Graham thought the market was "high" in the 1950s. I linked this article earlier in the year but it provides a good summary of the algorithm he used for deciding when the market was too high:
advisorperspectives.com
Statistically, buying the dips (by which I mean buying when the stock is going down but is still well above intrinsic value) is going to work most of the time - except when it doesn't. Also statistically, most people lose money in the markets over time since they sell too late (still in bull mode) and buy too late (still in bear mode). If you are the kind of person who can hold on through 50-70% losses in a real bear market, of course, you should still be able to equal the market.
I really don't understand the bias against holding all or mostly cash in an overvalued market with bond yields at rock bottom. Let's be clear here - equity multiples have been declining on average since 2000 and I see that trend continuing until we get closer to the averages of the last century. Thinking one is going to somehow escape the average outcome with a portfolio that looks anything like the market (including "value" industries in peak cycle) seems a bit simplistic to me. This is one place where I think the O'Neil crowd has an edge of the buy and holders in a ripe bull. The smart ones have been out of the market for over 6 months based on institutional selling.
I know that the Mike Burry mantra is you should be fully invested at all times independent of market level, but you have to remember (1) he was shorting stocks throughout (2) he was exiting stocks that broke support (3) he (from what I can tell) was focusing buys in "down" industries (of which energy is currently the key offender). I'll warrant this strategy could work again for small investors. But IMO when one is in an overvalued market one should seriously question whether one's portfolio has any special reason to withstand a big sustained sell off. It doesn't take more than a 5-10% drop in the Dow to lose half your portfolio depending on your focus.
For my part, I'd probably be heavily cash right now except (1) there are some great buys in oil which are showing support (2) I've got a list of 20-50 high fliers that are shortable or close. I've gotten a number of good ideas from the thread, but I've been sitting on most of them waiting for support levels. In a true bottom-sinker bear market (which hasn't happened since the 70s) I'm truly convinced everyone will lose money on the long side.
It doesn't really matter to me whether the big indices reflect this 5, 10, or 15 years from now. I'm working on a stock by stock basis and what I see is 6 months ago I had few stocks to short technically, and now they're all over. And the declines are big - 25, 30, 50%. When I find a value stocks with nice months long support, I'm more than happy to buy. Interestingly Lazarus has been holding up well down in the weeds. But I just can't understand free fall buying in a correction in an overvalued market.
So I reiterate - IMO if one is not willing to use TA on the long side (or short), one should probably be mostly out of the market at these levels. Graham didn't use TA to my knowledge, hence a pure Grahamian should be near 100% cash (IMO investment grade bonds don't yield enough to justify the risk, with special situation exceptions).
JMO,
Graham |
