@ Rob
Normally, I would not start a thread like this with a persons name, but it appears you don't mind this type of thing.
I don't spend nearly as much time as I should learning about investments. I spend much more time trying to eliminate any reoccurring bill in my life. I have not had the chance to read everything you have posted or checked out your site yet as I don't read everything in general because I have to set priorities in my time. But I think I read that you have been completely out of the market since 1996. I think I understand your strategy in valuation. In layman's terms:
People should avoid getting involved with the Baseball card, Status/Luxury items, and Beanie Baby raves that plague the stock market/society. Stocks/things are not worth as much as people are buying them for because when you look in history we have always had periods where we could buy them at better values and history tends to repeat itself. You basically want everyone to shop for investments/food in season.
The only flaw I see in waiting for value is that things are worth what they sell for (that doesn't mean anyone is buying at a good deal) but if you don't buy what you need (investments/food) you risk inflation (the other tax) eating away your principle (starving) while you are waiting. I don't believe a luxury car/boat/vacation is worth what they are sold for, but as long as people buy them at the luxury prices they truly are worth that price. Something being overvalued does not mean people did not purchase the item with real dollars (think famous paintings). The kick is that these people need each other to value the items as they do or the items will no longer sell at luxury prices. Another problem is that if people want something now they have to buy things at the prices they can find.
I don't see any flaw with buying a few dozen stocks at a good value instead of paying mutual fund fees to buy many overpriced less risky (I only say this because higher returns are usually related to higher risk) stocks, but I think not being invested has its own risks. I have read (propaganda?) that most large gains are in nearly as few days as the falls.
Given enough time I think there is no doubt that you will be correct. I just hope that there is another repeating stock trend for you to jump on. It is possible that the stock market does not go as low as you want until a true collapse. Then the concern will be if money in the bank is worth anything. The question lies if people can afford to be out of the market for 20-30 years trying to time it using value.
Is there a reason you have not bought individual stocks that are a good value instead of being out completely while attempting to time the entire market based on value?
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RobBennett
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You're raising very important points, Matthew. You can't imagine how much time I have spent thinking about this sort of question, trying to figure it all out. I don't say that I have it all figured out now. but I think that I can offer some clues. I also of course acknowledge that there are some very smart people who have very different views than mine.
I don't think it is at all a bad idea to pick individual stocks that offer good value. My reason for not doing so is that I am just too darn busy working on building up my site to put the time into it that it would take for it to work. I believe that the single most important thing in investing is having enough confidence in your strategies to stick with them through bad times. If I picked stocks that I had studied in depth, I think that would pay off. But I don't have any free time today to do the necessary research.
It could be said that I have elected to invest in myself. Whether that will pay off or not remains to be seen. At least I know what I am investing in! At least I am not hiding important information from myself. Let's hope!
"I don't believe a luxury car/boat/vacation is worth what they are sold for, but as long as people buy them at the luxury prices they truly are worth that price. Something being overvalued does not mean people did not purchase the item with real dollars (think famous paintings)."
I understand the point you are making here and it is one that causes a lot of smart people to place at least a guarded confidence in market prices. Many people acknowledge that valuations matter but they are not willing to take that thought to its logical conclusion (which is what I do) because they have respect for markets and feel that the market is a better judge than they are of what prices should be. They are reluctant to trust their own ability to "see through" the answers the market comes to. They feel that they might make mistakes if they try to outsmart the market and conclude that it is best to at least conditionally trust the market to do the job at least to some extent effectively.
I wrote a column just this past week on this precise question. So I will link to it here and then try to sum up my take in the words that follow. The column is titled "The Curious Case of the Market Price That Is Not the True Market Price":
http://www.valuewalk.com/stock-market-v ... ket-price/
I make a simple and bold claim in that column (it's only me saying it and there is certainly no rule that anyone be persuaded -- but I felt I needed to get it out before people) -- that the true market price is not the nominal price but the market price as adjusted for the effect of overvaluation or undervaluation.
The stock market is different than all other markets in the way that prices are set. You are right that, with paintings, it really is so that at least someone elected to pay the price that is called the market price. I question whether that is so re stocks. If the price of Apple is $30, there is one person who sold one share of Apple at $30 (the price is set by what happened in the last transaction). But there are millions of Apple shareholders who would not be willing to sell at that price.
Do we have any reason to believe that, if all Apple shareholders put their shares up for sale tomorrow, that the market price would remain $30? It certainly would not. If all shares went up for sale, the market price would collapse. So is that $30 price really the price being assigned by the market? I think it is a fooling around price, it is not a serious price.
I think the serious price is the price that would apply if all shares went up for sale. I think that the valuation-adjusted price is a better indicator of this real price than the one you obtain by looking at a single transaction. (It would be very hard if not impossible to come up with a good valuation-adjusted price for a single stock, but I think it can be done effectively for a broad index.)
I am questioning whether stocks really are in any meaningful sense worth the price at which a single share sells. I of course acknowledge that you can obtain that price or something close to it if you sell on the day the price is quoted. But I don't think that is what people want to know when they ask "what are my stocks worth"? They want to know what the LASTING value of their stocks is. I believe we get a closer approximation of the lasting value of a broad stock index by adjusting the nominal value by the overvaluation amount as indicated by the P/E10 value.
I argue that we should be telling people this valuation-adjusted number each time we report the nominal number. I think that would change investor psychology DRAMATICALLY. I believe that people who bought index funds when they were priced at three times fair value (2000) were putting one-third of their money into stocks (a great value proposition) and two-thirds of their money into cotton-candy nothingness (a disaster choice). So I think it is a big deal to figure out whether this really is so or not.
I don't worry about inflation too much because my investments (TIPS, Bonds) are inflation-protected. And they have provided a higher return than stocks for the entire time I have held them.
I agree that there would be a risk in waiting for stock prices to go too low before getting in. It's certainly a mistake to get too greedy. What I want to see before getting in is less emotion among investors. I have made reference to some of the things that I have seen on discussion boards and blogs. That sort of thing terrifies me. I just do not see how the market can function so long as so many people are so intensely emotional. I agree with your general suggestion that you cannot trust the valuation stuff 100 percent (nothing can be trusted 100 percent). But I have to see less emotion to feel confidence in the asset class.
I would be willing to get into stocks at a P/E10 level of 15 or 16 or 17 or even 18 f I saw the emotion dissipate. My guess is that the emotion will dissipate only when we get to 10 or 11. That's why I say that those P/E10 levels are the P/E10 levels at which I would get in. It's the level of investor emotion that is my real concern. The P/E10 level is just a means of quantifying that.
My personal view is that we just happen to be living in the worst time in history to own stocks. It had to happen to some group of people and it just happened to be us! I don't see this as being the result of a conspiracy. My view is that the people who came up with Buy-and-Hold were trying to do good work and just happened to make some mistakes and that that set us on a wrong track, I think when we get this worked out we will be entering the best time in history to invest in stocks.
I hope so! I am fundamentally a stock guy. I want to be in stocks. I don't like the idea of being out for so long. I am by no stretch of the imagination anti-stock. It would be fair to say that I am anti-emotion when it comes to investing. It is my belief that the emotion is the result of the mistakes that were made in development of the Buy-and-Hold Model. I see all that we have seen as being the consequence of some people being too sure of themselves when all they really had was an untested theory. They were right to put the theory forward but they were wrong to put it forward with so much dogmatism. I am very much anti-dogmatism.
Rob
I don't think it is at all a bad idea to pick individual stocks that offer good value. My reason for not doing so is that I am just too darn busy working on building up my site to put the time into it that it would take for it to work. I believe that the single most important thing in investing is having enough confidence in your strategies to stick with them through bad times. If I picked stocks that I had studied in depth, I think that would pay off. But I don't have any free time today to do the necessary research.
It could be said that I have elected to invest in myself. Whether that will pay off or not remains to be seen. At least I know what I am investing in! At least I am not hiding important information from myself. Let's hope!
"I don't believe a luxury car/boat/vacation is worth what they are sold for, but as long as people buy them at the luxury prices they truly are worth that price. Something being overvalued does not mean people did not purchase the item with real dollars (think famous paintings)."
I understand the point you are making here and it is one that causes a lot of smart people to place at least a guarded confidence in market prices. Many people acknowledge that valuations matter but they are not willing to take that thought to its logical conclusion (which is what I do) because they have respect for markets and feel that the market is a better judge than they are of what prices should be. They are reluctant to trust their own ability to "see through" the answers the market comes to. They feel that they might make mistakes if they try to outsmart the market and conclude that it is best to at least conditionally trust the market to do the job at least to some extent effectively.
I wrote a column just this past week on this precise question. So I will link to it here and then try to sum up my take in the words that follow. The column is titled "The Curious Case of the Market Price That Is Not the True Market Price":
http://www.valuewalk.com/stock-market-v ... ket-price/
I make a simple and bold claim in that column (it's only me saying it and there is certainly no rule that anyone be persuaded -- but I felt I needed to get it out before people) -- that the true market price is not the nominal price but the market price as adjusted for the effect of overvaluation or undervaluation.
The stock market is different than all other markets in the way that prices are set. You are right that, with paintings, it really is so that at least someone elected to pay the price that is called the market price. I question whether that is so re stocks. If the price of Apple is $30, there is one person who sold one share of Apple at $30 (the price is set by what happened in the last transaction). But there are millions of Apple shareholders who would not be willing to sell at that price.
Do we have any reason to believe that, if all Apple shareholders put their shares up for sale tomorrow, that the market price would remain $30? It certainly would not. If all shares went up for sale, the market price would collapse. So is that $30 price really the price being assigned by the market? I think it is a fooling around price, it is not a serious price.
I think the serious price is the price that would apply if all shares went up for sale. I think that the valuation-adjusted price is a better indicator of this real price than the one you obtain by looking at a single transaction. (It would be very hard if not impossible to come up with a good valuation-adjusted price for a single stock, but I think it can be done effectively for a broad index.)
I am questioning whether stocks really are in any meaningful sense worth the price at which a single share sells. I of course acknowledge that you can obtain that price or something close to it if you sell on the day the price is quoted. But I don't think that is what people want to know when they ask "what are my stocks worth"? They want to know what the LASTING value of their stocks is. I believe we get a closer approximation of the lasting value of a broad stock index by adjusting the nominal value by the overvaluation amount as indicated by the P/E10 value.
I argue that we should be telling people this valuation-adjusted number each time we report the nominal number. I think that would change investor psychology DRAMATICALLY. I believe that people who bought index funds when they were priced at three times fair value (2000) were putting one-third of their money into stocks (a great value proposition) and two-thirds of their money into cotton-candy nothingness (a disaster choice). So I think it is a big deal to figure out whether this really is so or not.
I don't worry about inflation too much because my investments (TIPS, Bonds) are inflation-protected. And they have provided a higher return than stocks for the entire time I have held them.
I agree that there would be a risk in waiting for stock prices to go too low before getting in. It's certainly a mistake to get too greedy. What I want to see before getting in is less emotion among investors. I have made reference to some of the things that I have seen on discussion boards and blogs. That sort of thing terrifies me. I just do not see how the market can function so long as so many people are so intensely emotional. I agree with your general suggestion that you cannot trust the valuation stuff 100 percent (nothing can be trusted 100 percent). But I have to see less emotion to feel confidence in the asset class.
I would be willing to get into stocks at a P/E10 level of 15 or 16 or 17 or even 18 f I saw the emotion dissipate. My guess is that the emotion will dissipate only when we get to 10 or 11. That's why I say that those P/E10 levels are the P/E10 levels at which I would get in. It's the level of investor emotion that is my real concern. The P/E10 level is just a means of quantifying that.
My personal view is that we just happen to be living in the worst time in history to own stocks. It had to happen to some group of people and it just happened to be us! I don't see this as being the result of a conspiracy. My view is that the people who came up with Buy-and-Hold were trying to do good work and just happened to make some mistakes and that that set us on a wrong track, I think when we get this worked out we will be entering the best time in history to invest in stocks.
I hope so! I am fundamentally a stock guy. I want to be in stocks. I don't like the idea of being out for so long. I am by no stretch of the imagination anti-stock. It would be fair to say that I am anti-emotion when it comes to investing. It is my belief that the emotion is the result of the mistakes that were made in development of the Buy-and-Hold Model. I see all that we have seen as being the consequence of some people being too sure of themselves when all they really had was an untested theory. They were right to put the theory forward but they were wrong to put it forward with so much dogmatism. I am very much anti-dogmatism.
Rob
In history, there have been people who were able to create conspiracy to scare people out(in?) of investments just so they could buy them up cheap. Today I am guessing many corporations are gambling with investor money in derivatives. This can create a real collapse in value of stocks because I view derivatives as corporations taking our money to the horse track.
My understanding, which could be wrong, is that banks willfully took on the bad loans of consumers because they were able to get the loans guaranteed (through derivatives) by insurance companies like AIG and in the mean time pocket tons of money in closing deals and creating arm loans. Everybody (from their perspective) thought it would be win-win but somebody always gets scammed in a bet. Unfortunately, nobody had the real money to bail the foreclosing consumers out because consumer loans are based on future slavery (payments). That is when our government stepped in (after all, only government can guarantee future slavery through taxation).
Back to scaring people out of the market and conspiracies. Here is something to consider. Have the banking industry fabricate arm loans which are basically designed to rob any equity from the general public through foreclosure (as most people overextend themselves when allowed) and take the only real asset (the home). Set up derivatives to guarantee that you will not go bust when all your "customers" default on the loans with a huge insurance company. Broadcast to the public that a huge crises is swelling as the huge insurance company can not make good on the pay off. Stocks start to tumble as all the market timers instantaneously bail out. The market in reality struggles as everyone asks everyone else to "pay up". Companies start to lay people off in an effort to come up with the funds required to keep operating because new orders drag as everyone has to start looking for money to pay up or because they can no longer get new loans (or is this to promote the corporate agenda of outsourcing?). Finally, all the people who make emotional decisions (many of the people who THOUGHT they were buy and hold) start to move their money into "safe" no reward investment methods locking in the losses. The market continues to tank. Time for the banks to ask themselves (Federal Reserve) with public approval from our government to bail the banks out so that they can afford to keep their new found fortune (excess real estate) using taxpayer money. In the end, they will eventually set up loans with responsible people who will make good on the future slavery (payments).
I don't see stocks today being any worse than the Great Depression. I don't think the market will ever be free of emotion until everyone is out and then there will be another emotional boom because everyone will think the sky is the limit. Another scandal similar to the one I theorized above or the ones in history might bring stocks back to a value amount but what if the people who design the conspiracy decide to buy at 18 while you are waiting for 10?
...Not that I believe in conspiracy either. Most things are just complex.
My understanding, which could be wrong, is that banks willfully took on the bad loans of consumers because they were able to get the loans guaranteed (through derivatives) by insurance companies like AIG and in the mean time pocket tons of money in closing deals and creating arm loans. Everybody (from their perspective) thought it would be win-win but somebody always gets scammed in a bet. Unfortunately, nobody had the real money to bail the foreclosing consumers out because consumer loans are based on future slavery (payments). That is when our government stepped in (after all, only government can guarantee future slavery through taxation).
Back to scaring people out of the market and conspiracies. Here is something to consider. Have the banking industry fabricate arm loans which are basically designed to rob any equity from the general public through foreclosure (as most people overextend themselves when allowed) and take the only real asset (the home). Set up derivatives to guarantee that you will not go bust when all your "customers" default on the loans with a huge insurance company. Broadcast to the public that a huge crises is swelling as the huge insurance company can not make good on the pay off. Stocks start to tumble as all the market timers instantaneously bail out. The market in reality struggles as everyone asks everyone else to "pay up". Companies start to lay people off in an effort to come up with the funds required to keep operating because new orders drag as everyone has to start looking for money to pay up or because they can no longer get new loans (or is this to promote the corporate agenda of outsourcing?). Finally, all the people who make emotional decisions (many of the people who THOUGHT they were buy and hold) start to move their money into "safe" no reward investment methods locking in the losses. The market continues to tank. Time for the banks to ask themselves (Federal Reserve) with public approval from our government to bail the banks out so that they can afford to keep their new found fortune (excess real estate) using taxpayer money. In the end, they will eventually set up loans with responsible people who will make good on the future slavery (payments).
I don't see stocks today being any worse than the Great Depression. I don't think the market will ever be free of emotion until everyone is out and then there will be another emotional boom because everyone will think the sky is the limit. Another scandal similar to the one I theorized above or the ones in history might bring stocks back to a value amount but what if the people who design the conspiracy decide to buy at 18 while you are waiting for 10?
...Not that I believe in conspiracy either. Most things are just complex.