Doug, Re: The Sky is Falling
Warning -- An Equally lengthy response.
As a genetic number cruncher, the hair on the back of my neck always
stands straight up when I see comments such as the following: <As a
previous Reuters article noted, one research firm concluded that "the
average stock in its 7,736-stock data base has fallen nearly 20
percent since April 1998.">
First, April, 1998 is a strange date to start! Sixteen months for a
study appears to be the ultimate misuse of the scientific method; that
is, we start with a hypothesis and attempt to prove it.
Next, based on my data base, when I see a study reflecting a
"7,736-stock data base" or all stocks on the NY Exchange or all
exchanges, it fails to consider that many of these are non- U.S.
companies. My data base reflects 725 foreign companies. Now, their
one year performance, compared to the Index, is excellent at 40.6% vs.
39.8% (we all know where they were one year ago). However, the
annualized 3-year performance is .7% and 5-year 2.9%, compared to
28.6% and 25.1% for the Index, respectively.
Let me reflect part of a post that I placed in another sandbox last
weekend:
It is interesting that, while I hear a constant chorus of folks
complaining about the market internals, my work shows significant
improvement:
PERCENTAGE OF STOCKS MAY AUGUST
IR Greater than Index 17.5% 27.5%
IR Zero to Index 14.8% 31.4%
IR Less Than Zero 67.7% 41.1%
(May had 6,172 non-foreign Stocks in the universe; whereas, the
universe had grown to 6,400 Stocks at the end of August.)
The Big Boyz now total 68 companies; however, I'm going to keep
my group of 65. In any case the Big Boyz continue to kick butt:
(As of 8/31/99)
PERFORMANCE INDEX BIG BOYZ
YTD 8.3% 15.3%
1 YR 39.8% 59.4%
3 YR 28.6% 40.3%
5 YR 25.1% 34.9%
I am concerned about some of the stock valuations. My favorite
example is WMT. For the buy and hold types who bought WMT is late
1992/early 1993, it took them 4 1/2 years to get even. In this period
of time, WMT was one of only 20% of the S&P companies that managed to
increase earnings sequentially each year during the five year period
(which makes the love of quarterly earnings reports even more
entertaining).
The three lessons, I learned from the WMT example are: 1) The
Efficient Market Theory is a Joke, 2) When Big Stocks reach an
extremely over-valued condition, they tend to go into hibernation,
sometimes for years, and 3) Together with Captain Jim's thesis last
year, firmly convinced me of the scope of a liquidity driven market
in this era of the Index funds.
It is important to note that Index funds did not exist in the time of
the Father of FA -- Benjamin Graham. I will readily agree with Peter
Lynch that, in the long term, all that matters is EPS. The rest of
the "stuff" is just noise. Over time, war, peace, rising and falling
energy costs and interest rates, inflation, deflation ... matter not.
My FA reflects that we came into this year some 20% over-valued. This
was principally caused by the Index increase last year on flat
EPS. If the Index remains flat for this year, in general, the over-
valuation will be corrected with the increase in EPS this year. Note,
however, that this would require an 8% decrease between now and the
end of the year. Hardly, the end of the world, but I would just
assume not participate in this reduction in equity values. <gg>
Now, the TA is not so reassuring.
Berney |
