Graham and Doddsville -- Value Investing In The New Era Message Board

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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era

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To: porcupine --''''> who wrote (966)	11/11/1998 10:15:00 AM
From: Freedom Fighter	Read Replies (2) of 1722

>>What I recall mainly from Dreman's appearance on WSW was his advice that investors hang in with 100% stock portfolios<< I have problems with that advice even though you can justify it if you want to by looking at multi-decade stock vs. alternative studies. 1. It implies that you can always find stock bargains that will produce greater returns than the alternatives at any snapshot in time. This is simply not true. 2. It leaves you in a situation where you can't take advantage of the truly great bargains that pop up during corrections and panics in either the overall market or in a particular sector. For example, one could argue that stocks are presently discounting returns of between 5.75% - 7.5%. (with the lower range being the more likely in my view and a PE contraction a distinct profit erasing possibility). That means that an investor is surrendering returns of 1%-2% annually by staying in bills and notes. Even during this relentless rise in the market, there have been 3 sharp pullbacks in the last year or so that provided opportunities to buy some stocks at levels where the discounted return was much higher and a PE expansion was a very good possibility. This more than makes up for losing 1%-2% over a period of even a couple of years and it avoids facing the risk of a PE contraction that would more than wipe out that 2%. On the other hand, there have been periods where the Gap between stocks and bonds/cash has been as high at 8%. A 100% investment strategy would certainly seem appropriate at that time. This may seem like market timing, but it isn't. It is setting the standard for investment at a level where the spread between the expected return on the stock and its alternative is high enough to cover all the associated risks. This includes the risk of missing opportunities like we had just a few weeks ago. Some companies I am familiar with were selling at 30% discounts to their values on a long term normalized basis and an even greater discount if you think low interest rates and inflation are a permanent state of affairs. This more than made up for losing a couple of percent for awhile and gave me a PE expansion pop because the market recovered so quickly. Wayne Crimi members.aol.com

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