The bear re-approaches.
Lately, the winning strategy has been to ignore the maxim "the past does not predict the present." Even scholars like Jeremy Siegel have fallen into this trap, while repeating this maxim to students and clients. These people have been successful in an Amway way, and now every tabloid business publication and "stock market genius" is admiring via emulation. What has happened in the last 25 years is being used as an excuse for buy recs, flashy bullish stories, and yes, polar bear scenarios. The theory: Don't worry, stocks go up. Or, much less common, "Buy canned goods." But looking at the last 25 years of stock market history, or the last 50, means absolutely nothing in regards to predicting the market will do in the future. The best strategy remains to buy stocks in companies such that one receives a significant, reliable earnings yield on the security that compensates one for the risk borne. And the simple fact is that the leaders of this market do not qualify.
I'm looking for the second wave of the bear now as the Dow touches 10,000. The first occurred in mid-late 1998 and is continuing for most stocks (the stealth bear). How am I letting it affect my strategy? I'm not. I'm still 85% invested and looking for places to put the 15% cash. I am however being extremely selective, buying only situations that offer deep value not subject to wild market-based revaluation, companies I would be comfortable LBO'ing. In particular I am being wary of any PE-based valuation or valuation that relies on future earnings growth to make sense. Recently Value Line highlighted stocks like Keane, 3Com, Omnicare, Concord EFS as great buys because they had fallen in the face of large historic growth. To me this is a mistake, as earnings deflation will surely hack away all the legs on which these stocks stand. In fact, these cos have fallen further since the rec. My current acid test: no earnings growth required for the stock to still have 50% appreciation potential, and with little to no downside. These stocks are out there, having been sucked down by a vortex of ignorance and disgust perpetrated by the short-term, big money institutional strategies not to mention greedy individuals.
The market is irrationally trying to circumvent risk with short holding periods, causing the liquidity premium to go through the roof. In effect, short-terming itself to death.
I'm no Perma-bear or the-sky-is-falling bear. My portfolio and actions are always on display at valuestocks.net. But these are uncharted waters by every measure, and it is foolish in such treacherous circumstances to try to predict future good returns on what has been working in the last 25 years. Absolute value (rather than relative growth) among stocks, and relative value among all asset classes should be the standards to live by. And by these measures, massive revaluation and redistribution must occur.
Good investing,
Michael Burry |
