Down goes the Dow

coach d wrote:Well, I wasted a little time this afternoon, grabbing some date off the cloud and writing some R code, and what I came up with is this:

TIME PERIOD 1930-1955:

Mean P/E (traditional) 12.95

Variance 21.62

Std Deviation 4.65

TIME PERIOD 1980-2015:

Mean P/E (traditional) 21.01

Variance 206.80

Std Deviation 14.38

These are VERY different eras, and you CANNOT expect to use what is in the 1934 version of "Security Analysis" and get meaningful results. Saying that you are not going to buy unless the MARKET PE gets to 15 means you will not be an equity investor in this era.

A PE of 21 in this era is not "overvalued." That is the AVERAGE.

coach d,

I've got good skills with spreadsheets and stats, but a brain that doesn't align itself well to thinking about money (I'm just not wired to think about money). However, what you've been writing in this thread has resonated with me, and I'd like to spend some time dabbling with data and seeing what trends I can infer. Can you give me any useful pointers how to start down this road? You can assume I've got strong statistical reasoning and advanced spreadsheet skills, but limited knowledge where to find appropriate data, and limited understanding of the state of knowledge in useful, meaningful trends that can be exploited for successful investing.

Many thanks in advance!

I'm the opposite - I'm not great with spreadsheets and stats but I'm pretty good with money.

Anyway, if you are interested in quant analysis of the stock market, take a look at Jim O'Shaughnessy's "What Works on Wall Street" - it's a fascinating book about trends. Its goal is to use data to define strategies that would have worked better than just buying a market index.

At the least, it can give you a sense of what to look at. At best, it can answer most of your questions for you.

agip wrote:Anyway, if you are interested in quant analysis of the stock market, take a look at Jim O'Shaughnessy's "What Works on Wall Street" - it's a fascinating book about trends. Its goal is to use data to define strategies that would have worked better than just buying a market index.

At the least, it can give you a sense of what to look at. At best, it can answer most of your questions for you.

Thanks for the tip, I just ordered it on Amazon.

idiot investor,

A cautionary note, stock trading strategies are supported by the belief that Federal Reserve policy support risk-on in the equity markets. However, trend following strategies tend not to be supported when investor risk preferences have changed, that is, cash becomes a preferred asset class. In the last nine months we have had two time periods that were classic risk-off where the market dropped 12% in a short period of time. The Dow and S&P 500 are currently under where they were a year ago. S&P 500 earnings have dropped 18.5% from the peak in 9/30/2014. I would bet that fundamental investment strategies will be a better bet going forward. Of course you have to believe that this time is NOT different.

Igy

Ghost of Igloi wrote:idiot investor,

...I would bet that fundamental investment strategies will be a better bet going forward. Of course you have to believe that this time is NOT different.

Igy

Hi Igy, thanks for weighing in. I've been following this thread with intermittent interest from some time, and over that time I've compared what the various actors have said and/or predicted with what I've been able to observe.

You strike me as well-meaning but a consistently doom and gloom, risk-averse kind of guy, and if I followed your advice over the past couple of years I would be doing moderately worse than I am (but at the same time would probably have avoided some bad decisions and reduced the volatility in my holdings).

agip strikes me as a consistently sunny optimist who is maybe sticking his neck out a little beyond his actual knowledge.

maserati strikes me as a conspiracy-theorist, protecting his money with a bit of a tinfoil hat attitude.

coach d strikes me as the rational voice of reason, an informed, active investor with a fairly deep knowledge of past market behaviour that he exploits to his evident (claimed, anyway) advantage.

I'm probably wrong about all of you, but that's how I read the tea leaves in this thread, hence my question to coach d.

Best of luck to all of you, I meant no offence with my generalizations, although I recognize that generalizations nearly always come across as offensive.

Great analysis. You pretty much nailed it (though I'd paint agip as more of a realist).

idiot investor,

I think your criticism of me is justified and no offense taken. However, my first post was 3/2/2015, listed below:

"The risk in the stock market is under appreciated. QE has distorted equity prices and the next big move is down rather than up. The Schiller PE is 27 and valuations are stretched when measured against other valuation models. Remember, the stock market has had two 50% down markets in the past fifteen years. The fifteen year average compounded return on the S&P is only 4.3%, which is inferior to treasuries. Treasuries are overvalued as well. Cash is the superior asset class when risk returns to the market."

Read more:

http://www.letsrun.com/forum/flat_read.php?thread=5369837&page=230#ixzz46wxq5CLO

As a former coach and teacher I am an optimist at the core. Investing is always an odds bet, and when the macro environment shifts then the odds shift. In my view that shift began with the Taper and the end of QE.

Note that during the intervening time period from my first post the market has gone nowhere. I have posted about the overvaluation in biotech, FANG, China, and story stocks. I have posted on the overvaluation and suspect accounting in S&P 500 earning releases. These thoughts have been echoed by others and certainly are not original thoughts on my part.

I certainly do not have all the answers and if one realizes the risks in equity trading and has the capacity to absorb losses I wish them the best.

In regards to my personal risk tolerance I am net leveraged short the S&P 500 and NASDAQ Technology Index. At various times I have also been short Biotech and China.

Beyond all of this I do enjoy writing and discussing the markets.

In the end you are only as good as your last trade.

Igy

Note that during the intervening time period from my first post the market has gone nowhere.

Actually it went down, then up, then down, then up. I predict more of the same.

idiot investor,

To add to the conversation and not intended to throw stones, the O'Shaughnessy Growth Fund performance: YTD -1.41%, 1 Year -9.14%, 10 year -3.57%.

Kudos to coach d, but trading ain't that easy.

Igy

Ghost of Igloi wrote:

idiot investor,

To add to the conversation and not intended to throw stones, the O'Shaughnessy Growth Fund performance: YTD -1.41%, 1 Year -9.14%, 10 year -3.57%.

Kudos to coach d, but trading ain't that easy.

Igy

no it ain't easy, and so far there has been some trouble translating the book's findings to the real world. However 3/4 of the o'shaughnessy based funds are beating the SP500 since inception, which is a great thing, esp when the fees are so high: c.1.25%. If done without fees, all four would be well ahead of the Sp500.

HFCGX since 11/1/96 9.05% vs. 7.67% for SP500

HFMDX since 9/17/2003 11.21% vs. 7.92% for SP500

HFCVX since 11/1/96 6.64% vs. 7.67% for SP500

HFLGX since 3/20/09 17.83% vs. 17.52% for SP500

But it must be said that the funds have only done around half of what the strategies did in backtests.

Ghost of Igloi wrote:

idiot investor,

To add to the conversation and not intended to throw stones, the O'Shaughnessy Growth Fund performance: YTD -1.41%, 1 Year -9.14%, 10 year -3.57%.

Kudos to coach d, but trading ain't that easy.

Igy

and anyway, the numbers above are wrong. per morningstar:

henn cornerstone growth (hfcgx)

1 yr: -6.33%

3 yrs: 10.56%

5 yrs: 9.35%

10 yrs: 0.83%

this fund had several terrible years in the mid 2000s. That's the hard part with quant funds...they will all fail for some period of time...the question when they do fail is whether you stick with them or not.

I heard long term capital would have been fine if they had just stayed with its strategy...but they were so levered they had to quit and go bankrupt.

Since the 20 year record is pretty good, I'm staying with it.

agip,

Here is the fund I came up with when I did a Google search:

http://quote.morningstar.ca/quicktakes/fund/f_ca.aspx?t=F0CAN05M0I

®ion=can&culture=en-CA

Anyway, as you can see in all the O'Shaughnessy symbols you quoted the one year are not so good: -6.33 (HFCGX), -6.74 (HFMDX), -5.98 (HFLGX) and -2.73 (HFCVX).

The point is not to throw stones at O'Shaughnessy or his strategies, but to illustrate there is a time and place for these things.

In a riptide you swim perpendicular to the flow. In cross country you hold your position on the hill and pick-up the pace on the downhill.

Igy

agip,

On second look, it is perhaps giving data as a Canadian investor, and the losses are currency related.

I will go with your data, my apologies, the one year data is based on your symbols is correct.

Igy

Ghost of Igloi wrote:

agip,

Here is the fund I came up with when I did a Google search:

http://quote.morningstar.ca/quicktakes/fund/f_ca.aspx?t=F0CAN05M0I

®ion=can&culture=en-CA

Anyway, as you can see in all the O'Shaughnessy symbols you quoted the one year are not so good: -6.33 (HFCGX), -6.74 (HFMDX), -5.98 (HFLGX) and -2.73 (HFCVX).

The point is not to throw stones at O'Shaughnessy or his strategies, but to illustrate there is a time and place for these things.

In a riptide you swim perpendicular to the flow. In cross country you hold your position on the hill and pick-up the pace on the downhill.

Igy

that looks like the canadian version - different fund, and probably affected by currency, unlike the US versions.

the us versions have been hurt over the last 52 wks, yes - partly because some are small cap funds (small caps are down 6-7% over the same 52 weeks) but also because, as you point out, they have momentum as a factor, so they tend to be higher beta than some funds.

quant funds are typically backtested over decades, so year to year they can go wrong, certainly. that's why I cited the since inception numbers, which are quite good.

agip,

Yep, I agree.

Igy

S&P 500's bull trend is poised to buck 'sell in May' headwind

https://research.tdameritrade.com/grid/public/markets/news/story.asp?docKey=1-SN20160426015877&cid=1-SN20160426015877-MIT

Research,

I would not call it research, but if one believes that following the slope of hope in Ouija board trades go ahead. Let the trend be your friend but don't be surprised when the market bites the feeding hand.

Earnings continue to trend down, with only 42% of companies beating lowered GAAP estimates, stock buybacks adding 4% tailwind to earnings.

Igy

It's the same kind of research that you base your guesses on.

Facts, nothing but the facts: Earnings continue to trend down, with only 42% of companies beating lowered GAAP estimates, stock buybacks adding 4% tailwind to earnings.

Igy