Investing Wisely - Making Money Consistently - Requires ... Part I
My focus is "Investing Wisely", e.g. taking advantage of the bull/bear cycles as they occur within the overall marketplace. Integrating modern analytics within these cycles means maintaining a process of thorough fundamental, technical and consensus analysis of the marketplace. I believe that this discipline provides the necessary clarity regarding the rotation that most all companies go through; from favorable times to unfavorable times and perhaps back again.
Making Money Consistently - Requires ...
I have been writing about fundamental Valuations for years. More recently I have been quite critical of the financial analysts who provide public data on behalf of their employer. That's the rub, they are paid to say what their employer thinks will bring more money into their particular mutual fund or perhaps institution.
On the other hand, I believe "valuation metrics" is perhaps the number one way to make prudent and consistently profitable investment decisions. I find that a great many investors derive their investment decisions using this approach but ignoring the flawed methodology of the composite analysts. That is just one reason investors have not enjoyed watching their portfolio grow over the past decade.
Alan Abelson of Barrons noted the current environment's unusually pricey status, he says:
"Moreover, at 20 times this fading year's earnings, stocks hardly stack up as outrageously cheap. On that score, the latest calculation by Andrew Smithers, the smart Brit who runs the eponymous London-based investment firm Smithers & Co., is that U.S. equities are more than 70% overpriced, according to q, his favorite yardstick and essentially a measure based on replacement value."
You probably know that those financial analysts that are using funny math and strange valuation formulas have the forward looking PE is just 13.3 - cheap by historical standards, but not accurate.
Please say WOW - just for me, before I go on.
John Hussman says stocks are likely to return just 3.6% per year in the coming 10 years - well below the norm:
"On the valuation front, the consensus estimate from the strongest models we track indicates that the S&P 500 is most likely priced to achieve 10-year total returns averaging about 3.6% annually. Given the inverse relationship between the Russell 2000/S&P 500 ratio and subsequent relative returns for the Russell 2000, I expect that returns will most likely be negative for small-cap stocks over the coming 4-year period, even without the assumption of renewed economic weakness."
I would add that the 'returns' will be even less in next year and perhaps the following year.
Robert Shiller's cyclically adjusted PE removes much of the noise in the standard PE ratio. Valuations peaked at 27.5 during the most recent bull market. This is well above the current ratio of 22.7. During the dot com. bubble the ratio hit 45.7. Since the Greenspan Put (now the Bernanke Put) became a permanent component of the modern day equity market stocks have experienced abnormally high valuations. While stocks do not appear cheap since the inception of the Put the current ratio is high by historical standards:
Warren Buffett has previously stated his favoritism for comparing the entire equity market valuation to GNP.
Are you convinced yet? Ok, Ill go on just a bit more.
Here is one more chart of Tobin's Q Ratio:
So why is all this so important? Consistently making money in the stock market has some good advice to offer, along with the bad.
"Buy Low and Sell High" might be the most familiar great stock market quote and nearly all investors now-a-days have lost that knack. There are many reasons for this to be true, and I try hard to share as many as I can crowd into my various Blogs.
This is simple one of them. Cash is a wonderful safe harbor and now is a time to be in Cash, or if you are a bit proactive take some Bearing positions.
It is important that this article not be viewed as a recommendation for the purchase or short sale of any company or ETF at this time. Favorable to the process of "Investing Wisely", it is intended to suggest that - fundamental, technical and consensus data analysis is very helpful to identify Inflection Points as the marketplace cycles from Bull to Bear and back again over and over and over again.
It is this continuous "cycling" that presents us all with clear Inflection Points. So the good news is that we are given frequent and conservative (low risk) opportunities to "invest wisely" or to simply hold cash.
My Current Bottom Line:
* I am holding 100% Bearish Positions.
* Patience and Discipline - waiting for my list of Fundamental, Consensus and Technical - "Conformations" to all fall into place is part of the necessary process for "Investing Wisely".
* Inflection Points historically have occurred historically about three - five times per annum. We have already had 5 clear and meaningful Inflection Points so far this year. Investing at or around the time of my Inflection Points has proven to be a profitable way to invest.
* In my late August posting, I said: "The Market is now (very possible) setting up for another meaningful but likely (short in duration) Rally!" It certainly did rally!
* Now it looks just the opposite. One of these days this choppy and bifurcated market (late April to date) will do something meaningful and the next possibility of that is a meaningful Pullback.
* High Volatility may not currently be showing up on VIX due to the current rally - but VIX being an Inverse Indicator, I can assure you that it is clearly - alive and well.
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Thank you for your time in reading my "stuff" and continued interest in my work.
Smile, have Fun - "Investing Wisely",