As the markets go down, will the bears become more bullish?
It's pretty clear that some of them will and some of them won't.
I remember back when I was a graduate student (79-84), and
got by (for the first two years) on one twentieth of my current
income. I saw, for example, GM selling for under 3 times
earnings. I certainly wished then that I had the money to buy.
Would I buy if that situation came around again? I hope so.
But I'm not the same person I was 15 years ago, so who knows.
Getting stuck in a positive stance for the last 15 years would
have made you look reasonably good, as far as investors go.
I remember the bearish sentiment that started to rise in the
summer of 87, and I picked up a copy of Barron's and priced
short term index puts the week before the market crashed.
After I realized I would have had a 24x gain, I decided that
if the market ever got that over-valued again, I wouldn't
procastinate away the opportunity. I also have decided that
if the market ever gets as under-valued as it was in the early
80s, I will take advantage of that. But who knows.
One of the older market gurus said that the difference between
investing and speculating, is that investors primarily expect to
receive regular income from their purchase, while speculators
primarily expect to sell it at a profit. When you see stocks trading
at extreme multiples of both their book value as well as their
discounted dividend stream, you know the speculators have
run the prices up.
The secret problem that speculators have is that in the absence
of a market, they cannot tell you how much anything is worth.
That is, an investor can estimate the dividend stream, and
compute a value based on the interest rate they use to discount
that risk type of investment. Pure Investors don't need to know
what the stock price has been in the past. It just doesn't matter,
as they are looking only to what they will regularly, predictably,
receive in the future. Pure speculators, on the other hand, have
a much easier job. All they have to do is look at how the price
has changed in the past. They might also look at relative prices
to other companies in the same industry. But they have no way
of pricing a security in the absence of other price information.
Speculators tend to buy things as they begin increasing in price.
Eventually they drive out the investors, who can no longer see
a reasonable price relative to the regular, predictable, future
returns. When the investors are driven out of a market by high
prices, stocks become extremely volatile as the speculators
push already high issues higher and low ones lower.
Speculators can be bulls or bears, and so can investors. But
when investors become bears, they are pretty much driven
out of the market. Consequently, market tops are usually more
volatile than market bottoms. An interesting exception occurred
during the great depression. Even though prices were extremely
low, there wasn't enough investors to keep the volatility low.
This was presumably because most investors had lost most of
their cash investing in "bargains" during the three year slide
after 1929.
My 77-year logarithmic chart of the Dow along with its book
values, earnings, and dividends, indicates that great times
to buy the Dow occurs when it sells below its book value.
These are not common:
4Q31-2Q33: A truly great time to buy.
1Q42-4Q42: Also a good time.
2Q49-3Q50: An excellent time to buy.
3Q74-1Q76: An okay time to buy
3Q77-4Q82: A truly great time to buy.
During the firts three of these opportunities, it made sense to
borrow to the hilt to buy the Dow. Here are the corresponding
(highest) corporate bond interest rates minus the approximate
dividend rates, or carrying costs:
4Q31-2Q33: 5.0% - 5.4% = -0.4%
1Q42-4Q42: 2.8% - 5.9% = -3.1%
2Q49-3Q50: 2.7% - 7.5% = -4.8%
3Q74-1Q76: 8.8% - 5.0% = +3.8%
3Q77-4Q82: 13.8% - 6.1% = 7.7%
Both speculators and investors in real estate use leverage.
The difference is that investors expect the income to finance
the leverage, while speculators expect the eventual sales
to be enough larger than the purchase price to pay for the
leverage. This is similar to the stock market.
Anyway, the Dow is currently at something like 5 times its
book value. So in terms of incredible deals, if the Dow
dropped to the 1500 region, I would go to great lengths
to buy as much safe stocks as I possibly could, regardless
of how fearful the economic situation. Will this happen?
I don't think so, and I hope not.
That occasional urge to analyze the economy is coming over
me. I like to make "phase-space" plots of independent
variables of dynamical systems. This is my favorite way of
uncovering repetitive behaviour in noisy dynamical systems.
If I do any of these, I'll post notes to this thread. One of the
interesting ones, which I have not updated for 5 years, is to
plot interest rates versus the unemployment rate, labeling
each point with the year. The economy tends to make big
circles, usually in the same direction, as rising unemployment
leads to lower interest rates, then lower unemploymen, then
rising rates, then rising unemployment. The plots give you a
much better sense of where you are in the economic cycle.
-- Carl |
