Investing in a Vacuum

Investment Analysis Clubs Saul’s Investing Discussions
21

Saul,

In today’s world, a rising tide lifts all boats.

I earn a wage. About 10 percent of that goes directly into the market. Another 5 percent is matched by my employer.

As employment goes up, this bi-weekly input into the market goes up.

In other words, when total, full time, permanent employment starts falling, you can expect the general market to get softer.

We, as old people, tend to think that Baby Boomers rule the world. However, Gen X, my children, are actually a larger demographic. These are forming families and buying houses. (LGIH anyone?) They are also getting the jobs that have 401k s. The latter drives dumb money into ETFs and Mutual Funds. This money must be invested no matter what.

This flow of money will continue until it doesn’t. So, one was inclined to attempt to time the market, then one would need a handy chart of quality, permeant, full time employment. That will tell the story.

Cheers
Qazulight

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22

If only it was that easy.

Unemployment is usually a lagging indicator for the stock market
To make it worse the figures are often incorrect and subject to revisions over a period of 2 or 3 months .
And they do attempt to measure the “marginally attached” to employment.

https://www.google.com/search?q=unemployment+and+the+stock+m…

the “peak” in employment might be more useful but peaks are obvious only in retrospect. Like peaks in the stock market itself

Plenty of charts are available

https://www.bls.gov/web/empsit/cps_charts.pdf
if employment is near a peak there is no sign of it now. Even labor force participation is on a slight rise

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23

You might be able to do a big data thing and sweep up all job posting and find patterns there.

They will not be gross paterns, rather the more subtle ones. A job that matters will have a 401k match, and be one where people tend to remain in the same job with the same company for long periods of time.

It would not be easy if possible at all. But with the ETF dynamic, it is probably the only accurate way to use a MACRO indicator to buy the market.

Personlly, I think buying companies with solid growth is a better bet.

Cheers
Qazulight (On the other hand, I am attempting to sell my investment real estate and probably my home.)

24

Oh, I currently am reducing cash, not adding.

I have traded my AT&T stock for three funds.

I did sell LGIH, but I am looking to replace it with something.

Cheers
Qazulight

25

Stenlis, Mauser and Saul: historically, your chances may in fact be poor, depending on real (inflation-adjusted) returns, the period in question and assuming a realistic investment timescale.

Haywool: on the contrary, the swan (and its cygnets following behind) are very well-known and therefore very white. No black swan required for this debacle.

TJ: True enough - but what were the characteristics of the birds which survived? To change the analogy, cats have nine lives because their evolution ‘discovered’ eight levels of precaution were insufficient.

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26

Stenlis, Mauser and Saul: historically, your chances may in fact be poor, depending on real (inflation-adjusted) returns

It does not make a difference, if you compare apples to apples cash to market returns you will come to the same results whether you adjust both sides for inflation or not.

27

Understanding the question on the table to be real returns on the market, inevitability of over a realistic investing number of years, I submit as examples that an investor in the DJ Industrials in 1966 would not have had a real return for 26 years; that even after re-investing dividends, the S&P took more than 13 years to make it back to its March 2000 high in real terms, and you would not have wanted to be a yen-denominated investor in Japanese stocks in 1985 (think decades).

As for cash, we know all about its disadvantages (someone tell the Germans) or usefulness if you are going to need it soon or when you have more or less run out of options (like now; why we are all here or looking at small burr-walnut antique furniture - same price as IKEA! Hurry now while stocks last! etc.). But Rob Arnott did a study which showed that if you had bought a 20 year Treasury bond in 1966 and rolled it over every year, you would have done better than the S&P through December 2008, 42 years, which is one of those interesting facts.

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28

But Rob Arnott did a study which showed that if you had bought a 20 year Treasury bond in 1966 and rolled it over every year, you would have done better than the S&P through December 2008, 42 years, which is one of those interesting facts.

I have seen a lot of such studies and they are all useless for understanding the risks of investing in stock market. Typically they only ask (and answer) one question - what is the largest time interval where a given financial instrument performs better than a market index. (Typically this involves an interval where the market index was at a high at the start and at a low at the end.)

In the case you mentioned, Arnott finds that the largest interval where 20 years treasuries performed better than S&P 500 was 42 years starting in 1966.

Interesting, but not really useful. Like if you sold the S&P 500 a year later or a year sooner, the yield would have been better than with the treasuries.

Here’s what a useful analysis would look like:

You take an interval - like 20 years (or 42 years if you really like) and list the yields of the two financial instruments over the whole database in, say, 1 month increments. That means since 1923 when the S&P 500 was first calculated, you would have just under 900 values for 20-year yields in monthly increments until now. Then you would compare how many of those 900 yield values were better with the 20 years treasuries and give me a percentage. If more than 50% were on the side of treasuries, then you should be generally better off with treasuries.

Sadly, stock-market skeptics never offer this kind of analysis.

Same goes for the other examples as well. And it might be that there are crappy investment places that you should stay away from (like the japanese market), but it takes more than pointing one interval out to make a sufficient argument.

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29

Qazu
Y did u sell lgih?

30

To my never ending embarrassment. I made a macro call. With the storms and tightening labor and materials market nationwide, I felt that LGIH will have some one time expenses that will impact its earnings.

In addition, it will face labor shortages worse than it has now. When coupled with heavy debt, I decided to look elsewhere. This is the same reasoning that made me give up my five percent dividend in AT and T.

Cheers
Qazulight

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31

I definitely do not accept that a little market history (or any history) is ‘useless’ for understanding risk - but let us agree to disagree!

32

Sadly, stock-market skeptics never offer this kind of analysis.

“Lies, damned lies, and statistics” is a phrase describing the persuasive power of numbers, particularly the use of statistics to bolster weak arguments. It is also sometimes colloquially used to doubt statistics used to prove an opponent’s point.

The term was popularised in United States by Mark Twain (among others), who attributed it to the British Prime Minister Benjamin Disraeli*: “There are three kinds of lies: lies, damned lies, and statistics.” However, the phrase is not found in any of Disraeli’s works and the earliest known appearances were years after his death**. Several other people have been listed as originators of the quote, and it is often erroneously attributed to Twain himself.[1]

https://en.wikipedia.org/wiki/Lies,_damned_lies,_and_statist…

There is something else that no one points out, all these comparisons are just correlations with no proof of causation. Why did the bond market outperform the stock market from 1966 to 2008?

But Rob Arnott did a study which showed that if you had bought a 20 year Treasury bond in 1966 and rolled it over every year, you would have done better than the S&P through December 2008, 42 years, which is one of those interesting facts.

Try correlating bond yields with interest rates over the same period:

Historical Prime Rate Graph
http://www.forecast-chart.com/interest-prime-interest.html

No matter how hard they try zero is as low as interest rates can get. Just how valuable is “Rob Arnott’s interesting fact?”

BTW, Black Monday 1987 did not repeat on the 30th anniversary. On October 19, 2017 the S&P 500 was up $0.84, 0.03%. One curious fact about this non-event: Those who brought it up as a prediction never bothered to say afterwards that it didn’t happen. :wink:

There is one truth I can state with no reservations, “we can’t predict the future.” What can we do about it? Try “Dhandho investing” or lose a little when you lose and win big when you win. Here is what TMF had to say:

Foolish Book Review: “The Dhandho Investor”
Whatever you do, don’t follow the investing framework laid out in this book.

David Meier (TMFHumbleServant) Jun 29, 2007 at 12:00AM
Whatever you do, don’t follow the investing framework laid out in this book. It will make my job as an investor that much more difficult because you’ll be much more competitive.

OK, that’s not completely fair. After all, one of the goals at The Motley Fool is to help you become a better investor. And that’s exactly what The Dhandho Investor by money manager Mohnish Pabrai can do. But be forewarned: Pabrai gives us the recipe, but we have to determine the ingredients we’ll need to make the dish.

https://www.fool.com/investing/general/2007/06/29/foolish-bo…

My version for “win big” is to invest in fast growth. My version for “lose a little” is to have a sturdy portfolio that is not likely to enter into a chain reaction meltdown.

But what about all those dire predictions? Put it down to entertainment.

Denny Schlesinger

The Dhandho Investor: The Low-Risk Value Method to High Returns Hardcover – April 6, 2007
by Mohnish Pabrai

https://www.amazon.com/Dhandho-Investor-Low-Risk-Method-Retu…

My 2007 book review
Who is your audience, Mr. Pabrai?

https://www.amazon.com/review/R1PQRZNVETG2WW/ref=cm_cr_srp_d…

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33

Rayvt posted an interesting view on this very subject on the Mechanical Investing board. Check it out.

http://discussion.fool.com/waiting-for-a-downturn-to-invest-afte…

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34

First step, identify all the days where the intra-day high was higher than any previous high.

This is the way Yahoo reports the 52 week high but using only 52 week’s data.

The most important new-high variant is the one that the news talks about – the close was higher than any previous close.

This is the new high that my portfolio web-app uses.

It stands to reason that if the stock market grows over time bull statistics will outperform bear statistics. You have to be a much better market timer if you are a bear than if you are a bull. During bull season the market goes up. During bear season often the market just goes sideways instead of down.

Denny Schlesinger

35

Certainly true about Japanese stock market. And even worse if you bought into stock markets in places like Cuba or 1917 Russia. In case of the latter the monetary loss might have been insignificant compared to being killed in the civil war or liquidated as a Capitalist by the Soviets.
Nothing but death and taxes are inevitable. Certainly not stocks. But play the odds.
And diversify a bit, real estate, cash, a few gold coins and diamonds as bribes, a valid passport, , maybe some non US assets, etc.

36

most of us just wing it, Rayvt comes up with historical facts.

I have long thought one of the most bullish things a stock can do is to go up, that new highs are quite bullish. Now I have more proof.
Momentum (easy to define) and "value’ (harder to define ) are the only two market forces that can be shown to have worked for many years in many cyclical markers.

I would love to see hard evidence of which types of stocks, what are the hard criteria that determine when new highs are the most predictive.

37

I invest in high growth stocks and have found this board invaluable.

In addition I take a diversification approach that is very different than what has historically been discussed here. I use a portion of my gains in stocks to buy farm land. Since I started the annual rent per acre has gone from $50 per acre to between $200 to $300 per acre depending on soil characteristics. The rent coupled with the increased value of farm land has made it an interesting investment. Most acquired for about $1000 per acre and now sells foe $5000 to $6000. Granted not very liquid but very predictable. I do not take the risk of farming. I leave that to younger men. So far it has not yielded the up down cycles of the market. However I keep a close eye on emerging competition to agriculturally produced food.

Also timber on the non farmed areas takes quite a while to yield a return but a decent return over time is possible (provided beetles, fire or hurricanes do not destroy the timber)

In addition I really enjoy the land, a priceless return to me.

Regards,
HydeMarsh
Long SHOP, NVIDA, NTNX, ANET, FB, MASI, BIDU, HD

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38

Hi Hydemarsh,
Interesting philosophy and congrats on the success. I like the diversification strategy. I will say however that you may not have owned the farm land long enough to see the cycles that will occur in farmland. Real Estate, by definition doesn’t go through the daily fluctuations that the stock market sees, since land isn’t available for sale everyday, but it definitely has its ups and downs.

I know as I have family members who farm and have lamented the fact that the prices have gotten so high that they can’t afford to buy land anymore and make it work financially. The story I get from them, (3-4th generation farmers in Ohio) is that when land does go up for sale, which doesn’t occur often, the buyer usually turns out to be an investor from a distance (you!?). The buyer, who is looking for diversification, doesn’t really mind that the return from that land is small because they are looking for a “safe” investment and diversification. The return is small but since the comparison is prevailing interest rates, i.e. 1-2%, they are happy. But as a farmer, they can’t justify the price and farm it themselves.

So far, no problem. The question is how long can that continue, raising interest rates should presumably turn that story around. So yes, rents may continue to climb, if only due to inflation but increasing prices? I wouldn’t count on it. In fact, I would predict that if interest rates rise appreciably, I would expect farmland prices to move in the opposite direction as the rent will pay less return in comparison.

By the way, an interesting fact is that farm crop prices haven’t really kept up with inflation, in fact most crops were about as expensive per bushel (or whatever unit you want to use) as they were 30 years ago. They have just gotten better at productivity per acre. So I wouldn’t count on rents climbing forever either.

But as everyone here should know, I am all about diversification, so I like the strategy. I just wouldn’t somehow think that you have a no lose proposition.

But as they say, land, they aren’t making any more of it…

Randy

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39

Hi randy, I appreciate your response. I have been doing this for quite a while. Most of the tracts I have owned over twenty years, some much longer. Bought it when I was working for Cisco Systems in the early 90’s. I have several thousand acres that produces a substantial income. I have closely followed this business since I earned an agronomy degree in the early 70’s. Switched to computer science and networking when I firmly understood the risk of farming. I get rent upfront and let the banks and farmer take the risk.

The real cycles are in timber prices.

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40

egads hydemarsh. I’ve been interested in investing in farmland for a long time but completely and utterly lack the background. Recently I decided I should try to find a mentor and wouldn’t you know it… you made this post. Would you mind if i picked your brain sometime? My email is mckenzethan at hotmail dot com. Thanks for considering.

Ethan