My preparations for the next market drop.

My preparations for the next market drop.

That’s easy. I don’t try to time the market and I stay fully invested. I try to pick good, really excellent companies, whose stocks don’t have a long way to fall if things turn bad. In other words, companies that have a lot of growth, and whose stocks are reasonably priced with reasonable PE ratios.

Why don’t I try to time the market? Because the experts can’t do it, so why should I think I can do it. I remember vividly, in November 2008, an economic expert forecaster being interviewed on one of the financial channels, and being asked what positions he’d recommend the viewers being in at that time, and he famously replied, “Cash, and the fetal position”. Everyone thought he was so clever, but he was totally, absolutely, completely WRONG! It was the bottom and people should have been 100% in stocks. But he was influenced by the panic in the air at that time. And he wasn’t the only one. They all said “Sell out of stocks”.

There are people saying “Watch out for a market crash this year!” The only trouble is that they said that last year too, and in 2013, 2012, and 2011. And in 2010 they were warning about a “Double Dip Recession”. Eventually they will be right, or partially right. Even a stopped clock is right twice a day.

Given all that, and that no one can forecast the market, here’s my attempt to do so. Sure this has been a long Bull market. But this isn’t a market that charged out of the Great Recession (like a bull, so to speak). It has inched its way up slowly, climbing a wall of worry all the way. And it had, and could still have a long way to go. Does this feel like a frothy market top? Do you hear any euphoria? Have you heard anyone calling for a massive market rise, anyone at all? Does everyone seem worried about one thing or another? And the market keeps inching up. The economy is growing, unemployment is falling, employment is rising, there’s no inflation, NO inflation, and no wage inflation. The market usually continues to rise for two years after the Fed starts raising rates, and they haven’t even started yet. Give me a break. Relax and have fun investing. Sure, a correction will come along sometime, but we’ll all live through it.

Saul

For FAQ’s and Knowledgebase
please go to Post #6412

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Sure enough, here is another common sense opinion that I extracted from the Reitmeister Trading Alert, written by Steve Reitmeister, the current head of Zacks. I find that his short term trades (in 2X or 3X ETF’s, long or short), tend to be based on what I consider hunches, but his long term vision has been impeccable. Here’s what he has to say today:

The bull market is still in place. This is another of the many tradable dips lo these past several years. So take advantage of it while you can.

And we continue to take advantage of the dip by adding to some of our favorite names on the cheap…

The key thing I want to point out today is that 10 year Treasury rates continue to decline from Friday’s irrational spike to 2.25%. As expected the new bond buying program in Europe is lowering rates there and thus driving up demand for higher yielding and higher quality US Treasuries. This is pushing 10 year rates back down to a close of 2.13% today.

Thus, any article you read today that says the cause behind the continued decline in stocks is because the Fed will raise rates is utter and complete NONSENSE. If that were true, then bond rates would continue to go higher at this time.

So Reity, why are stocks going down right now?

Plain and simple we are in a mature bull market with lower annual gains being served up along with more volatility. So after hitting new highs last week investors want to take profits. So we drift lower for a span before folks are ready to trek north once again.

Some might say 2 steps forward and 1 step back. However, that is too generous for this environment. More like 1.2 steps forward and 1 step back. You just need to patiently wait for all those .2 remainders to add up to a decent return at the end of the year. I know it’s not fun, but show me where investors have a better risk/reward relationship these days and I will put my money to work there. Until that is evident to me then I will keep riding this US bull market.

Saul

For FAQ’s and Knowledgebase
please go to Post #6412

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“Given all that, and that no one can forecast the market, here’s my attempt to do so. Sure this has been a long Bull market. But this isn’t a market that charged out of the Great Recession (like a bull, so to speak). It has inched its way up slowly, climbing a wall of worry all the way. And it had, and could still have a long way to go. Does this feel like a frothy market top? Do you hear any euphoria? Have you heard anyone calling for a massive market rise, anyone at all? Does everyone seem worried about one thing or another? And the market keeps inching up. The economy is growing, unemployment is falling, employment is rising, there’s no inflation, NO inflation, and no wage inflation. The market usually continues to rise for two years after the Fed starts raising rates, and they haven’t even started yet. Give me a break. Relax and have fun investing. Sure, a correction will come along sometime, but we’ll all live through it.”

A lot of wisdom packed into that paragraph, Saul. I hope all readers of this board will relax and simply take a few minutes to ponder these time tested market truths.

In fact if I close my eyes I can hear Louis Rukeyser and his 90 year old father echoing those exact same sentiments on Wall Street Week 25 years ago!

Thanks for sharing, Saul.

Jim

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“Sure, a correction will come along sometime, but we’ll all live through it.”

Yes we will. I started in investing in 1999, and the 1999-2002 was not kind to the novices like. I thought euphoria was the norm. The first stock I bought went up 50% in six weeks. Then came the reckoning, and I lost about 90% of my invested capital over a three year stretch. No big deal–it was only several thousand dollars, and I was still in my twenties.

Then came 2008. I was a little more seasoned by then and saw the crash coming (but not the magnitude). I sold out in May 2008 and preserved most of my capital, and got back into the market in 2010. In retrospect I would have been better off if I just stayed in the whole time.

Corrections will come as sure as day follows night. And while it may not seem like it at the time, we will all live through it. We have before. We will again. If this board has any readers who are just starting out with investing, know this–when the correction comes, your fear will test you. Today you can tell yourself that you will hold through a correction, but it is a different thing all together when you are deep in the red and the market looks like it can keep falling. Picking stocks is not hard. Holding and adding through a bear market is very hard–but it is what separates the average investor from the above average investor.

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There are people saying “Watch out for a market crash this year!” The only trouble is that they said that last year too, and in 2013, 2012, and 2011

And this is exactly my point about Tom Gardner’s clarion call. He even states that he has been calling for the market reversal for over a year (for the member of TMF’s most expensive service) and he still believes it.

Is there any investor who does not believe that at some point the market will “correct”? I think not. But how long will Tom predict this turn around before he finally is able to say “I told you so all along”? How much cash should be side-lined for how long waiting for that wonderful day to swoop in and buy some Rule Breaker or Stock Advisor or Hidden Gem or what have you recommendation at a discount? What is the cost of the lost opportunity versus the gain of waiting?

If you can’t answer that question (and I don’t think Tom can) then why is it good advice?

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Corrections will come as sure as day follows night. And while it may not seem like it at the time, we will all live through it. We have before. We will again. If this board has any readers who are just starting out with investing, know this–when the correction comes, your fear will test you.

It’s worth noting that the overall valuation of the stock market is very high today.
It is quite possible that the stock market will spend the next decade or more substantially below current levels, and the S&P’s total return over the next decade could be zero or negative. It’s in any event unlikely to be very high.
In other words, DEFINITELY don’t put any money into the stock market that you’ll need within the next 15 years.
This applies in particular for investments in individual companies (especially speculative ones).

It’s worth noting that the overall valuation of the stock market is very high today.
It is quite possible that the stock market will spend the next decade or more substantially below current levels, and the S&P’s total return over the next decade could be zero or negative. It’s in any event unlikely to be very high.
In other words, DEFINITELY don’t put any money into the stock market that you’ll need within the next 15 years.
This applies in particular for investments in individual companies (especially speculative ones).

I have to disagree with pretty much everything that you wrote, and I don’t find it in any way useful. I’m sorry if that sounds argumentative, but it’s my view. Stating that the valuation of the stock market very high today is very ambiguous. What exactly is the market that you’re talking about? The Dow? The S&P500? The global stock markets? There are different definitions and notions that people have for “the market”. And by “very high” valuation what exactly do you mean? Relative to past earnings, projected earnings (and whose projection?), historical apples to apples valuations. Personally, I don’t invest in indices but in a handful of individual companies (right now I have 18). For this reason, it doesn’t really matter what “the market” is doing; if we’re talking the Dow then that’s only 30 other companies instead of my 18 companies. I have a very good idea of my valuation for the companies that I own and when my valuation is much higher than the valuation based on the current stock price then I expect the price to rise (if not today or next month then eventually).

I own many of the stocks that Saul owns and our top 3 are the same (SWKS, SKX, and BOFI). I’d say that Saul and I probably have about 60% overlap. As an example, let’s look at the top holding in our portfolios: SWKS. It has climbed from the low $70s to $92 in the past 2 months…that’s an increase of more than 30%. Is it overvalued now? Let’s have a look. To simplify Saul’s method, I look at 3 things:

1) Historical adjusted earnings per share growth
We want to see a company that’s growing fast. For SWKS here are the past 2 years of adjusted EPS growth when compared to the same quarter in the prior year (in order of oldest to most recent quarter): 50%, 20%, 20.8%, 21.8%, 29.2%, 53.7%, 75%, 88.1%. The midpoint guidance of the quarter in progress will achieve adjusted EPS growth of 80.6%. So SWKS gets an A+++ for earnings growth. But this alone does not mean that the stock is a good buy so we must go to step 2.

2) Market price relative to the trailing adjusted EPS (then compared to the EPS growth)
So for SWKS we now have a market price of $92 and a TTM adjusted EPS of $3.83/share as of the quarter ending on 12/31/2015. So the TTM P/E is 24. It’s just a number and taken alone it means little. It must be company’s adj EPS growth. So the P/E is 24 and growth rate is 88.1% when taking the most recent quarter. The growth rate when taking the full year’s EPS over the prior year’s EPS is 64.4% ($3.83 vs $2.33). So taken together I give SWKS a solid A. And that’s AFTER the stock price has risen more than 30% over the past 2 months. So far SWKS is looking like a solid buy, but we’re not done yet. Next, we need to go to the final step which is making a determination of the future adjusted EPS growth. This is important because we want to be confident that growth will continue. So on to step 3.

3) Future adj EPS growth assessment
Steps 1 and 2 are pretty basic and mathematical. Step 3 is more of a judgment call based on a lot of information. You will probably see a lot of different opinions. The more information you get the better, but you also need to decide which information is important and which information is not important. For me, the case of SWKS was pretty cut and dry. Management has guided for the next quarter and has given some opinions of what they think is in store for their business for the rest of 2015 and beyond. Listening to the last conference call will be extremely helpful. The guidance for the current quarter is for >80% growth. SWKS is in most mobile devices and devices that need to communicate with other devices (IoT). They’re in multiple markets so seasonality is getting to be less of a factor for them. China, then India, then other emerging markets will move to higher and higher bandwidth devices and SWKS is one of only a handful of companies that can handle this increasing complexity. So to me it seems that they are gaining market share in multiple very rapidly growing markets. They are also increasing their operational leverage. So I would give SWKS another solid A for this third check.

So I believe SWKS is still a bargain. I’d predict that they will hit (conservatively in my opinion) $5 in adjusted EPS in their FY 2015 which ends 9/30/2015 and gets reported in late October or early November. I think SWKS deserves at least a P/E of 25 which would give it a stock of $125 7 months from now. That’s ANOTHER 36% increase from today’s closing price. All I can say is that this is the reason that SWKS is my largest holding.

I do a similar analysis (steps 1-3) on the other companies that I own. So tell me again, why should I care what “the market” is doing? Why should I listen to fear mongers who say that “the market” is over valuated and will not grow for the next decade?

Chris

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It’s worth noting that the overall valuation of the stock market is very high today.

This claim has been made frequently on TMF and other places … and some quite strong rebuttal has been offered as to why it is not true.

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It’s worth noting that the overall valuation of the stock market is very high today.

Let me tell you a little anecdote. I met mauser (who posts often on this board, and is a very sharp guy) about what seems like two years ago, over a similar discussion. He had come across a statistical indicator which gave him persuasive evidence that a major correction was imminent. I pointed out that there were lots of contrary indicators, and that no one knows when a correction is going to arrive anyway. They are pretty random events. We agreed to disagree. The imminent major correction wasn’t imminent after all. In fact it hasn’t arrived yet, and there is no indication that it will arrive any time soon, although we will CERTAINLY have one eventually. Pick good stocks you are comfortable with, and don’t try to guess corrections.

Best,

Saul

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Whether valuation of the market is high or low depends on what tools you use to measure it.

But either way, is that information ACTIONABLE? Does it decisively change what you are doing?

In 15 years the general stock market could be exactly where it is now. But the odds are very high that it would go up and down a lot during that time.
Because as all of us know the market can stay over or under valued for long periods. Any calculations you make can not allow for Black Swan events. Not long before WW1, Civil War,and the rise of the communist whatever valuation you gave to the Russian stock market was meaningless. Because whether you had cash, stocks or bonds you were wiped out.

I only time broad indices, not individual stocks. I own both broad indices like RSP and individual stocks.

The timing is broken down into “Interesting” and “Actionable”. I do nothing about Interesting except worry and try to stay alert. I may post about these to get input from others.

“Actionable” is mostly momentum based, 100% data driven, and at best only spares me some of a bear market loss, and signals when it is time to get back in.
It has worked well in the past. It is something I can put numbers on and thus something to help me avoid the all too human lemming instinct and the tendency to filter information to confirm my bias. I have found my “gut” to be very unreliable here. I have zero ways to predict the group business outlook for the 500 companies in the SP 500 or for broader indices. The low cost ETF have made this approach easier. They are cheap to trade with little slippage.

IOW "Actionable "does not forecast, it is just a way of telling you what markets are doing,where they are in the cycle, and statistically what this has meant in the past. Valuation like CAPE does not fit into “Actionable” .The methodology is long term only,designed only for major bull and bear markets so signals are rare.

Come a bear market, once the signals were given, I would sell my broad market ETF . This would be probably be after the market has started down but sometime before it reached the bottom.

But like you I usually hold any individual stocks where the business seems to be unchanged. Because the methodology is only for broad market indices, mostly S&P 500. I have no mechanical way to time individual stocks.

At the moment I have few “interesting” and no “actionable” indicators to point to any major market change from this rather elderly bull.Elderly but not on life support??

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Come a bear market, once the signals were given, I would sell my broad market ETF . This would be probably be after the market has started down but sometime before it reached the bottom.

I have been talking about this concept with an investor friend … he desperately wants a mechanical system, but doesn’t feel like he has found one. It seems to me that there is an inherent problem in such timing systems. If the trigger is something that is relatively long, then it is pretty well guaranteed to not kick in until one is already down the slide and to not reverse until the slide has turned and gone a fair ways back. For an event the size of 2008, this will preserve some capital, but can still be a not very nice loss. In smaller events, it becomes relative likely to buy in higher than one sold, unless there is a very slow recovery, meaning that it is less good than just holding on.

If one shortens the baseline to make it more responsive, then one moves in the direction of twitchy, again with a significant risk of getting the timing wrong relative to just sitting through the change.

I certainly recognize the desire … but can’t say that I have seen a good mechanism yet.

In other words, DEFINITELY don’t put any money into the stock market that you’ll need within the next 15 years.
This applies in particular for investments in individual companies

You were making sense, until this logical fallacy.

  1. The “market” is very highly valued.

  2. So there is a good chance that owning “the market” will not prove profitable over the next 10-15 years.

(so far, so good)

  1. Certainly, there could be many individual stocks that could be attractively priced.

  2. Those attractively priced stocks have a very good chance of being profitable over the next 10-15 years.

  3. So if you’re going to invest today, do not buy “the market”, but rather search long and hard for the individual bargains.


FWIW, the ever-conservative and under-promise-yet-over-deliver Warren Buffett instructed potential Berkshire investors that if they buy Berkshire at prices “modestly” above 1.2X book value, they are virtually certain to see a profit within several years.

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Buffet also said that his estate will invest 90% of it’s funds in the general broad stock market. Your basic and hold, no stock picking.

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What is the cost of the lost opportunity versus the gain of waiting?

brittlerock:

I’d just like to clarify that while Tom expects a market drop of at least 10% sometime, he is not advocating sitting on the sidelines. He is still advocating investing and making recommendations and buying stocks in the EP. His point was for people to prepare psychologically for such a correction and not panic when it happens, more or less what Saul and others are saying.

John

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Why don’t I try to time the market? Because the experts can’t do it, so why should I think I can do it.

There are times when you can do it. Mutual fund managers can’t do it, because they are required to stay invested. Quite often their charter tells them they must have 95% of their funds in the market. Hedge funds can do it, but with their large positions it’s often difficult to extract themselves orderly on short notice. You, as a small investor, can do it - if you want.

I have done it four times. Yes, four. Two of those have been raging successes. Two have been unnecessary, but totally inconsequential failures. Briefly, here is the story:

In 1999 the market looked “toppy”. I used that word several times across the bubble, starting in 1999, when I began moving out. I changed from mostly stocks to mostly cash. At the time Mrs. Goofy and I were planning a very long RV trip, and I knew I would be out-of-touch with the real world for long periods (pre-wireless days), and felt uneasy having most of our worth in the market - so I didn’t. In May of 2001 we took off, and we were quite glad to be out of stocks at the time. (Yes, we got back in after we returned, and after the market carnage was past.)
http://discussion.fool.com/what-if-someone-was-to-create-a-soapb…

As an inveterate reader, particularly of economic histories and contemporary business, I watched the gathering storm of 2008 and said to Mrs. Goofy “I’m worried the whole thing could come down.” She is the buy-and-hold forever type, but even she saw the foundation rotting, and said “Sell if you think you should.” I did, almost everything except a few very long standing positions in taxable accounts like Berkshire and Walgreens where the tax hit would have been enormous. The next week Lehman went upside down, Bear Stearns was no more, and the poop hit the rapidly spinning fan blades. We were out, almost commpletely, and I was happy enough just to have the money in a half dozen different FDIC accounts.

No, I did not get out at the very tippy top, nor get back in at the perfect bottom, but I missed the train wreck, and when neighbors were bemoaning their 401k fate and asked how we were, the Mrs. said “He sold it all a couple months ago” with some satisfaction.

So those are my stories of success. Here are the failures. Later in 2008 I got back in, but got scared by a headfake collapse and got back out. As I noted in the post linked below, it cost me $200. Oh, it also cost me about 1,000 points of (Dow) growth, waiting as I did until I was sure the economy was going to mend. But wait, when I said it cost me 1,000 (Dow) points, I am reminded that I saved myself about 5,000 points by getting out in the first place, so I do not beat myself up too harshly.
http://discussion.fool.com/well-i-spent-200-today-27456712.aspx

My second failure came later, when Republicans threatened to shut down the government over demands for instant budget balancing. I thought them both irresponsible and intransigent, and while I was half right, the shutdown was averted and the market did not tank. (I expected macroeconomic consequences if the government shut down for an extended period, OR if their prescription for reduced spending at a time of economic distress was followed.) Since it did not happen, I cost myself the trading commissions and got back in quite quickly.

Now much of my “trading” happened in tax free accounts of both my wife and I, where we socked away the maximum throughout our working careers, so there were no tax consequences. That was not true in 1999 and 2000, when some rather outsize gains in AOL and other 90’s darlings cost me six figures in taxes more than one year to exit. (Am I sorry that I sold AOL at $120 and paid the taxes? Heh.)

So obviously there are tax consequences to be considered, and there may be other things too. I’m not advocating pulling the big trigger at every little twitch and turn of the market, but neither do I think it’s wise to say “I will never sell, because the market will always take care of me.” That wasn’t true of anything in 1929, it wasn’t true of the NASDAQ in 2000, and it wasn’t true (at least for a while) of the general market in 2008. Five years is a long time to hold your breath while you’re under water. A decade is even harder.

I do think the market is ahead of itself, which is different than irresponsibly toppy, and I do not see any macroeconomic collapse on the horizon (absent a nuclear attack from North Korea or something), an in fact I am more aligned with your thoughts in your recent post about ‘inflation.’ That said, I am being more watchful than not these days, and while I may miss the end of the bull and not be so lucky as these past times, I am also not going to go to sleep and pretend all will be OK no matter what.

You can, occasionally, time the market. I know it can be done. Not perfectly, obviously, and not always, but also not “never.”

I remember vividly, in November 2008, an economic expert forecaster being interviewed on one of the financial channels, and being asked what positions he’d recommend the viewers being in at that time, and he famously replied, “Cash, and the fetal position”. Everyone thought he was so clever, but he was totally, absolutely, completely WRONG!

You complain about Tom Gardner making a call for a market turn a year ago and having been WRONG! Someday he will be right, and a rapacious bear can knock the market down 25% or better. Only time will tell if an early call is more damaging than a stick-it-out philosophy, but I would not be too harsh in my criticism, having done exactly the same thing myself following the 90’s (overheated) bull.

 
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You complain about Tom Gardner making a call for a market turn a year ago and having been WRONG! Someday he will be right, and a rapacious bear can knock the market down 25% or better.

Hi Goofy Hoofy, I’m sorry, I can’t remember saying anything at all about Tom Gardner. The quote you copied was about 2008.
Saul

Investment Company Institute
What Does Consistent Participation in 401(k) Plans Generate?
Changes in 401(k) Account Balances, 2007–2012

…Analysis of a consistent group of 401(k) participants highlights the impact of ongoing participation in 401(k) plans. At year-end 2012, the average account balance among consistent participants was 67 percent higher than the average account balance among all participants in the EBRI/ICI 401(k) database. The consistent group’s median balance was almost three times the median balance across all participants at year end 2012.
http://www.ici.org/401k

Enjoyed your post, on market timing the best evidence seems to be that consistent steady contributions are the best way to go measured a number of different ways. Buying right through the cycles, right through 2008/09, on automatic pilot.

Consistent Participants Have Accumulated Sizable 401(k) Account Balances

…Trends in the consistent group’s account balances highlight the accumulation effect of ongoing 401(k) participation. At year-end 2012, 15.5 percent of the consistent group had more than $200,000 in their 40 (k) accounts at their current employers, while another 16.2 percent had between $100,000 and $200,000 (Figure 3). In contrast, in the
broader EBRI/ICI 401(k) database, 8.5 percent had accounts with more than $200,000, and 9.5 percent had between…$100,000 and $200,00

From what I have been able to see, supposedly sophisticated corporate insiders and share buybacks did the worst 2008/09. The retail “rubes” did much better. Yardeni’s flow of funds reports show much the same thing.