What's your take on recent sentiment?

Investment Analysis Clubs Saul’s Investing Discussions
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Hi all,

Just wondering how everyone is ‘preparing’ for recent investor sentiment over US market. People talk about Fed raising interest rate this year, oil prices, another market crash coming up like 2000 and 2008, European market and Greece, blah blah blah.

I understand this board of Saul and et al. is dedicated to financial analysis (i.e. 1YPEG and I thoroughly appreciate that from my recent position of SKX) and we as fools prefer to hold our equities with long-term perspective, I’m just wondering what would you do if ‘the bear’ is pretty much predictable in a very near future. Is trimming enough? Moving onto commodities like gold? Or major selling is recommended, holding cash until the market reaches the bottom and scoops up the ones on your shopping list? (Or you don’t do anything since no one knows what’s going to happen?)

The reason I’m asking this question is I’m fairly new to equity investing and am looking for two cents from the experienced.

I’m

  • a foreign investor (Canadian)
  • in late twenties with very short investing career
  • with relatively small port (less than 50k)
  • still holding cash since I only have very few core holdings
  • contrarian in nature (i.e. CBI, TRN)
  • quite comfortable with looking at financials/ratio analysis since my job is heavily dedicated to them

What would you if you were in my shoes? What would you do with upcoming ‘bear market?’

Hex

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What would you if you were in my shoes? What would you do with upcoming ‘bear market?’

Hex, I wouldn’t pay any attention to those people. They’ve been saying a bear market is coming since 2010 (5 year ago), when they were saying “A double dip recession is coming!” You can’t predict the market or the economy, but right now we have:

-Low energy prices
-Low interest rates
-Falling unemployment
-Rising employment
-No inflation
-A slow and steady growing economy (the flat economy during the huge winter storms means nothing)
-Lots of people worrying and predicting Bear!
-Very few people euphoric and predicting Bull.

In spite of all the ideologically produced worry you hear, it’s hard to imagine a more positive economic scenario, and less reason for a bear market.

Saul

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Just wondering how everyone is ‘preparing’ for recent investor sentiment over US market. People talk about Fed raising interest rate this year, oil prices, another market crash coming up like 2000 and 2008, European market and Greece, blah blah blah.

I read all about it, then ignore it. What matters is that your financial situation is robust enough to handle whatever comes down the pike. The best description I’ve heard is “robust” vs. “fragile.” Bankruptcy happens when you can’t pay your debts. To avoid bankruptcy make sure you won’t be called upon to make payments when you don’t have the money to pay with.

We often create false illusions of safety. Selling puts is one of them. The illusion is that you’re buying stocks on the cheap but what happens if the stock goes to zero at a time like the Fall of 2008? A chain reaction sets in. Everyone is selling at the same time and the bottom falls out of the market. But if you have no obligations to pay and some cash, you can pick up some nice bargains. No prediction was necessary, only a robust portfolio.

Saul has the right idea, build a bullet proof portfolio with solid companies that are growing earnings.

Denny Schlesinger

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Saul,

I was listening to a radio show yesterday where the host said that US growth was like 0.2% for the quarter, which is – not much growth at all, and very close to negative growth.

He said that a recession is defined as two quarters of negative growth and we are close to a recession, citing flat wages. The only booms have been in oil and technology.

The recovery(?) was based on lower interest rates alone, and that has pushed most money into stocks.

I thought it was curious perspective.

Karen

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I thought it was curious perspective.

Yes, these guys have been crying “The sky is falling” for years. If you keep calling for a recession for six or seven years, eventually one will come along, and you can brag how smart you were. And a stopped clock is right twice a day too!

In the first quarter we had the most snow in 80 years, as I remember hearing, in the northeastern states, the midwest was locked in with winter storms too, and there was snow down to the Deep South. And the economy still GREW, not declined. That doesn’t signal a recession, sorry.

Best,

Saul

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Your being in the late 20’s, you should not worry about an “upcoming” bear market. Get invested maybe 90 to 95%, assuming you have ‘x’ months’ essential expenses set aside. You will experience a bear market. You will see your portfolio get whacked. But I assume that you will have income for almost all of your next few decades. The market will recover (if it doesn’t we will all have bigger troubles than the drop in our portfolio value). Invest in yourself, too, in order to increase your income. Keep buying through the market decline. Don’t worry about what you can’t control. The bear market will be your friend. Rejoice in it.

KC

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Hex,
The bear around the corner has been in hiding now for several years. Even the CEO of TMF has had some bear sightings and has proclaimed he’s making sure to keep some powder dry (cash) in order to take advantage of the soon to be calamity. And what was the analysis that gave rise to this prediction? It was based on the inevitability of a bear market to soon develop due to longevity of the current bull. Financial analysis not required. We’ve defied the cyclical gods and they simply won’t tolerate this hubris much longer.

Yet, I agree. All the bear predictors are correct. We will eventually have a bear market. For perspective, a really serious, big, full-on bear could see the indices get trimmed by maybe 20% - 25%. A more moderate bear would be in the range of 15% - 20%.

A crash like 2008 (apx 30%) requires a pervasive economic bubble to burst. That’s the only way to create that much financial damage. While the too-big-to-fail banks are even bigger than they were before the 2008 crash, and while some of their activities are worrisome, there is absolutely zero evidence of a pervasive bubble such as sub-prime lending coupled with securitization of the loans coupled with scandalous ratings agency activity. In retrospect (always 20/20) it’s pretty widely agreed that that’s what produced the 2008 debacle. That situation demanded a combination of activity by both political forces and financial institutions that don’t exist today. This is not a naive, head-in-the-sand proclamation. It’s simply the facts.

Yet, the bear will eventually roar. And all those gurus who have been forecasting the bear for years will be all over CNBC and FBN and wherever else they can find a soap-box to loudly proclaim how they warned us. They may not be quite so vocal about how long it took them to get it right, and the opportunity cost of having listened to them when they first issued their dire warnings. But truth be known, most of these guys don’t make living by investing, they get paid for analysis and advice. They seldom are held accountable for how often or how long they got it wrong.

But bear with me (get it?). So, let’s say the loss of faith finally comes to pass. What to do? If you still have a job, maybe it’s a good time to keep your head down. At the peak The Great Depression (1933) unemployment reached 25%. That’s pretty grim, but it also means that 75% of the folks that wanted a job still had one. I don’t know what you do for a living (you indicated that financial analysis is part of your work), but I’d venture that your job is pretty secure. You might take a salary hit, but that’s probably the worst. If you maintain enough cash to cover about 6 months living expenses and are reasonably free of consumer debt you can probably be worry free.

If you have been a follower of this board and have taken the majority of the advice found here to heart you will find yourself invested in solid companies. Of course, their stock price will take a hit, but the companies will be well equipped to not only weather the economic storm, but to exploit it. And because you avoided buying companies with stratospheric PEs, they will probably not get crushed nearly so badly as the companies that sold more promises than products.

As for keeping dry powder for investment, I personally keep very little capital out of the market. I don’t need to. Here’s why. As I just mentioned, most of the companies I’m invested in will exploit a bear market to buy out competitors worth buying. My investments carry far more dry powder than I could ever hope to accumulate. I will sit quietly on my investments as my portfolio value falls. I won’t sell except for the unlikely situation where I’ve badly misjudged and one of my companies get’s into serious trouble. My companies will take advantage of the downturn to a much greater extent than I could. After the bear goes back into hibernation, these companies will come back stronger than before.

The average bear market has an 18 month life span. Even at my age (I’m retired), 18 months is not an unendurable amount of time to just sit tight. If I have some extra cash (I don’t know where it would come from - so this is a hypothetical) I would most certainly look for a beaten down stock of a strong company and buy it.

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As for keeping dry powder for investment, I personally keep very little capital out of the market. I don’t need to. Here’s why. As I just mentioned, most of the companies I’m invested in will exploit a bear market to buy out competitors worth buying. My investments carry far more dry powder than I could ever hope to accumulate. I will sit quietly on my investments as my portfolio value falls.

Truly a wonderful response! thanks so much Brittlerock. I especially hadn’t thought in terms of my companies buying up other companies on the cheap in a recession.

Saul

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I have a copy of Ravi Batra’s book The Great Depression That Didn’t Happen, originally published under the title Surviving the Great Depression of 1990: Protect Your Assets and Investments and Come Out on Top.

http://www.amazon.com/Surviving-Great-Depression-1990/dp/B00…

Fear mongering makes money.

Denny Schlesinger

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I live in the Upper Midwest and our snow was no biggie. We had a few big snowfalls but we were not locked in, not even close. Maybe one or two days but not something where no work gets done, and it’s a temporary, brief thing.

The West coast port situation was something, but also wasn’t that more of a blip?

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Thanks everyone for your wisdom. These are advises I cannot secure from ‘paid advisers.’

As for keeping dry powder for investment, I personally keep very little capital out of the market. I don’t need to. Here’s why. As I just mentioned, most of the companies I’m invested in will exploit a bear market to buy out competitors worth buying. My investments carry far more dry powder than I could ever hope to accumulate. I will sit quietly on my investments as my portfolio value falls. I won’t sell except for the unlikely situation where I’ve badly misjudged and one of my companies get’s into serious trouble. My companies will take advantage of the downturn to a much greater extent than I could. After the bear goes back into hibernation, these companies will come back stronger than before.

I got to agree with Saul for this one. This statement just shifts my investing game to another level. Thanks for opening my eye brittlerock. You are also very accurate with my personal finance. Being a member of the ‘boring’ part of the finance world, my job is pretty secure albeit modest return. (plus no debt as of now) Since I have not yet established my portfolio and am holding cash looking for solid businesses, I will take a conservative approach taking positions and continue to follow this board while exercising my due diligence. (and hopefully contribute where appropriate)

-Hex

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Nobody can reliably predict bear markets in advance. Except maybe those who say the bear is imminent every week for years, eventually they will be right
.
Economics and valuation are useless in predicting the top or returns over the next year or so. But over the next decade from present high valuations, returns are likely to be low , with lots of gyrations between now and then, plenty of chances to make or lose money in the meantime.

. Since the SP500 just hit a 6 month high, and since bear markets ( except the Black Swan ones) usually take time to develop, the statistics say the risk of substantial losses in the next few months is small

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This market has climbed a wall of worry. There was a great screenshot the other day of some of the same headlines from the same publications about the coming bear market over the past few years. Some even posted the same title more than once.

In an environment where companies make money, have tons of cash, grow profits, buyback shares at record levels, have near zero interest rates, and lots of money in the markets that need to be invested somewhere, I think a true bear market is not on the near term horizon at all.

But the current market is not giving a free pass to companies that aren’t growing fast enough for their valuations anymore. And we are still only 2% off all time highs on the S&P, so a few days of selling and rotation between stocks is not the worst thing out there.

Just stay calm :slight_smile:

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