Any Sign of a Bottom?

I’m sitting on a pile of cash after selling some real estate. How should I put the money to work to earn a rate at least equal to inflation? Are there any indications we are nearing a bottom in the stock market? The BCC is signaling 5 out of 7. Do you think it will get to 4 as it did in March 2020, when the market bottomed a couple of years ago?

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I’m sitting on a pile of cash after selling some real estate. How should I put the money to work to earn a rate at least equal to inflation?

Sit on the cash, very slowly losing money.
When a great deal presents itself, pounce.
If you count the gain from the pounce, the return on cash can be very high.

I’d like to get an attractive entry point for QQQE, for example.
One line of reasoning I use suggests that below about $61 might represent a better-than-average entry price.
That’s another 17% drop from here, so no pouncing yet for me.
That uses the average valuation level in the last 15 years as a yardstick for a “fair” price.
Still–
At current levels my models suggest that, starting here with QQQE at $74, one might expect five
year real total returns in the rough vicinity of inflation+6.7%/year, which isn’t all that bad.
But I think better entry points will be coming to town.

Are there any indications we are nearing a bottom in the stock market?

Not on the metrics I use.
Opinions no doubt differ on that front. Understandably, as the future hasn’t happened yet!

The thing is, given how amazing valuations have been lately, it will take what might usually count as a bloodbath just to get back to what used to look average.

Jim

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The thing is, given how amazing valuations have been lately, it will take what might usually count as a bloodbath just to get back to what used to look average.

Jim
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This. Exactly this.

So many seem to be looking at drops from ATHs to determine a bottom.

But if the ATH was never deserved, and/or was a byproduct of a pandemic-induced free money liquidity surge, then perhaps we need to look at where things “should have been” and when you factor that a crash or capitulation should go too far in the negative direction, you get a better idea of where a bottom may still take us.

TTD is an example.
I was a huge cheerleader and it made great returns for me from Spring 2017 thru Jan 2020 when i sold. I felt the stock got ahead of itself, and the multiple had expanded too quickly at that point.

Pandemic hits, and TTD actually grew more slowly in 2020, yet their stock grew 3x.

Great company, great ceo, very consistent in general. But the pandemic screwed up the stock price. It now continues to sit around Oct 2020 levels.

If you think “i have an 18-month discount” it sounds cheap. At about a post-split price of $75 at moment.

If you are me, you realize the pre-covid trend would put it about 33% cheaper near $50.

And then you realize you thought it was expensive pre-covid.

So what is just a dip from ATH and what is actually a great entry price can be wildly different and all very subjective.

Dreamer

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Long rambling post ahead, largely off topic for the board.

So many seem to be looking at drops from ATHs to determine a bottom.

Certainly, that’s not the best way to go.
A lot of people were bottom fishing tech stocks in mid 2000, late 2000, mid 2001, late 2001, mid 2002…
eventually it was the correct thing to do, but I suspect most people who kept the faith were fully back in far too early, out of cash.
Not that it’s easy, as you don’t ever know in advance how far something will fall. Or if it will.

But, that being said: for some things it’s not completely impossible.
It’s not like the clocks have no hands, it’s just that they’re not very accurate so few people look at them.

Every investment has an actual true value.
Pretty much every bond or share had a finite lifespan.
The true value is the present value of the coupons that could be paid out from now till then, plus the final liquidation payout.
Obviously nobody knows in advance what that total payout amount will be for stocks, but some things are predictable enough that you can estimate it to a useful degree.

The usual first shortcut for shares is to assume that you’ll sell it at some date far in the future, and count that as your final payout.
Assume that the growth rate and valuation multiples of the company are not better than average at that time, no matter how good they are now.
Every fast grower will stop increasing its share of GDP some day.
With a future earnings estimate and a future multiple estimate, you have a future price estimate and an annual return estimate.

That reasoning is the heart of my basic rule of thumb: most stocks are probably a good investment at under 12 times their average EPS 5-10 years from now.
They might be dead-end cash cows or super-growth firms with no earnings for the next few years,
but if you assume that everything trades at a P/E in the teens eventually, and that rapid growth
lasting more than 10 years into the future is so rare than you can ignore those cases,
then the assumption of a normal exit price down the road can give a signpost of where prices get reasonable.
So, for even the highest of growth firms, I just try to imagine what the plausible earnings per share are 5-10 years out. (in today’s money)
If the asking price today is more than 12-15 times a number I find plausible, I stay away.
If it’s less than 10, it’s likely going to work out very well.
Note, other than the obvious geopolitical issues meaning you might lose all your money, BABA seems a truly outstanding deal on this metric.

With those general thoughts in mind, I would quibble with your last comment:
So what is just a dip from ATH and what is actually a great entry price can be wildly different and all very subjective.

The opinion of what’s a great entry price is highly subjective.
The reality of what’s a great entry price is a reality. It’s just that it’s a reality that’s damnably hard to estimate in advance : )

The only silver lining is that there are some investments for which you can make a decent stab at things.
And others that are wildly unpredictable but have such an asymmetric of outcomes that you might win big but don’t lose much at all if you’re wrong.

I stick with rules of thumb that, though they’re certainly wrong, are probably right enough that I can spot the right neighbourhood.

For example, if the Nasdaq 100 equal weight set is trading at its average valuation level of the last 15 years, then that’s probably not too far off a notion of a fair price.
And if I buy today, I should conservatively assume that I’m not going to get a valuation level better than that when I ultimately come to sell.
So, my “dead money” time risk in years is probably roughly equal to the percentage of overvaluation divided by the usual annual rate of growth of fair value.
After a flat spot that long, it will be at its average valuation level, and I’m likely to get the long run trend return thereafter.
In this case, I use median real earnings yield among the 100 stocks, which trends amazingly well.
It does have huge dips during recessions which seem to be entirely transient, so those can be somewhat ignored when building the trend line.
At the moment, this back-of-the-envelope approach would suggest that an investor in QQQE would
not be irrational to anticipate returns on the order of 2-3 years of no returns followed by maybe 8 or 8.5%/year thereafter.
The price in any given year is unpredictable, but the notion is that if you smooth out the squiggles enough, that would be a likely result.
Within rock and roll distance, anyway. Not that bad, compared to a lot of choice these days.

The same sort of line of reasoning can be done for a lot of things…a few with usefully predictable/accurate results, most not.

Oddly enough, the broad US market is one of the harder things to try to predict, despite not having any big unpredictable inputs.
It’s easy to estimate what the earnings will do, within modest error bounds for quite long time frames.
And the valuation multiples are mean reverting. We can be pretty sure that the multiple of trend earnings will be more than 5 and less than 30 even 1000 years from now.
With those two observations, you’d think it would be a cinch.
But…valuation multiples mean revert very very slowly. We might see five whole years at 30, or five years at 5.
If we can’t guess the average ending multiple 5-10 years from now, or 10-15, with better precision than that,
the forecasts might be right on average but rarely very close in any given instance.

Sorry for the rambling.
I’m always posting about value investing on a quant forum, and quant investing on a value forum.
You’d think I wouldn’t get them mixed up so easily.

Jim

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This is exactly why / how I write puts. I don’t love the market / the stock / the whatever here, but I’m willing to own it 15-20% lower.

This is exactly why / how I write puts. I don’t love the market / the stock / the whatever here, but I’m willing to own it 15-20% lower.

I started doing the same this year, but at lower levels, like > 3 standard deviations below today’s prices. My logic is that the general market is overpriced by the same, so I may as well have some investing activity that keeps me occupied. If the market corrects to where I believe it should be, then I’ll own the stock at the level I think is a fair price. If the market keeps climbing higher, I take my put income and go home.

Perhaps this approach even has the added feature that I don’t need to act when there is blood in the streets, which is often hard to do. Rather, I decide now what the fair price is and commit now (via puts) to buying at that level.

It’s taken me forever to admit I’m not an econ, but I’m not. I’m human. And this strategy is perhaps the first that fully embraces by humanness.

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