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Buy and Hope Investing

Recs

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February 28, 2009 – Comments (9)

This title comes from Big Picture who has reposted John Mauldin's latest.  A super worthwhile read...

You read this stuff and the layers...  Within this is a very good statement:

We
are in an economic period unlike any other we have faced. I think we are likely
to have a long, slow recovery after the recession ends some time (hopefully
early) next year. However, to suggest that corporate earnings are going to show
the same type of resilience in 2010-2012 that they have after every other
recession since WWII is ignoring the macroeconomic picture surrounding the
potential for earnings growth. “Any starting conditions we select in the
historical data cannot replicate the starting conditions at any other moment
because the preceding events in the two cases are never identical.”

We
are in a synchronized global recession. Yes, we will recover, but the causes
are not those of the typical business-cycle recession. We are seeing massive
debt deflation, deleveraging on a scale never witnessed, a financial industry
that has to be rebuilt, and a housing industry that is reeling all over the
world. We created a lot of excess in a number of industries. We decimated the
savings of a generation that was hoping to retire soon, and now will have to
work longer and save more.

This
is not a typical recession. And for any analyst, writer, or pundit to trot out
past historical data to demonstrate that the stock market is going to rebound
at such and such a time and at such and such a pace simply ignores the fact
that the future is unlikely to look like the past for at least the next 2-3
years. We are in a brand-new world, macro-economically speaking.

 

That was quoted in Mauldin from  Peter’s Financial Times.

I suppose I didn't get caught in this mess because I saw what was happening here as very different then the past.  And I have spend a lot of time thinking about why I have gotten so much bad advice and why so many belief's I was taught turned out to be wrong.  They made things challenging for me, but ultimately it was a complete lack of seeing that what happened in the past could not continue and just thinking it through the reasons scream to be heard.

Practically all of the chiding I got over my position was justified with a justification that we've seen this in the past but huge things that are different were ignored.

In a way, I am finally grateful for the huge hits I took in the past.  They enabled me to be independent and to call a spade a spade and speak out against what "the experts" and analysts were saying.  They screwed up with me in the past and I studied why.

Still watching here....

 

9 Comments – Post Your Own

#1) On February 28, 2009 at 1:01 PM, kirkydu (93.67) wrote:

Hey Dwot,

I don't post many replies, but a sentence in your blog jumped out at me. 

I'm not so sure that it's "so many belief's I was taught turned out to be wrong" but rather that so many people did so many things wrong to wreck the belief system.  You, even more so than I (and I have done pretty well), recognized the system was being abused by those who would fall back on pretense, ideology and overbearing dogma to justify their actions and the actions of those doing things similarly as themselves. 

I have screamed at CNBC for portraying what has happened as something that the system did to us. The system was fine until people changed some rules and pushed over de-regulation to try skim more for themselves.  People worried about taking a bigger slice of the pie, rather than working to make the pie bigger and getting more that way.  It is people who abused the system, not the other way around.

Your beliefs are just fine.

P.S. Anybody not reading the FT.com and InvestorsInsight.com are short changing themselves.

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#2) On February 28, 2009 at 2:03 PM, RainierMan (76.66) wrote:

I think these statements are so right on. My lesson from all this is when something makes no sense, question it despite the pundits. My view of "experts" has been changed forever. Defying conventional wisdom through all this mess has been a huge benefit.

The idea that we're going to bounce back to something like a normal economy and stock market just make no sense.

In addition to Maulkin's statements above, we might just thrown in something about the confidence level that we should have in what we are being told by Washington and Wall Street. I think there is a severe shortage of truth about the situation and about company balance sheets. 

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#3) On February 28, 2009 at 6:35 PM, Ecomike (< 20) wrote:

My best advise question everything, especially if it is being sold! Never take anything at face value. I stayed out of stocks for 21 years, saving cash in a MM fund just waiting for the day to buy stocks on sale. I will be buying tomorrow during the rout, and holding durring the comming rally. Don't know how long I will hold, a month, 3 maybe more. We will see. I got started buying in last 15 minutes on Friday.

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#4) On February 28, 2009 at 8:39 PM, JakilaTheHun (99.93) wrote:

Great post, but I'd also challenge people's bearish stock market beliefs.  I'm not optimistic about America's future; not by a long shot.  I've been saying since 2003 that America's prosperity was a giant illusion and that the housing market run-up was ridiculous and was helping to exacerbate the destruction of America's middle class. 

That's only the tip of the iceburg.  America has become a suburb building machine with massive sprawl that has resulted in gross economic inefficiency.  We are destroying our competitive edge were falling prey to the bankrupt economic philosophies of market fundamentalism.  Now, market fundamentalism is getting morphed into a new bankrupt ideology of government interventionism.  And we still haven't addressed any of the real problems underlying this mess.

I'm not optimistic about America's future at all, but I believe that now is a good time to buy in.  There are two reasons I believe this:

(1) A large portion of the market is discounted for a major depression.  I don't believe this will happen.  This is not Great Depression Part II as all the perma-bears believe.  The Great Depression was brought about by some similiar causes but there have been some distinctive differences --- one of the most important is that absurdist valuation methods had become common in the '20s stock market run-up (sorta similar to the tech bubble but not this crisis), which is why I don't expect the Dow to drop to 1400 like some people.  Looking at the asset values of companies and stock market prices, it appears people expect a 5-year depression or 40% further deflation --- both seem unlikely to me.

(2) The governments of the world have reacted in dramatically different style to this crisis than the Great Depression. The response has been bailout after bailout and spend, spend, spend.  We can talk about deflation like we've never seen before, but it won't last forever.  Not with the way money is being thrown around.  Of course, this will create new problems (mo' money, mo' problems?), including a crushing debt-load for American taxpayers and high inflation in many nations (including the US). 

 

Just because the future outlook for the American economy is poor, that doesn't mean stocks are a bad buy.  In fact, if 10% inflation hits, the stock market is going to be one of the safest placest to be.  The last thing you want to do is save and watching your savings get wiped out.  Better to have one's money in an inflating market, as well.

Even ignoring this, the market has so thoroughly discounted companies right now, I think it's unrealistic.  We'll see Dow 14000 again some time (can't say when --- maybe 2012, maybe 2025), but that won't necessarily mean that America's economy is in good shape. 

I'll also challenge people to consider something else --- that maybe this isn't the "big one".  Maybe the "big one" is coming, but we're in good enough shape to limp along for now.  It takes a long while for a nation to become bankrupt and it manifests itself over decades.  France from the late 17th Century to the late 18th Century is a great example of that --- it took almost a century for all that debt to catch up to them.  It may or may not take that long for us, but whether we inflate ourselves out of it

 

All in all, I think people are looking at the Great Depression and learning the wrong lessons from history.  This happens often in American history.  We convince ourselves that some crisis is precisely like the last big crisis.  We convince ourselves that this war is like the last one.  We learn lessons but we misapply those lessons to the wrong crises. 

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#5) On February 28, 2009 at 9:46 PM, FutureMonkey (82.46) wrote:

I don't know that all the analysts and experts are off base or that our current situation does not reflect if not replicate past market conditions.  Of course every bear market is different, but 2000-2009 is very similar to past long secular bear cycles, it just wiggled up and down a bit more impressively than in the past.  At the peak of the last long secular bull cycle people were paying a lot more for each dollar earned by SP500 collective of companies than at any time in the past. Some analysts acted like things were "different this time" and the bull would go on forever, or that the "correction" from 2000-2002 was enough and now things were "different this time" and the bull was back (even though we were still paying more per dollar earned in 2002-2003 than historical averages).  If you look at past long secular cycles "corrections" by definition correct past the average price well below what people are typically willing to pay for each dollar earned by companies. Ed Easterling's website and books are a pretty good place to look for understanding long secular cycles (which are very different than business cycles)

We have been contracting p/e since 1999.  But, because earnings were going up very fast between 2004-2007 the market was still rising. In 2008, when both the earnings AND the price investors were willing to pay for those earnings went down at the same time...well, you get a year like 2008.  Maybe that trend will continue.  Certainly I expect earnings will continue to contract and perhaps investors will continue to pay less and less for those earnings.  However, unless the world ends, eventually earnings grow again and confidence grows again and we start a new long secular bull.  If the world ends...uhm, who cares what your portfolio is worth?  Of course, assuming the world continues, I suspect the market will flail up and down day to day and week to week, while the talking heads on CNBC get wildly excited and bright eyed on GREEN days, and purse there lips and bulge their veins on RED days.  Somebody is always right, and somebody is always wrong and the reality is that nobody really knows what is going to happen.

Buy some stocks, buy some bonds, buy some real estate and rebalance on a regular basis.  Not a hard formula to follow if you aren't greedy or prone to reactionary plunging in and out of positions.  Worrying that 2008  is "different this time" and will keep going down forever is as irrational as thinking in 1999 that "is different this time" Because if "this time" really "is different," then you and I are going to have a lot more to worry about than the condition of our stock portfolio.   

FuMonk

PS (some secular bear markets last a lot more than 9 years, and generally the P/E for SP500 gets down pretty stinking low before it starts to expand again).

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#6) On February 28, 2009 at 11:12 PM, rofgile (99.32) wrote:

Every once in a while, you get many people claiming that for the market "this time its different", "this time it is something really special".  In 1999, it was the dot-com boom.  Now it is the media driven end-of-the-economy-bank-bust.

I've been watching one manufacturing company, Manitowoc.  I've been seeing in the last week, a huge number of buys by insiders including the CEO.  The people running the companies don't think that they will go bankrupt and that it is the end of the world.  

I'm buying stocks now.  Not all at one time, mind you, but I am buying and holding in small additions in dividend paying stocks that are very marked down.  Just going to the shopping malls here in Alabama - it is as if all the shoppers are coming back already.  I don't think things are as bad as the media is making it look.

Buy and hold good companies with dividends and no debt, and don't worry. 

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#7) On March 01, 2009 at 1:12 PM, bammerone (30.49) wrote:

Dwot, always appreciate your links and postings, I am a bit more pollyanish than you, just can't stay that down all the time. Hey have you seen this article from the NYT on Canadian Banks? What are your thoughts here? http://www.nytimes.com/2009/02/28/opinion/28tedesco.html?em

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#8) On March 02, 2009 at 7:18 PM, dwot (45.65) wrote:

Kirkydu,

I don't think people yet realise the extent to which beliefs will be redefined.  I think that if you worked hard you did ok and I think generations coming are going to increasingly find that more thing work against them despite their efforts.  More people will find them selves between a rock and hard place despite doing everything as advised.

A friend of mine is about 34 and I am not sure if he's found a teaching job yet.  Last I saw him he'd been about 6 years stuck on teacher on call work.  He did what they said to do, worked hard, won scholarships, went to university and he feels like he has done nothing but work, yet he hasn't been able to pay any of his student loans and makes no more then someone working retail and he wonders why he worked so hard.  He feels like he is in worse shape then his younger sibblings, who looked at what he was getting in return for all his hard work and said screw it.  He has two that are actually probably doing more with what life is supposed to be, living it.  The one lives hand to mouth at Whistler doing what ever work he can get and spends all of his time skiing and partying.  Financially they are both broke, but one is at least living and the other is existing.

Increasingly going to school doesn't give you lifestyle, indeed, it can be stealing from living, and I think we'll see more and more of this.  I have already seen a lot of this.

 MichaelinWA,

Thanks so much for your comments.  I agree...

 Good luck Ecomike.

TheHuney,

 I have formed my beliefs around thinking about what an aging population brings and I don't think it is good.

 FutureMonkey,

I think moving into this next run demographics are very different.

 rofqile, I am neutral on buying stocks now.  I was screaming that it wasn't wise to be in the market when it was at the top and even strongly suggesting it was still a good time to be selling when it was down 20-25%.  Now I am neutral.  I really have no opinion one way or the other.

Bammerone,

I look at Canada Mortgage and Housing and I am disgusted.  Canada didn't follow the US blindly, but lending standards were reduced and we do have problems, although the Canadian problems appear to be more manageable.

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#9) On March 02, 2009 at 7:34 PM, jester112358 (28.78) wrote:

Great post as always DWOT, you demonstrated again  why you were and still are one of my favorites.  We need much more common sense in financial matters.  Don't lend to those who can't pay it back and don't borrow more than you can afford to pay back with future earnings.  Produce more than you consume and save more than your earn.  Plan for a rainy day.  All platitudes but always true.  Simple, but completely forgotten by a significant minority of people.  And the thrity will pay the price as usual.

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