David, Lynch's rule is too simplistic and he never followed it, which can be proven by Magellan's horrible performance in down markets. He more than made it up in up markets, but he was not a major league defensive player on stocks.
What matters most is the discounted return on stocks, not on their relation to bonds, though that has some impact as an alternative investment. In other words, is the S&P 500, with a PE ratio of 33.5, an "earnings" yield of about 3%, and a dividend yield of 1.28% a good investment? First you have to answer two questions. Do you believe the earnings are fairly stated? My answer is, no way. Others believe differently. Second, do you expect the growth in earnings and dividends to be sufficient to make up for the low rate of return on the starting numbers? Again, my answer is not a chance, though many others think they are high enough to make the index an investment and not a trading sardine.
So, what I am saying is I don't want my money in an investment with an internal rate of return lower than money funds and a risk level much higher than money funds. Bonds may be an alternative, but cash is a no risk alternative with higher expected (by me) returns over the next five years.
The short answer is, I don't think simple relational formulae work. You have to make some tough decisions about the future growth rates and about the future discount rate, and you could be wrong. But going with automatic triggers is not my cup of tea. |
