. But for example:

"blind stock investing"

"thinking can be good"

"paying attention to value to enhance performance is impossible"

The things that you seem to be implying (and my apologies if I am reading more into your words than was your intention) are not really based on my words, thoughts or actions so I will take the time to point this out in case this was not obvious to you.

1) I would be the last person in the world to advocate "blind" stock investing. Blindness in this case would seem to imply ignorance (since we are not really talking about seeing things but rather about understanding things). I do not advocate ignorance. Indeed, I insist upon keeping as much of the big picture as one can wrap one's head around in focus.

2) Thinking can be good? Again, perhaps you do not mean to imply that I would take the opposite stance. How would it be possible for thinking to be bad? One should be aware, however, that much or what passes for thinking is actually the opposite.

3) "Paying attention to value..." As I have said on these boards, investing in value stocks in general will lead to better outcomes than investing in growth stocks. What could be more pro-paying attention to value than this?

Finally, I would respectfully suggest that 99% of what passes for enlightened thinking is really just emotional baggage masquerading as something that it is not. There are tens of thousands of very bright people investing in the markets, each convinced that they are brighter than the next, more knowledgeable than the next, or just plain ballsier than everyone else. Are you quite certain that you are in fact the brighter one? Because the guy on the other end of that trade thinks that he is.

Bigfoot Investments wrote:

Finally, regarding the fact that you find the psychology of markets fascinating - I do as well. However, my advice to anyone (including you, although I am quite confident that you will not take it) is that it is fine to be interested in the psychology of the markets. But when it comes to placing your bets you are better off trusting mathematics over psychology.

Thanks for all the replies, Bigfoot. I will reply where appropriate. Let's see if I can can trim the lengths - we've built up some doozies.

Actually, I agree with your advice. I do trust mathematics and the numbers over psychology. What I am exploring personally, is whether there is value (to me) of supplementing the numbers with some psychology. Only time will tell. Even if it is fruitful, it will still be an experiment of one, and not statistically valid to prove anything.

agip wrote:

bonds are different than stocks - stocks can and will climb forever. Bonds have mathematical limits. At least as long as there is the chance of some inflation at some point in the future.

Realistically, interest on bonds will approach zero but never get there (again, assuming inflation). That puts a cap on how much a bond can be worth. So while I am comfy owning stocks, understanding that they can climb forever, I will stand away from bonds at times like this, because they can't do that.

unless we have severe deflation.

Yep. I don't disagree.

Fascinating though, two axioms most everyone invests with today:

-stocks can and will climb forever.

-interest on bonds will approach zero but never get there (again, assuming inflation).

I wonder if there are any surprises (deflation) coming that will challenge these.

Ever get a sick feeling in your stomach that you are underestimating the likelihood? I do... quite often over the past 5-6 years.

The severe/hyper-inflation crowd looks absolutely mainstream when compared to the deflation crowd. Deflationists are the true minority, and black sheep IMO.

agip wrote:

bonds are different than stocks - stocks can and will climb forever. Bonds have mathematical limits. At least as long as there is the chance of some inflation at some point in the future.

Realistically, interest on bonds will approach zero but never get there (again, assuming inflation). That puts a cap on how much a bond can be worth. So while I am comfy owning stocks, understanding that they can climb forever, I will stand away from bonds at times like this, because they can't do that.

unless we have severe deflation.

Forgot to add...

Am I incorrect in stating that while you refuse to try to "outthink" the market in stocks, you are actively attempting to do so in bonds?

After all, maybe the bond market is pricing in deflation risk better than we can? (I know about Fed involvement, but they're probably involved directly or indirectly in stocks too).

I still can't tell, and you didn't answer directly - is this what you think I've done with Graham?

Please feel free to correct any incorrect assumptions I make as to your meaning or intent.

Here I am going to assume that you are referring to your initial post (I will also refer to another post or yours):

"From the introduction of The Intelligent Investor, written in 1971/1972 by Ben Graham: (my emphasis added)

"The extent of the market's shrinkage in 1969-70 should have served to dispel an illusion that had been gaining ground during the past two decades. This was that leading common stocks could be bought at any time and at any price, with the assurance not only of ultimate profit but also that any intervening loss would soon be recouped by a renewed advance of the market to new high levels. That was too good to be true. At long last the stock market has "returned to normal," in the sense that both speculators and stock investors must again be prepared to experience significant and perhaps protracted falls as well as rises in the value of their holdings."

I've read the resident financial expert on LetsRun repeatedly claim, basically the underlined myth above. I trust Ben Graham's advice much than the advice dispensed around here.

It's 1968 all over again."

So, here are my objections, both to Ben Graham's statement (which I will not look up to verify - I am simply going to take your word for it), and to your post:

1) "This was that leading common stocks could be bought at any time and at any price, with the assurance not only of ultimate profit but also that any intervening loss would soon be recouped by a renewed advance of the market to new high levels." -

- This notion, that any intervening loss would soon be recouped is not sufficiently well defined for this statement to have much meaning. How soon is soon? I also tend to have little respect for anyone speaking for others. It is simply too easy to do, to assign a position to someone else (or better - to "the ignorant masses") and then to proceed to argue against it.

2) "At long last the stock market has "returned to normal," in the sense that both speculators and stock investors must again be prepared to experience significant and perhaps protracted falls as well as rises in the value of their holdings." -

- Are there people today and have there been people in the past who invested in stocks without being "prepared to experience significant and perhaps protracted falls"? Undoubtedly. But I am not nor have I ever been one of them. I have consistently stated that one needs to be able to sleep through a loss of 50% in their stock market portfolio without it significantly impacting either their emotional state or their life plans - otherwise they simply do not belong in the market. Further I have always stated that one should have a time horizon of at least 10-15 years for money invested in the stock market and that even then there are simply no guarantees.

3) "I've read the resident financial expert on LetsRun repeatedly claim, basically the underlined myth above."

I completely disagree with this statement. I do not hear agip, FP or others speak of the stock market as only going up, that any losses would "soon" be made up, that stocks are relatively risk-free, that there was any "assurance of ultimate profit", or indeed any of the mind-set that Graham was representing in that quote. To state that the "resident financial expert" claims what Graham warned against demonstrates either (a) a woeful ignorance of Graham's word, (b) a woeful ignorance of the advice typically proffered here on LRC, (c) both or (d) a willful misrepresentation of the above.

4) "I trust Ben Graham's advice much than the advice dispensed around here." -

- To each his own, of course. As I have stated, I do not trust anyone's advice. I only trust my own insofar as I can understand the capitalist system in which we live, the nature of equity markets, and to a very large extent, mathematics, probability and statistics.

5) "The replies thus far are very revealing. 3 resident experts have chimed in... in perfect melody.

It sounds pretty similar to what Graham described."

Again, I disagree quite strongly with this. Graham described folks who thought that the market only went up and that risks were minimal. While it is true that "3 resident experts" have all expressed opinions that were somewhat similar to each other, it is completely disingenuous to equate what they agree upon with what Graham described. You would be just as accurate to say, "Look, they agree that apple pie tastes good. That sounds pretty similar to what Graham described"

Yes, of course, except for that inconvenient fact that it does not.

So finally,

6) "I still can't tell, and you didn't answer directly - is this what you think I've done with Graham?"

Yes. Clearly.

Wake up wrote:

Who's Ben Graham? Seriously.

Banged/married his son's wife, after his son passed away....look it up

Do you or others have any insight into the effect of computerization of trading on the severity of 2008/2009 stock market downturn and the likelihood of another severe downturn coming more quickly than broader economic trends would predict?

Bad market news travels and registers more quickly throughout the market than it once did. If your portfolio is down 5% quickly, you know that hour, or definitely that day and then many are on watch for a 10% decline. When that happens, isn't a herd mentality, panic selling situation more likely than in prior decades? Don't computer screens turn the 5, then 10, then 15% market downturn into the line of people yelling outside the bank when the doors are closed, that you see when you walk by, and then join in, or feel very very uneasy if you don't?

Does it make any sense to "buy and hold," once the S&P reaches multi-year highs, then passes through -5% and continues heading down? Why not exit at 94% of a multi-year high, or 93% and then wait till the panic stabilizes lower to get back in?

My assumption is, that in addition to the rational thinkers and stock valuators on this board, there is a significant number of hope and fear investors, whose emotionalism makes a strictly dispassionate valuation basis for when to be in or out of the market one that misses the worst or best moves of the market as a whole in the modern era.

Isn't "Buy and Hold" your father's stock market?