I’m Still Going Long and Hoping the Markets Go Down
blogmaverick.com
blogmaverick.com
> Some may also wonder how long it will take the market to “recover.” It depends exactly what is meant by “recover,” of course, but one measure might be when the market returns to its pre-crash peak. The historical data is somewhat more distressing in this context.
> After the Great Depression, it took 29 years — until 1958 — for the market to reach its pre-Depression, inflation-adjusted peak. After the 1970s recession, it took 24 years — until 1992 — for the market to make a full “recovery” by the same measure. So no matter whether you start from the recent 2007 peak, or from the market’s absolute inflation-adjusted peak during the tech bubble in 2000, we may still have at least a decade to go before full “recovery.”
Although of course some of that time will be 'going back up', so won't be so bad. it's not like 74-92 were all bleak and tough, difficult years.
If you invested in the index, you break even over that period.
But if you invest in big winners(taking Apple and Microsoft for known examples in tech) you come out way ahead.
Hopefully, we won't have to worry about either of those for time being.
"The end of the depression in the U.S. is associated with the onset of the war economy of World War II, beginning around 1939."
Also from War Economy entry:
"On the supply side, it has been observed that wars sometimes have the effect of accelerating progress of technology to such an extent that an economy is greatly strengthened after the war, especially if it has avoided the war-related destruction. This was the case, for example, with the United States in World War I and World War II."
It didn't suffer through it at all, it got fixed by it.
The notion that WWII fixed the depression is the "broken window" theory writ on a grand scale.
Even if it was worse overall, it gave us an economy and nation afterward that was far better than before the Great Depression. It is, of course, impossible to say where we'd be without it today, but things like the GI Bill greatly educating the American workforce or women entering it significantly undoubtedly changed us for the better.
The ramifications of that war are so complex that we're still finding new ones, but I was just pointing out that it is generally considered the end of the Depression, and much of the reason for our following prosperity.
But I can't say that was the case, would have been the case, any more than you can say the opposite, because we don't know what would have happened if we had tweaked x or y, and can't test it. That's why economics is a social science, not a science. That's why economists are still arguing over what caused the great depression, as well as what ended it.
Very few nations ever achieve a period like America did from that point to probably about 9/11/01. If we had to make the decision again from a purely economic standpoint, given the benefit of hindsight, we'd make it the same way.
> It didn't suffer through it at all, it got fixed by it.
And now, you're attempting to declare post hoc, ergo propter hoc? The whole point of what I'm saying is that there are thousands or millions of changes in policy, technology, demographics, sentiment, which had an impact on the economy, we don't know which did what.
I could just as easily explain the post-war years by saying that it's natural that any country which does not get bombed to smithereens will experience relative prosperity, whether or not it participated in bombing other countries, as we did in WWII. Perhaps it was only that advantage which overwhelmed the tax of war spending.
Again, I can't say for sure, but neither can you. I'm inclined to think you're wrong though, from the simple perspective the the allocation of resources over time.
Stock index levels are not indicative of quality of life, job levels, or even the financial health of a nation. Just because the Dow has fallen 40% does not mean that as a nation we are 40% worse off, unless we happened to have all of our money in the stock market.
That said, I thought we'd hit bottom yesterday. And the day before that. And the day before that.
Anyways, here's some stuff that will take the fear out of you.
http://bigpicture.typepad.com/comments/2008/10/10-bullish-si...
Good link, thanks. So perhaps time to start buying soon...
I don't understand. The simplest tenant is "buy low, sell high". Most stocks are low, way low now. No need to time the bottom. Buy and hold. Buy quality companies whose business/products you personally understand.
If you already have stock, it's a nobrainer perfect time to buy more of the same. Dollar cost averaging.
Bought a stock at $20, now it's at $15? buy another. Your cost is now $17.50. Stock has to go up half as far for you to be making return.
Their anecdotal analysis is bad. They didn't check recent crisis in other countries, for example. The Asian crisis and the Japanese stagflation are certainly more similar to the current situation than US 1929, 1973 or even 2002.
It all depends on the next steps. Bailouts failed, inter-bank credit is still dead. There wasn't yet deleveraging.
I can do many [better] things with my cash than put in stupidly risky stocks at the moment.
So basically that means we've been financing bubbles. In my view, it's up for debate whether a succession of booms and busts is necessarily worse than a more steady development. But since this latest bust turns out to be rather violent there will be a political reaction. If that reaction is to end the boom and bust economy then stock markets might not rise much for the next 10 or 20 years.
I'm not saying they won't snap back some from the current very low levels, but after that I wouldn't bet on the next huge upswing.
Bingo. This is more than just another downswing in the economy. We've reached our limit for credit and leverage-fueled growth and it will NOT be the same level of growth as experienced the past 20-30 years. The U.S. is in debt up to its eyeballs and the bills are starting to come due.
Just looking at this basic chart here: http://en.wikipedia.org/wiki/Image:US_Federal_Debt(gross).JPG
Shows that since 1980 most of our growth has been on the back of an insane amount of growing debt, which is now to the tune of $32k per PERSON! The bills are coming due, this is a fundamental correction in the economy and it's not going to be a quick little recovery back to growth of the 90s.
Another interesting question is of course who owns this dept and how much of it is owed to foreigners, because that points to possible ways of silent default ;-)
And even good investors can miss the mark bad in volatile times. Like Buffett with Goldman Sachs if they don't pick up and if more and more of the bailout money goes to recapitalization, covering a bit on swaps (directly or indirectly), and bailing out real companies (like GE, GM, and Ford.)
That said, Cuban will probably do okay here. There is a degree of panic selling going on.
Current Market Capitalization of the Company = 10 x Quarterly Revenue/Sales of the Company.
Anything beyond is either irrational or manipulation.
I haven't been in the market for a couple years, but I'm salivating over this downturn. Sorry for all those losing money, but in my opinion this is a buying opportunity like there never was before.
It's not a crash, it's a readjustment to prudent pricing.
> So I'd be looking for value stocks that have a P/E ratio that's overly low
The thing that makes me nervous about that kind of thing is that there are people who have written code that knows a lot more than my sum total knowledge of the stock market to look for those sorts of factors. Given actors like that, is there any reason to invest in anything but broad index funds?
Going to an index is usually a safe bet. I think it still is. But that's long term. You could end up waiting ten years just to double your money. I'm just talking about a quick hit. Now you could combine the approach and go with an sector index. But the more you spread it out the more of a slow response you're going to get, in my opinion.
http://www.economist.com/finance/displaystory.cfm?story_id=E...
So... it seems as if people really do think of everything - why wouldn't they, with millions or billions on the line. What hope does an individual have?
More than you think. Especially if you change your attitude towards the problem a bit ;-)
A whole lot of people support themselves by trading successfully. The thing is, making decent money by trading is a full time job, not an after-hours hobby.
You CAN make money designing trading strategies. People do it. The question is simply whether the EV returns on your time will be higher than working on an actual job or businesses. Someone smart enough to make a winning trading system is also smart enough to get paid a lot in other endeavors. So more often than not it's a wash. Except traders get to work in their underwear...
I found that nearly everything was fairly valued. When a stock had a low P/E, it was nearly always for a reason, like it being a homebuilder or financial or having a shaky economic position. No way was I going to invest in those. When I did invest in one that looked like it didn't fit in those categories, they missed earnings the next quarter, reported a loss, and haven't gotten back to profitability yet. Again, the market was smarter than me.
The trick to making money in the stock market seems to be to invest when the big boys are constrained not to. They realize that they should be putting money in, but can't, for whatever reason. The best example is if they're a mutual fund and their clients are all pulling their money out. Doesn't matter how many bargains are out there, they still have to sell to honor redemptions.
As I tell one of my hedge-fund-employee friends, "You're only as smart as your dumbest creditor."
Fear is, for the moment, outweighing greed.
Eg. you think Morgan Stanley is dirt cheap at current levels ($10) and you are willing to invest $100,000 in them.
Action 1: You bought $100,000 worth of MS shares at $10 each
Action 2: You bought $90,000 in bonds that yields 11%. You bought $10,000 worth of Jan 2010 MS 5 call options at $7 each.
Scenario 1: MS gets nationalized or goes bankrupt Action 1: You would have lost almost all of your $100,000 investment. Action 2: If you hold out until your bond mature, you'll get back your $100,000 principal after 1 year. Your options is worthless.
Scenario 2: MS goes up to $30 Action 1: Your investment is now worth $300,000 Action 2: You get $100,000 from your bonds and your $7 options is now worth $18. So your investment is worth $125,000.
So Action 1 is very volatile and risky. Your profit range from -100% to 200%.
Action 2 allows you to sleep soundly at night, even during current market conditions. Your profit range from 0% to 25%. Hey not bad at all. In the worst case, you'll have at least preserved your capital.
Option 1 Average ROI = 50%
Option 1 Average ROI = 12.5%
The probability of MS getting nationalized or going bankrupt is 90%. So it's 0.9 * 0 + 0.1 * 3 = 0.3 = -70%.
Whoops.
Woopsie daisies.
Does this still hold in light of the stock market crash this last week?
There's a lot of danger in picking stocks based on P/E. You have to look at their debt ratios and short term financing requirements. You should avoid highly profitable firms that use crazy leverages in achieving these high returns.
All the more reason to go long.