I also tend to be early and am learning the obvious lesson from that. WAIT. I will not argue with anybody on this thread who says that a hell of a lot of investments look very cheap right now. But the same investments looked very cheap last week and now are down another 10%. The logical extreme of this is that you wait forever and never buy. But I think you all know me better than that. Somewhere in between I'll make my stand. I haven't decided whether it will be all at once or just starting to nibble. The macro will decide that for me, and that is what I am watching now. But for now I am still a seller. I have another 10% of my portfolio (there's not much left) earmarked for any significant bounce this week.
What am I watching for as buy signals? I am not a technical analyst, and until recently I would have agreed with the conventional wisdom that market timing is futile. But it worked for me and I always am skeptical of conventional wisdom. John Neff, one of the greatest value investors of our time, has been scoffing at the notion that you can't time the market. So my buy signals are the opposite of my sell signals, on which I sold over the last six months, accelerating my selling in early July.
1) Extreme market valuation. Fair value of the S&P is at least 10-20% lower than its level now, based on the model I use. The major Wall Street firms use the same model (stock prices are tied to interest rates) but with a major logical flaw - they assume the current return on equity of the S&P is sustainable. I don't. More traditional models (dividend yields, P/Es, etc.) would argue for much more pain, which gives me comfort that I am right.
2) Speculative mentality. The valuation of the internet stocks was a big signal for me to GET OUT NOW. Retail investors are still willing to pay over $100 for Amazon.com. When these speculative stocks drop another 50%, I will be much happier. I would predict Amazon eventually trades for single digits. Go back to the last speculative euphoria 25 years ago and look at the speculative companies then and you will see what I mean.
3) Conventional wisdom is that stocks are no-risk investments if you buy for the long term. I want to see newspaper articles terrifying people. Articles pointing out that if you had bought the Japanese market in 1990 after a 10% "correction" you'd still be down 50% today. Or if you had bought in 1929 or 1972 on the "correction" you would have been even maybe a decade later if that. I want to see this "new paradigm" discredited and Abby Joseph Cohen discredited.
I know I am annoying a lot of people now, but I kind of like watching my cash balance do nothing every day as I read the doom and gloom in the paper. Value investors have bought into this garbage that you can't time the market. Read Ben Graham again - one of the first lessons he tried to teach is to time the market.
Jim |
