Jay
Some thoughts about being invested in this market.
Was dusting off recently Ben Graham/Dodd's "security Analysis" classic. On page 6 while ruminating about the 1929 equity crash and subsequent bonds crash they say:
"The theory that a sound bond will be unaffected by a period of depression has suffered a rude shock. Margins of safety considered ample to withstand any probable shrinkage in earnings have proved inadequate; and enterprises once regarded as depression-proof are having difficulty in meeting their fixed charges. Hence if our judgement were based primarily on recent experience, we should have to advise against all investment in securities of limited value (excepting possibly short-term government bonds) and voice dictum that both bonds and stocks should be bought only as speculations, by people who know they are speculating and who can afford to take speculative risks"
Then they go on to say that:
"1927-1933 was a period of extreme laboratory test. The swing of the speculative pendulum during this period was of such unprecedented amplitude as to warrant the belief that it will not recur in similar intensity for a long time to come"
My thoughts:
1. Graham clearly advised people to stay out of stocks and bonds during the bubble period (specially the unsavvy ones).
2. They did not expect the bubbles to occur often, but guess what, we got one 70 years later and I do not see why their sound advise which applied then should not apply now. It seems though 3 generations later, the new generations need to learn about the perils of similar historical periods from the beginning
3. Once those lessons have been forgotten, the human sentiment governs market behavior again starting right at the bottom of the learning curve, exemplified by:
a. recent 500 point swings in the market we have seen
b. those disgusted with stocks now entering bond markets right possibly at their highs to relearn the same experience
So the question is then what heuristics investors might use to reenter the market for investment. At this point I been thinking to myself:
i. If one were incorrect about the right entry point, it is much safer to do it later than earlier because of the high risk with the Dow/S&P still remaining...
ii. The volatility/hope in the market may have to diminish to a significant extent on V shape/double bottom recovery etc, and the 200-400 point single days swings need to die out. Also means that volume on the exchanges needs to significantly diminish. If one were to assume that a bear will give back about 5-6 years of gains, we need to look at exchange volumes lower than that of 1996-1997. This volume should be:
1. corrected for all stock splits/new stocks issued in that period 1997-2002
2. lower than the corrected volume to account for people losing zest for stocks
It may come from some stocks reverse splitting, stopped trading etc, may be Nasdaq volume has started showing signs to converging in the direction but probably still far away from the target
Looks like history may be a good teacher if people are willing to look at it, however, the current calls for market bottoms, wild swings/speculation, valuations, still indicate there is significant reason for investors to be cautious about investing in the market yet. Past experience also shows that gold rise and real estate fall has lagged the market tops by significant number of years (2-5), so those are probably good things to watch to understand how is script is being played and how it is different from previous ones. My suspicion is that we still are at least 1.5-2 years away from the point where one would feel comfortable about investing in the market, but then I am speculating there and we know how much that is worth :-).
What do you think?
Best regards
Hemant |
