Zee: Recessionary bear markets produce drops that are historically close to double non-recessionary bear markets
Quote from
https://www.economist.com/finance-and-economics/2022/06/21/h…
“History suggests that in recessions American share prices fall even more sharply than they have this year.”
“History suggests that in recessions American share prices fall even more sharply than they have this year.”
Heretical thought of the day:
Since recessions and bear markets are both normal and reasonably frequent occurrences,
why would you buy stocks that you wouldn’t want to hold during one?
It’s like buying a house with no roof because it wasn’t raining at the time.
To torture the metaphor:
It starts raining. All the folks with no-roof houses scramble to sell their houses.
Amid the panic, the people owning houses WITH roofs start scrambling to sell their houses: clearly something serious must be wrong.
That’s the best time to be a buyer of a nice house with a roof.
There’s an old saying I really like: you make most of your money during bear markets; you just don’t realize it at the time.
The easiest and most predictable big money to be made in the markets is to buy good stuff when it’s temporarily really cheap.
(And of course not sell it if it gets even cheaper for a while, which it probably will)
Arguably the best way to spend your time during the early parts of a bear market is to pick in advance the stuff that you’d buy if it were on sale at half price.
Those could be picked with quant methods, or not.
Suggested homework:
Take the time to check out the prices of some specific things during the 2009 or even 2020 market bottoms.
Think about the money you could have made if you’d bought those things at those prices.
Pick anything you like…GOOG at under $1050, say, 2.25 years ago. Year to date average price is $2560.
Next time there’s a panic, let that greed suffuse you, not the panic that you will be tempted to feel.
Jim
Thanks a lot Zeelotes…You mentioned “When the overall bias is bearish signals such as discussed in this thread are acted upon completely differently than when the bias is not so strongly bearish. Just my two cents!”
I am guessing that means there is still more pain to come, and relying on just this one indicator may not be the right thing to do.
Thanks again,
Charlie
Thanks a lot Jim! Your suggested homework is exactly what I have been doing for the past few days…How I wish I had started in 2020, rather than 2021…But yes, I take solace from what you mentioned…if recessions and bear markets do come and go… and the market overall goes up over an extended period of time, then waiting for opportune times to buy “good” companies at “reasonable” prices would be excellent…
Thanks again,
Charlie
if recessions and bear markets do come and go and the market overall goes up over an extended period of time,
then waiting for opportune times to buy “good” companies at “reasonable” prices would be excellent…
The sentiment is not very on topic for the MI board : )
…but yes, I think so.
The hard part is picking what to buy when the the prices are crazily low.
If it is one of those very sharp super-sized panic sell-offs, the stuff that bounces most for the
first few weeks, maybe a couple of months, is the junkiest stuff that has fallen the most.
I know that, but I can never bring myself to bet on it.
I concentrate on the stuff that’s easy to value, and certain to be worth more in a couple/few years, and cheap relative to that likely future value.
This doesn’t require nailing the bottom very accurately, just knowing when it’s a good deal…good enough.
Jim
Take the time to check out the prices of some specific things during the 2009 or even 2020 market bottoms.
Think about the money you could have made if you’d bought those things at those prices.
Pick anything you like…GOOG at under $1050, say, 2.25 years ago. Year to date average price is $2560.
Next time there’s a panic, let that greed suffuse you, not the panic that you will be tempted to feel.
Most people like to say they’ll be buyers during bottoms, but when things get scary they don’t buy. That’s when they say, “Yeah, I’ll buy when things get even worse.”
This is happening right now on the BRK board. “I could have bought at $280 a week ago. But now it’s $270. I’ll wait until $260.” BRK might drop to $260, but then are you going to move the goalposts to $250?
Inevitably, stock prices will rise a little bit, and then they’ll wait for prices to drop again, and that’s how you drive yourself crazy.
So, if you can’t override that psychology, dollar cost averaging into positions works just fine.
This is happening right now on the BRK board. "I could have bought at $280 a week ago.
But now it’s $270. I’ll wait until $260." BRK might drop to $260, but then are you going to move the goalposts to $250?
Inevitably, stock prices will rise a little bit, and then they’ll wait for prices to drop again, and that’s how you drive yourself crazy.
So, if you can’t override that psychology, dollar cost averaging into positions works just fine.
Yeah, I can’t figure that out.
Wait till it’s a good deal, then buy. If it drops some more for a while, who cares? You got a good deal.
It’s very hard to nail a bottom without fibbing.
I tend to buy in steps on the way down, starting when I think it’s a fair/good deal, and ending when I’ve got the biggest position size I want.
With Berkshire at its current price, just under $264 per B share, there is no reason ever to wait for a better price.
For a sense of scale, I figure it has been cheaper than this no more than around 8% of the time since 2005, depending on the valuation metric used.
Using price-to-book as the yardstick it has been this cheap under 4% of the time.
You might want to hold onto dry powder for something else, that’s certainly fine,
but if somebody wants Berkshire, waiting for better prices, like waiting for Godot, can be an infinite wait.
Jim
How are you calculating book value? I see ycharts has last quarter’s, but their holdings have declined a lot since then.
How are you calculating book value? I see ycharts has last quarter’s, but their holdings have declined a lot since then.
The thing to remember is that book value is just a proxy for the value of a share of Berkshire.
It’s not a closed end fund. Half the value comes from their operating divisions, which aren’t very well valued by book value.
And they hold their big stock positions for so long that what matters for those is the long run business results, not the current stock price.
When you think about it, the businesses they own (public or private) aren’t worth any less than they were at March 31: their future earnings potential are pretty much unchanged.
Since then they’ve made a lot of profit, too: so the company is worth more than it was at March 31, not less.
I do look at book per share, but I try to remember that it’s a back-of-the envelope thing, a shortcut.
Peak-to-date book-per-share has historically been a better metric of value because all the dips are (have been) transient, and also empirically a better predictor of forwards returns.
So again, you can feel fine ignoring the upcoming drop in reported book per share.
The better solution:
I use a different valuation method. I value all the operating subsidiaries and the biggest stock positions as a multiple of their earnings, not their market value.
So, for example, this change means that I valued the stock portfolio by about $50bn less than its market value at end Q1.
And, of course, it means that the market value drop of that stock portfolio is pretty meaningless.
I applied roughly that same technique in every period in the last 20+ years, so the short term squiggles in apparent value due to stock price changes largely disappear.
Using that value history and comparing it to the price history, the average one year forward return
since '08 starting from valuation levels similar to today’s has been about inflation + 23%.
Of course I don’t expect that, but I expect something quite good.
Sorry, back to my trading screen to buy some more…
Jim
This doesn’t require nailing the bottom very accurately, just knowing when it’s a good deal…good enough.
Jim
I think what Jim is trying to say here is “Buy BRK” “Now”
Wait till it’s a good deal, then buy. If it drops some more for a while, who cares? You got a good deal.
It’s very hard to nail a bottom without fibbing.
I tend to buy in steps on the way down, starting when I think it’s a fair/good deal, and ending when I’ve got the biggest position size I want.
With Berkshire at its current price, just under $264 per B share, there is no reason ever to wait for a better price.
I read long time ago the advice: “You want to be selling on the way up and buying on the way down.”
It’s emotionally somewhat hard to do the “This is happening right now on the BRK board. “I could have bought at $280 a week ago.
But now it’s $270. I’ll wait until $260.” BRK might drop to $260, but then are you going to move the goalposts to $250?” thing. In fact a couple of days ago there was somebody who said that she waited for a lower price–and got it-- and thereby saved the equivalent of several months income. Problem is, of course, if you wait too long the price bottoms and you wind up chasing it up and up and up and up.
What I did is set a few GTC orders on BRK.B at successively lower prices in $10 steps. 295, 275, 265, 255. The 275 filled last week, the 265 filled today. No agonizing over “should I pull the trigger at this price”. Set up your targets and get a pleasant surprise when your broker sends you the fill notification.
I think what Jim is trying to say here is “Buy BRK” “Now”
True enough.
But it seems I’m always saying that to anybody who will listen, and many who don’t even want to.
The quality of result you get from glancing at a stopped clock depends entirely on when you choose to look at it : )
Jim
But it seems I’m always saying that to anybody who will listen, and many who don’t even want to.
I’m trying to love BRK as much as you do but they mostly track SPY and lag QQQ. What am I missing?
Ziggy
Jim’s a million times repeated (on the berkshire board, not here) “Price (SPY) versus value (BRK)” as I would sum it up = SPY was getting more and more pricey while BRK comparatively seen not.
I hope I am a good student and he has not to correct me too much 
“Price (SPY) versus value (BRK)”
Can the same be said about QQQ vs QQQE, ie large tech stocks are overvalued? Seems to be a similar conundrum.
Thanks
Z
BRK-A (or B) have performed better than the SPX and poorer than the NDX since about 2013. You can chart this on tradingview.com with:
NYSE:BRK.A/(AMEX:SPY+NASDAQ:QQQ)/2
It has performed almost exactly in line with an equal weighting of the two.
Actually, I think my math is hosed there … But you get the idea.
I’m trying to love BRK as much as you do but they mostly track SPY and lag QQQ. What am I missing?
…
Jim’s a million times repeated (on the berkshire board, not here) “Price (SPY) versus value (BRK)” as
I would sum it up = SPY was getting more and more pricey while BRK comparatively seen not.
See, I’m not needed.
Round numbers, the value of a share of Berkshire is up about inflation plus 10.1%/year in the last decade.
I calculate that in a couple of different ways and lately they have been giving nearly identical results.
For the S&P 500 in the same stretch, smoothed real earnings, the best metric of actual value, are up about inflation plus 4.6%/year. (historically very high, by the way)
Plus you get a dividend, averaging 1.94% in this stretch, for a total value generation of about 6.54%/year.
Any market return in excess of that has been as a result of getting more expensive, and should probably be though of as temporary.
A very crude rule of thumb of what to expect from the S&P 500 is the dividend yield the day you buy, plus the future GDP growth rate.
So we find ourselves in the odd situation that
Certainly there are lots of other good things in the market that would meet the same criteria.
The typical S&P 500 firm is very pricey, but that’s certainly not true of everything.
I like Berkshire because its level of bulletproofness and predictability means one can have a very large portfolio allocation without losing sleep.
I expect higher returns from most of my other positions, but they are much smaller positions because of the wider range of plausible outcomes.
Jim
Can the same be said about QQQ vs QQQE, ie large tech stocks are overvalued? Seems to be a similar conundrum.
I estimate that QQQE is in the vicinity of fair value at the moment.
Real earnings for the group have trended very well since about 2005, and almost as well for longer
periods if you simply ignore dips in recessions which seem to completely disappear afterwards.
Based on the on-trend level of earnings, and the average multiple of trend earnings since 2005,
you’d expect a price in the vicinity of $61-$71 at the moment.
My best guess would be near the lower end of that range, maybe $63ish.
With the current price between 65 and 66, it’s definitely in the zone.
Which is probably a pretty good deal for a core position.
Real earnings have risen something like inflation plus 7.2% to inflation plus 8.2%/year.
Generally near the upper end of that range…the lower figure is from about the most pessimistic trend line I could justify.
That’s the rate of rise in value for the index. Add about a half percent in dividends.
Might get a lot cheaper. Hard to say.
Jim