If you’re going to sell your stocks, where are you going to invest your money for a decent yield?
Dan,
When investing in stocks, yield is one component of total return. The 2nd is price appreciation. If I am personally expecting the prices to drop significantly (and you don’t need to agree that they will), then obviously, I can hold the cash in a bank account or short term t-bills.
While we are quoting Warren, I’ll throw one of his quotes out there too. “Cash combined with courage in a crisis is priceless”.
While I am not expecting crisis situation (crisis would warrant a 30% correction), I do expect slight correction of 10-20% because I personally believe there was only one period in Stock Market history when (1997-2002 and one quarter in 1961) when stock PEs were higher than today in a rising EPS environment.
Hence I think holding cash with zero % yield (for me) is better than risking an imminent correction.
There was a WSJ article dated 8/15/16 titled “Stock Valuations Flash a Warning” by Steven Russolillo.
His argument is that when stocks are priced as high as they are today (high does not mean all time high for average, but some valuation metric such as P/E or CAPE, then the future 10 year returns have been around 4%.
Look, for most of you, 4% is not shabby over the 10 years. Most of you are not even going to buy SPY. You guys seem to have 100% of equity portfolio in a concentrated portfolio (atleast Saul does).
This is an interesting board. Hence I posted my thoughts. I understand they are not popular. I don’t want 4% over next 10 years. I know that by waiting for an imminent crash (90% chance based on the article and my own study), I think I can wait. I am still not 100% confident, hence I do have 40% invested. If I find any potential opportunity, I can increase that to 50 or 60% even before we get the crash I am hoping for.
Here’s what I wrote to my friends when discussing this article and I will copy paste it here:
"However, and this is the reason to sell - during the next 10 years while the end result wont be shabby (if it is 4% annualized), there will be lots of peaks and valleys. There will come a time between now and 2026 when the valuations will be so depressed, it will feel like the world is coming to an end. (maybe not that bad, but certainly we will get 15-18 trailing PE). Good point on CAPE PE, I didnt think about that. But even leaving aside CAPE PE, trailing PE (using last 12 months earnings) is at historic peak of 23 to 25.7 (depending on who you ask). End result in 10 years with 4% nominal growth, 2% dividend yield, and 2% PE compression per year (which is what the article implies?) could be 19 PE with S&P at approx 2550. Question is, do we really expect this to go up in smooth line, or lots of drama along the way? Isn’t it better to cash out, watch the drama unfold, and pick your spot to get in. It’s not required that re-entry has to be at a bottom. But even if you target a re-entry at 20 trailing PE, it’s going to yield better results than 4% for the next decade. It is market timing, which is difficult game to play as you say, but only when you are somewhere in the middle of the range. At extreme ends, its probably a no-brainer. "
Huddaman