So much future potential

Investment Analysis Clubs Saul’s Investing Discussions
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Another reminder, as Chris pointed out up above, that we invest in companies, not markets. And we’re not investing for next week, but for the coming years.

I think you guys are doing yourselves a huge disservice with all the fear mongering. Very little has changed in the grand scheme of things, and I doubt the problems the market is obsessing over will have a meaningful impact broadly (China, which is a teeny fraction of U.S. GDP, and low oil, which should be broadly neutral to positive for the U.S. economy overall). Market declines are a chance for all the bears to come out and get their 15 minutes (and the media is thrilled to accommodate them, of course, as people pay close attention when they’re afraid – and that equals big advertising dollars).

Now there are people on this board talking about recession, and about multi-decade economic stagnation like Japan experienced. Even though none of the facts point in that direction. And all just because the market is down? Folks, the market is insane. Yes, someday there will be a recession – that’s inevitable. And sure, the market may decline ahead of it. Even a broken clock is right twice a day. That doesn’t mean every market decline foretells recession. We had a significant decline in 2011 (two significant dips, in fact), and we’ve all done just fine since then.

Speaking of 2011, does anyone even remember those dips? Do you feel like your portfolio was permanently damaged because of those dips? If you rode them out, they were a non-event (though let me remind you that it didn’t feel that way at the time). And if you took advantage of them, that worked out very well for you.

As Morgan Housel has pointed out multiple times, there’s a paradox of investing: current and future dips always look like big risk in the moment, but past dips look like wonderful opportunities to setup a portfolio for long-term outperformance.

I recommend doing your future self a favor and look at what’s going on as future opportunity rather than present risk. Ultimately, prices are driven by fundamentals. The best opportunities arise when the market becomes so irrational that prices and fundamentals radically diverge in our favor, and that’s what we’re now seeing for many of the companies discussed here on the board (and that’s just a tiny sample of what’s available, of course).

And sure, prices can continue dropping, and even better opportunities may arise before things eventually turn around. But you don’t have to be perfect to do very well over the long run.

I’ve seen a number of posts over the years with people kicking themselves at not investing more during the financial crisis. While the market itself isn’t anywhere near that level of drop, some of our individual companies have certainly seen their prices drop by over 50%. Some are trading at or below valuations we haven’t seen for many years.

Market drops are perfectly natural. Bear markets (which we’re not in yet) are perfectly natural. Take a step back, consider the facts, put your long-term financial goals into perspective, and take this drop for what it very likely is: long-term opportunity.

Neil

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This is a great opportunity for those who have cash on the sidelines.

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Thank you, Neil…always the voice of reason!

Your post is very much appreciated.

az5speedy

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I agree wholeheartedly, dovbgood!

a5speedy

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Neil,
I could not agree more with everything you just said except for not being in a bear market. And that exception is probably just how I am looking at things.
To me we are in a “new” kind of bear market or I guess it can be called whatever term anyone wants to use.
Since 2nd half of 2015, or one could argue pretty much all of 2015, “market” seemed pretty “shaky”. By this, I mean a few big companies carrying the S&P 500, share prices seemed to drop disproportionately to any news to the point even good news would cause drop in some strong businesses because sentiment was the “good news” wasn’t “good enough”. Share prices seemed to drop on good earnings/hitting estimates and drop or not go up much on great earnings/beats. Any news from China seemed and seems to cause disproportionate swings.
Looking at S&P 1 month -10%, 6 month -15%, 1 year -10%. Maybe while not technically meeting definition of a bear market, I am choosing to look at that way.
I’m not even sure where I was going with this, except maybe just to get some thoughts down and hear what others may have to say.

Thanks for your posts, Neil, which I find helpful and imformative.

Kevin

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Hi Neil, referencing your 15672 post

I remember the 2011 dips. I was all in with RB and SA stocks. The downturn was scary at first but I did nothing, calmed down, and decided to continue doing nothing.

It was a short lived correction and all my holdings came back and continued to rise.

I learned from that experience.

This time (now) I am doing some removal of under performers, adding to a few of my higher conviction stocks and adding a handful of new companies.

These discussions are helpful,

Thanks,
Frank

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Any news from China seemed and seems to cause disproportionate swings.

Maybe that means it is a Panda market? :slight_smile:

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Correction, I meant post 15762.

:-0

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Neil:

2011 dips did not foretell a recession but did theyforetell at some other times? I guess we cannot say unequivocally that stock market dips can or cannot foretell recessions. There is also a self-feedback thing going on too. Maybe the dips never foretell recessions. It is just that sometimes recessions did occur after such dips…and sometimes it didn’t. But we had no way of knowing when we were in the dips.
About what the past says about the future…Yes the US markets have always gone up over time and will probably continue to do so but that does not mean it will necessarily continue. Long stagnations can and do happen. Who knows that we are not going into one?
Yes optimisms can be contagious and that can keep the thing from crashing further. Pessimism can also be contagious and that would lead to the opposite effect. That’s the only thing we can say. The stock market expresses a belief or lack thereof about the future.
But the system is such that after the rain will come the sunny days. We just can’t say when that will be.

tj

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Neil said: “Take a step back, consider the facts, put your long-term financial goals into perspective, and take this drop for what it very likely is: long-term opportunity.”

Neil, your eloquent post prompts a few questions:

  1. How confident are you that this is a long term opportunity? 99.7%, 95% ,68%? (3, 2 and 1 sigma) or 51%. My assumption is that if you were less than 50% confident, you would NOT view this as a long term buying opportunity.

  2. What would you alter if you were less confident? Say you are 99.7% confident yesterday, but changed to 51% confident today. Would you own all of the same issues and use the same approach? Would you change the sector allocations? Would you raise a cash allocation?

  3. What data would convince you that it was NOT a long term buying opportunity? Would it be stock price, earnings growth, GDP growth including recession, company specific business prospects or other ? ( I will leave out phases of the moon, hemline height, super bowl winner and a few other possibilities.)

I am not disagreeing with your conclusion, but would like to understand a little more behind what went into making it.

Thanks,

Yodaorange

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yoda, I fundamentally believe in the ingenuity of American business. It would take something drastic to make me believe that there would be no further innovation, no further growth, no further creation of value, no further compounding of capital over time. It sounds ridiculous just saying it. Historically, there has never been a correction or bear market that we haven’t recovered from: why should this time suddenly be different?

If valuations were silly high across every company that I was interested in buying, that would convince me it’s not a buying opportunity. But today is the opposite situation, with many companies trading at low valuations.

Neil

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Yoda,
Welcome to Saul’s board. Don’t think I’ve see you post here before. Your posts on the REIT board have been very insightful. Hope you’ll post thoughts here as well.

David

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For years I have been yearning to buy value stocks, but the market kept creeping upwards. I got burned playing with growth stocks like Ambarella, Cyberark, Fireeye, and Skyworks, reaching for growth; and bottom fishing with US Steel.

This year, I have been overjoyed to load up on Apple, Microsoft, Qualcomm, Delta, Chevron, Exxon, Boeing, Proctor & Gamble, JP Morgan, Citibank, Morgan Stanley, and Goldman Sachs. I love a good sale. I am even 5% on margin to take advantage of this rare chance. I’m 51 and have a long time to wait.

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…Long stagnations can and do happen. Who knows that we are not going into one?..

…Here’s the answer to the question posed at the beginning of this section: To get very specific, the Dow increased from 65.73 to 11,497.12 in the 20th century, and that amounts to a gain of 5.3% compounded annually. (Investors would also have received dividends,of course.) To achieve an equal rate of gain in the 21st century, the Dow will have to rise by December 31, 2099 to– brace yourself –precisely 2,011,011.23. But I’m willing to settle for 2,000,000; six years into this century, the Dow has gained not at all.
http://www.berkshirehathaway.com/letters/2005ltr.pdf
Buffett 2005, dividends except at Berkshire, of course.

About ten years later +4,400 or so, less than 3% compounded. Nothing to write home about, fifteen years in. Still 2,000,000 points away fifteen years in.

All I can try and do is take Buffett’s advice to mostly ignore macroeconomics, advice that he fairly often discards, and hope the long stagnation eventually comes to an end. Can’t market time consistently so just have to add regularly if that’s possible and you didn’t retire fifteen years ago.

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the Dow…

I’m sure you already know this, but the Dow is a flawed index, ridiculously weighted by price instead of market cap. That’s why people pay attention to the S&P 500 instead of the Dow.

It also doesn’t make sense to exclude dividends from any calculation of long-term returns that someone is trying to use as a basis for a conclusion, as we know they are an integral part of market returns over the long run.

And I also don’t understand the emphasis on points gained or lost, as what matters is percentage gained or loss. I didn’t do the math, but I assume you’re saying that – excluding dividends – the market would have to go up the same percentage in this century as it did last century if we wish to match returns? It doesn’t sound so scary phrased that way.

hope the long stagnation eventually comes to an end

According to some random calculator I just found on the web**, the S&P 500 has returned 4.186% annualized this century with dividends reinvested, and that includes the worst recession this country has experienced since the Great Depression. Are you expecting Great Recessions to happen on a regular basis from here throughout the century? If not, why do you think returns later in the century wouldn’t be higher on average?

Incidentally, returns from 1900 to 1932 were only 5.909% annualized. But by the end of the century, returns were 10.531% annualized. So I think that goes to show that you can’t judge a century by its first 1/3, let alone its first 1/6.

Beyond that, the whole idea of measuring a century is completely arbitrary. If, instead of starting at 2000, you instead start at 1999, annualized returns rise to 4.827%. And if you start at 1998, they jump to 6.162%. Heck, if you start in 2009, they’re 15.523% – would you have written a different post if the Great Recession had occurred 9 years earlier, about how bright this century looks?

Neil

** Random calculator: http://dqydj.net/sp-500-return-calculator/

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Are the returns being bandied about in this thread adjusted for inflation? Surely inflation during the 1970s (and other time periods) accounts for a not insignificant portion of index gains during the 20th century, right?

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I’m sure you already know this, but the Dow is a flawed index, ridiculously weighted by price instead of market cap. That’s why people pay attention to the S&P 500 instead of the Dow.

It also doesn’t make sense to exclude dividends from any calculation of long-term returns that someone is trying to use as a basis for a conclusion, as we know they are an integral part of market returns over the long run.

And I also don’t understand the emphasis on points gained or lost, as what matters is percentage gained or loss. I didn’t do the math, but I assume you’re saying that – excluding dividends – the market would have to go up the same percentage in this century as it did last century if we wish to match returns? It doesn’t sound so scary phrased that way…

Neil, really an excellent post. thanks

Saul

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“the whole idea of measuring a century is completely arbitrary.” Agree. But so is any other time scale. From the basis of one investor it might be from the day he earned his first paycheck until the day he dies. But since one of those is unknown that also leaves a lot to be desired.

“what matters is percentage gained or loss” maybe for an index, but we humans can only spend dollars not percentages

The SP500 is itself a managed index. I don’t think it matters unless you own SPY. Maybe you made less money than SP 500 but did it at less risk?

If your investing makes enough to support you in the style of life you want/need, it is a success. I am not going to go into the tedious reasons but I would be very surprised if the average investor does very well in the next few decades.

And yes poor economic conditions can persist for a lifetime- look at some countries south of the US. The US has been an exception to the usual rules for a country but there is no surety about the future, reversion to the mean for countries is the most likely outcome. Can the US stay a uniquely happy place for investors as those great consumers, the middle class, slowly melt away?

I place next to zero reliance on the past, as it is always formed by unique circumstances. When it comes to the future the past is not much guidance for predicting returns.
No doubt French aristocrats thought their future was predictable in 1770.

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