Down goes the Dow

By historic PE, Shiller has demonstrated the current P.E. is a potent leading indicator for the next 5 and 10 year returns.

As of today the S and P 500 is 18.68, above the mean, but nowhere near the peaks seen at times in these prior 20 years.

There is very little out there to find the direction of the stock market for the short term, but volatility is easier to model for these purposes.

There are some short term leading indicators out there, slightly better than random, but are very weak predictors.

The guesses that are made in these markets are really entertaining, but no one should glean any insight from them as they have no reliable predictive power.

My post comes as I have been spending decades finding relevant data and building models for short term predictions in the stock market .What I can say with certainty is that the market is NOT random, but the inefficiencies requires lots and lots of time to uncover. The other issue is that all predictors have a shelf life. Lots of computers and researchers doing what I am doing, extracting all the inefficiencies out of the markets and it's fluctuations.

http://www.multpl.com/

Looks a bit like obfuscation to me. If you want to claim that his strategy is risky that's one thing. To try to make it look like perhaps this particular move of his was not necessarily a good one seems disingenuous.

He missed out on dividends for a year? OK, let's account for that in our calculations.

He missed out on buying at 6400? OK. But he only missed an incremental purchase at that value whereas he boosted his entire portfolio by buying back in at a substantial discount to when he sold.

He bought all the way up to 14,100. Didn't you as well? As such there is no difference between your strategy and his on this point and this point is, at best, a red herring.

Let's do the numbers. Klondike out at 12,800 in late May 2008, back in at 9000 in late June 2009. Flagpole rides up and down. Assume dividend yield of 3% and Klondike5 cash yield of 0.6%. How do things look?

Assuming that these gentlemen have $500,000 to start with in late May 2008 and further that they can put in an additional $2,000 every month (Flagpole into the market, Klondike5 in cash, waiting to reinvest in the market) they will end up with portfolios fully invested in the market by late 2009 with the following values:

Flagpole: $392,881

Klondike5: $531,603

Klondike5 will have 35% more money invested in the market than Flagpole. Place whatever judgement you wish on this. But, without placing any judgement, the math tells us that Klondike5 is 35% ahead.

Truth in advertising: I agree with Flagpole in principle. It is much better for nearly everyone to simply ride out the ups and downs. But I don't think that trying to deny that a particular move was a good one - when it very clearly was, by luck or by skill - is the best way to defend this approach.

Investor wrote:

That is correct. Gains and losses are not realized until investments are sold. That's Investing 101.

Bigfoot Investments wrote:

Do you actually believe something so patently ridiculous?

It's not ridiculous. It's a fact.

"But I don't think that trying to deny that a particular move was a good one - when it very clearly was, by luck or by skill - is the best way to defend this approach."

Most likely Klondike5 is a f*cking lier. Blowhards like him always are. They tell you how smart they are and what great moves they made AFTER the fact. I'd just as soon have a root canal with nothing other than yukon jack for the pain, than have a conversion with someone like him.

Clearly, the best way to make a lot of money is to time the market perfectly. It will beat every other investment approach out there. The problem is it always requires two correct guesses when to sell and when to buy - over and over for a lifetime. Nobody can do this since the market is not predictable.

What you KNOW is when the market has been going up, and when it has gone down. You can also know if the market is, in general, expensive or relatively cheap.

What I do is sell a little when the market is rising or when it is expensive, and I buy when it has dropped or is cheap. So for instance, I was taking small amounts of money out of equities in 2006, and moving them to bonds (and other investments). In 2007 I was static. In late 2008 I started selling bonds, and moving back to equities. By 2009 100% of all investing was going into equities. I was also buying individual stocks left and right. By 2010 I was back to where I wanted to be, and started investing in bonds again (and selling many of the individual stocks I bought).

Right now? Bonds are expensive, stocks are fairly valued (although some pockets are cheap), but I've been selling stocks and moving that to cash. Bonds are sitting right where they are. They are a good diversifier.

I sound like Klondike, but these are not huge moves. I'm not selling all my equities. I'm talking 1-5% of my portfolio. It's a form of rebalancing, but it's a somewhat tactical approach as opposed to a mechanical one most would advocate.

I don't recommend anyone following what I do. You should do what you think is right for you. Everyone has a different temperament, different goals, and different amounts of knowledge and IQ (or lack of). I'm okay if the market drops 50%. My goal is to have 2.5 - 3.0 million. Then I'll feel set for retirement. I'm concerned about the total return I achieve over my lifetime of investing. Not over some short period of time. It took a little more than a year to recover my "loses" from 2008, not counting my new investments coming from my salary, but counting the moves I made with money (bonds to stocks). If we have another 50% drop, I expect a similar recovery, though it might take a little more time.

BTW, Klondike's assertion that people did not recover their losses from 1929 until the 50's is hogwash. in the 30 stocks paid healthy dividends. Much more than today. So you just can look at the price graph which does NOT include dividends. Smart investors made money in the 30's, and a lot of money in the 40's.

Your basic premise of dollar cost averaging and not jumping in & out has been well established by Bogle, Peter Lynch, etc. This is a safe approach for the average person to match the market's returns.

There is no way to "prove" whether Klondike's success in his 2008 sell & 2009 buy was luck, skill, or a combination of both. No double-blind placebo studies.

My main point: Your assumption that his 2008/2009 experience was "at best a wash" is absurd in this case.

Back of the envelope calculation, using your numbers:

1. You talk about dividends, yet ignore interest on cash. Historically, interest on cash pays more than average market dividends. My savings account was paying 5.1% interest in 2008. By the time he bought back in in June 2009 it was probably closer to 3%. Much more than dividends on stocks, but for easy figuring I'll say interest = dividends. Wash. (see #6 for why this doesn't even make much difference in his case).

2. For easy figuring, let's say a person has 15 years of accumulated contributions in their investment account.

3. Let's use a $1,000,000 account when Klondike sold, in June 2008. If he sold at "high 12,000s" (say 12,600) and bought back at Dow 9000, then his $1,000,000 was still 1,000,000 in May 2009 (it also earned interest. 3% would be $30,000 but ignore interest for the moment) The "buy & hold"'s original $1,000,000 is now 28.6% lower, or $714,285.

4. New contributions. The account is 15 years old. That is 15 years of contributions. So, with zero growth, the year (actually 11 months) of contributions from June 2008 - May 2009 represented 1/15 of the account, or 6.67%, or $66,667 in this case. The 6.67% needs to be adjusted for 2 factors:

a) adjust down since the 15 years of contributions has been growing during those 15 years. So its $1 million value is probably more like 20-30 years worth of contributions; and...

b) adjust up because a person's annual earnings tend to increase over time as they develop in their career. So, earnings in year 16 is likely more than year 15, year 10, etc. For easy figuring, I'll be generous to your argument and assume the effect from a = b, so a wash.

5. Earnings on new contributions. You assume the Dow averaged 9000 during the year (11 months) he was out of the market. Conveniently that is the exact number he bought back in at in June 2009. The Dow was below 9000 from October 2008 until he bought back in in June 2009. It was only under 8000 from Feb 2009 to early April 2009. Probably around 2 months.

You make a big deal about buying at 6500, 6600, 6700, but you also bought at 12,500, 11,700, and 10,300 during that year Klondike was out. The Dow was only below 8000 for a couple of months. 2-3 months of contributions. The account has at least 180 months of contributions (15 year old account). 2.5/180 = 1.4%. So a dollar cost averager got those great low prices on 1.4% of the account's value.

Let's be amazingly generous to your argument and say that you got the screaming deal of Dow 6500 on 100% of that year's contributions. (You didn't, since you stated it averaged about 9000 during that time.)

1 year of contributions. = $66,667 from step 4. Bought at Dow 6500 and growing to Dow 9000, when Klondike bought back in = 38.5% growth. A $25,641 gain. The $66,667 becomes $92,308.

So, Klondike's 1,000,000 = 1,000,000 + 66,667 (new contributions going to cash) = 1,066,667

Buy & Hold: $1,000,000 dropped to $714,285 + $92,308 (contributions + earnings on contributions) = $806,593.

That is $260,074 more (32.2%) in Klondike's account.

6. Even if I am CRAZY generous to your argument, and ignore the interest on cash typcially outpacing dividends, there is no comparison.

Let's be generous and say Klondike earned 0% in interest.

Let's be generous and give you 3% dividends for the entire year. Let's be even more generous and give you 3% dividends on the $1,000,000 account, even though the value was much lower during that year (averaging in the $700,000s and as low as sub-$500,000). 3% on $1,030,000 = $30,900.

So, Klondike's account ends at $1,066,667

Buy & Hold ends at $837,493 ($806,593 + $30,900 dividends).

$229,174 difference. Klondike's account is 27.4% larger. Far, far, far from "at best a wash".

Extra credit: Now, you might even claim that you make EXTRA contributions when the DOW was "crazy low". But, that is not following a Buy & Hold system, which is what you argue for.

How is making extra purchases when the market is crazy low different from Klondike selling some when he thinks it is crazy high? How do you know what is "crazy low"? Did you buy any "extra" at Dow 11,000? That was 21% down. How about Dow 10,000? That was nearly 30% down. Dow 9,000 was 36% down. Or did you magically "sense" to wait through all those great opportunities with your "extra" money and hold out for Dow 6500, 6600, and 6700? If so, how did you know to wait that long? How can you possess such skill, and then claim that it's impossible for Klondike to sense when the market is high?

Both your "extra" buys, and Klondike's sells are either lucky, skillful, or a combination of both. But make no mistake, they are in the same bucket. Neither of those actions are following a buy & hold system.

Extra, extra credit: For you to move the needle on a 15-year old account with your "extra" purchases, you must have kept a significant cash allocation on hand just for such purposes. That cash allocation should be accounted for when you claim your 11% or whatever historical returns.

Bigfoot Investments wrote:

Looks a bit like obfuscation to me. If you want to claim that his strategy is risky that's one thing. To try to make it look like perhaps this particular move of his was not necessarily a good one seems disingenuous.

That's kind of like trying to justify your position by telling a "true" story that involves a guy selling $1.6M of stocks and then immediately buying them back.

Hypocrite detector wrote:

Bigfoot Investments wrote:

Looks a bit like obfuscation to me. If you want to claim that his strategy is risky that's one thing. To try to make it look like perhaps this particular move of his was not necessarily a good one seems disingenuous.

That's kind of like trying to justify your position by telling a "true" story that involves a guy selling $1.6M of stocks and then immediately buying them back.

I am going to assume that you have an IQ above 70 and therefore you realize just how ridiculous your post is.

buffett wrote:

"But I don't think that trying to deny that a particular move was a good one - when it very clearly was, by luck or by skill - is the best way to defend this approach."

Most likely Klondike5 is a f*cking lier. Blowhards like him always are...

It's possible. Certainly he would not be the first to be caught in a lie regarding investment returns on these boards.

Still, whether or not he is telling the truth is not for me to know (or even care, really). I only did the math to point out how silly one argument being used against him was.

Nice try, but you're the one who comes across as lacking intelligence. Your weak rebuttal lacking of substance is proof.

Investor wrote:

Investor wrote:

That is correct. Gains and losses are not realized until investments are sold. That's Investing 101.

Bigfoot Investments wrote:

Do you actually believe something so patently ridiculous?

It's not ridiculous. It's a fact.

It has been indisputably demonstrated to anyone with an IQ north of 85 that an investor makes or loses money regardless of whether said investor sells the particular investment.

My condolences if you fall on the wrong side of that dividing line.

That's a different argument. Maybe you're changing the subject to deflect attention from your misunderstanding regarding realized gains and losses. Whatever the reason, you're still wrong.

Hypocrite detector wrote:

Bigfoot Investments wrote:

Looks a bit like obfuscation to me. If you want to claim that his strategy is risky that's one thing. To try to make it look like perhaps this particular move of his was not necessarily a good one seems disingenuous.

That's kind of like trying to justify your position by telling a "true" story that involves a guy selling $1.6M of stocks and then immediately buying them back.

No, it's not. The two are not alike at all.

He is right about FPs horribly incorrect analysis.

His story was also correct... at least the main point about the "selling point" being the determining factor about whether money is "made" or "lost" or not.*

*If anything, the only hypocritical part about it was claiming Mr Hold was wealthier than Mr Sell. In reality, it seems disingenous to not account for future tax obligations on his "unrealized" stock gains. He did mention future taxes, but then went on to ignore them and claim Mr Hold wealthier.

The story was also disingenuous because it's not realistic to expect someone to sell their stock and then IMMEDIATELY buy it back. No one is that stupid.

Investor wrote:

That's a different argument. Maybe you're changing the subject to deflect attention from your misunderstanding regarding realized gains and losses. Whatever the reason, you're still wrong.

You are promoting one of THE MOST DANGEROUS MISTAKES in investing, one that has cost people $ billions in their retirement and investment funds. Ten years ago, Standard and Poors published some academic research that found that people who invested in mutual funds in their 401K accounts in the 1990s made NOTHING on their investments afte the 2000-2002 bear market was taken into account. The Nasdaq Composite has NEVER recovered to where it was in 2000.

The problem with not considering investment losses "real money" is that if you make a mistake, it costs you eventually, and not taking action to cut your losses on a mistake basically drags you into a block hole of ever larger losses. There's a big difference between a stock like Netflix, which I bought at 25 and kept through some operational issues (all the way down to more than double what I paid for it), and a company like Citygroup which became nuclear waste.

Do you REALLY believe the decline in C is not realized until it's sold?

What happens here is often this:

stock falls 10%: "Just a little profit taking"

stock falls another 10%: "It will come back, just give it time."

stock falls another 20%: "I can't sell it at a loss. I'll wait until it gets back to even, then I'll sell."

stock falls another 40%: "Too cheap to sell, but it's not real money because I haven't sold it, so I'll just wait and see if gets up to what I bought it for someday."

...and you've ridden it all the way to the bottom. Kind of what people did here in 2000 and 2008, and they'll probably do again.

GenericlD wrote:

The story was also disingenuous because it's not realistic to expect someone to sell their stock and then IMMEDIATELY buy it back. No one is that stupid.

Speaking of stupidity... his story was clearly a simplification to evaluate the claim of the sell point being some magical key to whether money has been made or lost. (Simplification is a useful tool to evalute a premise... i.e. eliminate other variables to minimize complexity).

For taxes purposes, yes. But for common sense, not always. That is his point.

"MyWorldCom" stock is bought at $30 per share by Mr Hold & Mr Sell. The company basically fails, never to recover, but never filing bankruptcy. The stock drops to $0.05 per share and never recovers... basically staying at penny-stock status. Mr Sell sells the stock at $0.05 per share. Mr Hold continues to hold it for the next 20 years, never selling.

Are you really arguing that that Mr Hold has not lost any money? Because he never sold?

Maybe you should look up & understand the concept of mark-to-market or fair value accounting.

Maybe you missed this...

Investor wrote:

That is correct. Gains and losses are not realized until investments are sold. That's Investing 101.

That is the crux of our disagreement. By definition, realized gains/losses are the result of selling investments. That's a fact, pure and simple. 'Bigfoot Investments' thinks it's "ridiculous". You too, coach d?

Investor wrote:

That is the crux of our disagreement. By definition, realized gains/losses are the result of selling investments. That's a fact, pure and simple. 'Bigfoot Investments' thinks it's "ridiculous". You too, coach d?

I'm not coach d, but since I just posted on the topic...

Of course, for "realized" gains, for tax purposes, the sell point is a magical point.

But for reality, and common sense purposes see my post immediately above yours.

I was responding to Generic ID, but to borrow your phrase: "You too, Investor?"

My point was solely about realized gains.

...and realized losses.