I would respond by first reviewing my post #46403 to you
"Bruce - Thanks for fascinating "MarketPlayer.QuantView analysis link.
It is a very interesting analysis and demonstrates why PE and other key ratios cannot be viewed historically on a stand-alone basis. Part of Buffett's teachings in the past have discussed the importance of the constant struggle for investor's funds between stocks and bonds.
IMHO, most tech stocks are still overvalued and I have yet to pull the trigger on anything. However, that could change before too long. A concern I have is that the trigger decision will be very difficult when it arrives, because things will look horrible and the "mega-bear" cases will become very believable. However, if you believe the theory behind the QuantView analysis, and consider the historically low (and getting lower) inflation and interest rate environment we are currently in, it becomes difficult to believe the mega-bear scenario of a possible 7-8 PE for the S&P 500. The last times those multiples were reached was 1973-74 and 81-82 (as shown in the chart on post #46383 that Chaz was kind enough to provide us with). Clearly the inflation and interest rate scenarios, as well as other key factors seen in those recessions, were dramatically different than what we have today. So, this recession could reasonably be expected to bottom-out at a higher multiple level as the analysis suggests. Also, the Fed has more powerful weapons at its disposal to ultimately bring this one to an end than it did during those two recessions. But, I would never rule out the possibility of other major factors like massive debt defaults, etc. causing the mega-bear scenario to happen.
Thanks again for the thought provoking link.
Robert H. Chaney"
So, I would agree with the basic concept behind the new article you posted in #47267, that adjustments need to be made to benchmark different eras for historical analysis. However, I disagree strongly with the author's specific conclusion that "the market today appears to be fairly valued."
The successful long-term investors I know who have correctly called the events of the past 1 1/2 years, and influenced me to be able to see them, have typically relied on one overwhelming factor that they refuse to let go of. That premise is that we are witnessing the bursting of one of the great stock market speculative bubbles ever, and the greatest industry bubble ever (tech). Jeremy Grantham does a great job of describing what this really means at his firm's website - gmo.com . His basic concept is that EVERY speculative bubble of any kind and in any type of market, eventually gives up all its gains from the bubble.
My research and experience has indicated that the bottom in a unique situation like this typically does not occur until the following have happened:
1) Everything that could go wrong is discounted into the stocks. Right off the bat, this can't have happened when 50% of Americans don't even believe for sure we are going into a recession. Most people still can't conceive how bad this thing can get: how high unemployment will go, how many more bankruptcies will happen or be threatened, how far housing prices can fall, how low the stock market can go, etc., etc., etc. I am not saying that all of these things will actually happen, but I believe people must see it as realistic scenario before a final bottom can occur. This factor #1 may not ultimately get checked off until we see some articles and posts about the possibility of this thing evolving into a depression.
2) Factor #1 then leads to total capitulation where everyone who will eventually get out of the market and tech stocks in this cycle, does so. I still see far too many people who just got in for the big ride and are not true investors at heart, that are now hanging on by their fingernails, and will likely get out before this is all over.
3) Valuations must reach historically normal levels for this kind of a disaster (with some adjustment for major differences in the basic environment like the author suggests). In other words, the stocks have to become REAL BARGAINS in historical terms. A study of past recessions shown in an excellent prior post by another member, indicated that EVERY past recession saw S&P 500 PE multiples recede to 15 or below. If you use a $45-50 earnings estimate x 15 = 675 to 750 for the index. I am not predicting this, merely doing simple math to show a very probable scenario based on historical analysis. And, it could get worse than that. Regardless of how you want to do the math, things just are not a bargain in the context of historical analogies, despite what the author claims. I think the investment banks have been successfully selling stocks this year as "bargains" because of their percentage price drops, which I believe history would indicate is an incorrect definition, and not truly meaningful in analyzing a bubble bursting scenario;
4) A number of fundamental problems with the economy/industry must have diminished and some of the fundamental changes necessary for a recovery have moved into place. There is currently no resolution whatsoever of the current threat to national security. Historical analysis of past analogs shows that the stock markets tend to drift down for a while, until some significant action occurs which appears to reduce the overall risk. Our success at Guadalcanal in World War II would be a good example. On the positive side, low inflation, interest rates and energy prices are all coming into place as necessary factors for a recovery.
Given the panic in the stock markets recently, I spent some serious time last week examining the macro-economic environment and the tech stocks I am interested in. I came to the conclusion IHMO that the factors still are not in place, and I don't see any of my target stocks as bargains yet.
One other concept I bring up for discussion. Several of the most successful people I know believe that this downturn will get worse, and generate several more "false starts" proclaiming a market bottom and imminent recovery, on top of the ones which have already happened. So, by the time this thing finally bottoms and begins its recovery in actuality, everyone will be so worn out that they won't believe it. Sort of like the "boy who cried wolf" scenario. If this happens, then the best strategy may be to patiently wait until the company fundamentals actually begin to turn-around, and then pay a small premium to play a relatively safe game. Having seen first hand this concept actually play out several times in other bubble bursting scenarios, I believe it deserves serious consideration.
Please accept all of the above as JMHO based on my experiences and analyses, and my desire to continually test them through solid discussion and debate. Personally, I find it difficult to write this post, because I am basically an optimist and I truly enjoy and find fulfillment in investing in great companies run by great people. This is partly why I find Gorilla Gaming so fascination. However, whenever I have let that basic optimism shade my view of what was really happening in the past, I have always regretted it. So, I am continuing to attempt to look at this situation objectively and rationally.
Robert |
