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starbucks4ever (97.41)

Cheap valuations should not be a reason to panic

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January 12, 2009 – Comments (21)

As one rally after another fizzles out, many bloggers begin to sound almost desperate, and to pray for the market to go up. These people should be advised to be careful what they wish for. There is no way to get around this simple fact: in order to profit from stock purchases, one needs to buy at a low price, and this low price can only be found during a bear market. It is surprising that people would show such underappreciation of the basic thesis that makes purchase of stocks attractive to begin with. 

Historically, stocks have shown a nominal return of 8-9% a year. However, these returns would not be possible if people had bought stocks at inflated valuations a few decades earlier. For example, those buy-and-holders who bought in 1982 are still comfortably ahead. But this success story would not have been possible if we had exhuberant optimism in 1982 and stocks fetched PEs of 30 to 40 like they did in 1999. Had things looked as rosy back then, most bloggers (if we stretch things a bit by assuming the Gardners had started Caps in the late 70s) would have sounded upbeat, cheerfully greenthumbing every Enron, Worldcom, and even an occasional GM. Little would they know what future held for them: 27 years of very mediocre returns. Looking back at 1982, they would have concluded that the whole game is pointless and that CDs and Treasuries offer better returns than equities. 

Let us imagine that some Caps blogger starting his investing career in 1981 and sitting on a 30% paper loss prayed to the gods of the marketplace, begging them to end the bear market, and gods listened to his request, and sent the S&P index to an unbelievable 1000 points. Given that the actual value of the index back then was approximately 100, that would be a 1000% gain on the 1981 portfolio. But there would be a downside to it as well, because all his stock purchases in the 27 years that followed would bring him nothing but bitter disappointment. Looking back 27 years later, the blogger would likely have wished he didn't make that fatal prayer that destroyed his future returns. Indeed, had he allowed the bear market to last a few years longer, his ultimate returns would have been substantially greater.

The bloggers who pray for the current bear market to end soon are making the same mistake. If the S&P, which is currently trading at PE=15, were to double in value tomorrow, then whatever investments these bloggers are going to make in the future would likely prove an irrational waste of time and money. It is really ironic that the same people who claim they want a 1000% boost from the stock market would so happily deny themselves the low base from which to start. Just like the baby boomers owe their current wealth exclusively to the fact they were stepping on crushed skulls of the previous generation, picking houses at the construction cost and stocks at a PE of 3, we should now be welcoming the pain of the baby boomers and feeling greatful to whatever economic upheavals that might tear these coveted assets from their weakening hands. To think otherwise would be entirely unrealistic. You cannot keep your seller happy and still hope for a good capital gain in the future. Likewise, you can't expect the seller to part with his property on your terms without a major bear market that would drive him to a point of desperation. That desperation should be really great right now if even we, being exposed to the huge body of historical data that proves Buffett to be right, still feel like giving up on the market entirely and crying to Obama for help.

21 Comments – Post Your Own

#1) On January 12, 2009 at 10:29 PM, Varchild2008 (85.29) wrote:

Problem is that us Bloggers whining and complaining.... well... I don't do that but geeze.... feeling the pain here with every knumbskull selling off their Activision Shares or Shorting Activision... or Issuing ANTI-Activision Press Releases more times than ... (sigh)

The stock market has slaughtered people's money to a level that is unrecoverable.  period.... no one will recover what they lost in the market so to sit there and pretend investing in stocks in a wondering way to invest is extremely naive.

Here's the problem.  People are getting highly mislead by MOTLEY FOOL (intentional / unintentional) to take risks beyond what's reasonable in any market good or bad.

Sure.. They have "Motley Fool Pro" which is a big improvement to help people HEDGE their portfolios and make them more diversified and safer....

But... you know what?  Who the heck has the time to even figure out what an OPTION is and what SHORTING is.. I don't have the time to comprehend the complexities of all that and so I don't see myself engaging in that behavior.

All I can do is split my cash between Stocks and Bonds and Mutual Funds and Money Market Funds and etc. in an even spread and hope I do well by retirement.

I encourage investors to do the same.  70%+ full bore STOCKS is ludicrous given what we have seen.  The system is rigged.

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#2) On January 12, 2009 at 10:31 PM, Varchild2008 (85.29) wrote:

Oh and another thing..

P/E Ratios are complete HOAXES if the Democrats get their way and America goes FULL BORE  Marxism....

We can basically kiss America's Economy Goodbye for at least the rest of my life-time if that happens and I am 28 years old.

When faced with MARXISM staring directly in your face and a handful of Stock Shares... I may as well be investing in MUD.

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#3) On January 12, 2009 at 10:34 PM, Imperial1964 (97.75) wrote:

Right.

My buddy Steve said last week he thought the market was going to go up the next day and I commented, "I hope not."  He asked, "So then are you short?"  I said, "No, I'm buying."

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#4) On January 12, 2009 at 10:37 PM, starbucks4ever (97.41) wrote:

Varchild2008,

I became bullish on the market when I saw that the Fool lunched the Pro. The Fool has a spotless record: once they launch a newsletter devoted to some trend, you know that this is a hot new trend that has just run its course. The Fool's current hot new trend to chase is the shorting and hedging.

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#5) On January 12, 2009 at 10:44 PM, Varchild2008 (85.29) wrote:

They also have a spotless record telling people to invest in Satyam Computers and Whole Foods at ridiculous levels of improbability.  

They also forget to inform readers clearly about pricing valuations and how they work.  David Gardner says, "Buy Activision at $16.57!!" and the stock barely can hold onto $9 a share.  Thank God I waited this one down to $9 and $8.

Course... They make excellent recommendations as well and I am a proud Stock Advisor subscriber.  But, man oh man.  I lose respect from Motely Fool more often lately than I have respect for them.

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#6) On January 12, 2009 at 11:03 PM, starbucks4ever (97.41) wrote:

If they never diworsefied past SA, we would be able to say that they are the best serice around. If they also lunched II and HG and stopped at that, their record would be somewhat tarnished but still very respectable. But since they launced RB, GG, PD, PRO, MDP, RMM, and that ridiculous commodies report (right at the very top of the greatest commodities bubble in history), there is nothing we can do about it.

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#7) On January 12, 2009 at 11:20 PM, biofest (46.93) wrote:

It is a zero sum game. Your pleasure is someones pain. There is no win win situation in the stock market.

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#8) On January 12, 2009 at 11:24 PM, AndreylikesMTL (98.53) wrote:

Hello Zloj.

I do agree with you on the investing low thing.As you can tell by my nick, I only buy one stock, But precisely as you say,This market made me buy more and more as it was going down.Here is the story. Instead of getting a new Pickup, I made deal with my wife that I we that money in a market, and bought stock @ 23$$ a shear, and it dropped as a rock.Of course to use this to our advantage, we bought more and more, and average now @8.00It is no secret; we are still down 50%, but instead of hoping to double the est. 20K investment.(From 23 to 48 a shear)

Now we have a chance multiply est. 100K investment 6X to same 48$$ a shear, which is getting farther and farther away, but hey why not buy as much as you  can and as long as it lasts, while its cheap?

Andrey

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#9) On January 12, 2009 at 11:53 PM, AndreylikesMTL (98.53) wrote:

Hello biofest

I do not agree with you.

In bull market, there are more buyers than sellers.That what makes the price to go up?

For example every one wants to buy KO, or something, at the market price. But no one sells, price is climbing until somebody comes alone,

Basically price doubled in one day, and capitalization grew by est.20, 000,000,000.00 Where did this money come from? if hardly anybody sold anything?

Price went up, and money came out of nothing…

Zloj am I right?

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#10) On January 12, 2009 at 11:53 PM, starbucks4ever (97.41) wrote:

Andrey,

I am sorry to tell you that, but you must be absolutely crazy to put 100% into one stock. That would be crazy even if that stock were BRK-B. In the case of MTL, there are some very good reasons you could ride that stock all the way to zero. Regardless of whether or not Putin sends a doctor to Zyuzin, it's enough to look at its balance sheet to sense a danger. It has $5.7 billion of liabilities against $450 mln of net tangible assets. It will take only a small revision of the value of its property, plants and equipment (very likely because how much do you think one would pay for a similar factory today?) to conclude that MTL has negative book value. Refinancing the debts to avoid bankruptcy is proving extremely difficult nowdays even for excellent companies like CX whose balance sheet is so much stronger. If you compare the finances of CX vs. MTL, and revisit the history of WM, C, or MER to see how quickly a simingly solid balance sheet can collapse when assets on the books get reevaluated, I am sure you will sound much less upbeat MTL. Its cash flow from operations could well turn negative if prices don't recover soon, and I bet that most of its debt is denominated in dollars while a large chunk of revenue is in rubles.

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#11) On January 13, 2009 at 12:00 AM, starbucks4ever (97.41) wrote:

And yes, you're right about the KO example. It was certainly not a zero-sum game for the Coca Cola CEO (his bonus is a function of market cap), but it was still a zero-sum game for the buyer and the seller. The interests of the card players are always opposite, even though the house wins in any event.

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#12) On January 13, 2009 at 12:06 AM, awallejr (83.92) wrote:

Well at first to Andrey, stop buying MTL at least. First, it is a Russian company and I just wouldn't trust investing there.  Second, if you love steel then buy the best which is Nucor (but buy it in the 30s).

In response to the initial post, the market is ever expanding/contracting.  At this point we are in contracting mode, hence long term players SHOULD be investing, but do the DD and look for the survivors, not the losers.  Of course, easier said than done.  But stick with the fundamental rules and long term things should work out.

At this point, dividends, low debt and free flow cash are king.  Plenty of stocks that fit into those categories, and NOW really is the time to buy.  When they are low.  But if you are the type that simply HAS to look at his portfolio every day, you probably are better off in a mutual fund or a CD.

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#13) On January 13, 2009 at 12:35 AM, AndreylikesMTL (98.53) wrote:

Hello Jloj

Steel makers and banks, are not the same thing. If I overlay charts of AKS and MTL for a year, they are the exact same thing. Except MTLs P/E is 5 times lower.There is a reason for big debt, acquisitions, developing of new deposits, plus they are waiting to do one more IPO.

After all, if I do not believe in motherland, who will?

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#14) On January 13, 2009 at 12:45 AM, AndreylikesMTL (98.53) wrote:

it is a Russian company and I just wouldn't trust investing there.

I am Russian too, should I not trust myself, is it too risky?B.S. guess what immigrant group in US has the biggest income? Bingo Russians

Or most educated? Bingo again.

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#15) On January 13, 2009 at 1:10 AM, starbucks4ever (97.41) wrote:

I also am cautiously optimistic about Russia (now more than ever; it was during the oil peak that I was most worried. Now that the falling price of oil has cleared many brains, even Putin begins to look smarter than before). That said, I think the low point of the crisis is still several months ahead. 

Speaking of AKS, I can see why it's trading higher than MTL, and it's for a good reason. Don't get me wrong, MTL is a great stock to gamble 5% of your portfolio on (or, even better, to trade it), but to bet the farm on a binary outcome? I wouldn't do that.

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#16) On January 13, 2009 at 1:43 AM, AndreylikesMTL (98.53) wrote:

zloj Can you coment on this?

http://news.prnewswire.com/DisplayReleaseContent.aspx?ACCT=104&STORY=/www/story/01-13-2009/0004953498&EDATE=

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#17) On January 13, 2009 at 2:16 AM, starbucks4ever (97.41) wrote:

It could be that I am entirely wrong and that management knows what it's doing and believes in MTL's stellar prospects (and then oh boy, will it be a ten-bagger within 1 year!). Or it could be that major shareholders just wanted to pay themselves before creditors take over. Or before Putin sends a doctor to them :)

"MOSCOW, Dec 24 (Reuters) - Russia's Mechel (MTL.N: QuoteProfile,Research) said on Wednesday it is pledging 25 percent minus one share of its Chelyabinsk Iron & Steel Works as collateral for a Gazprombank credit facility of up to $85 million. Any funds which Mechel borrows through the credit line will have an annual interest rate of up to 20 percent and must be repaid within 180 days. The funds will be issued in tranches, which cannot be released after July, 2009. Mechel shareholders will vote on the matter at a Jan. 15, 2009 extraordinary general meeting (EGM)." 

 

Mechel OAO Decreases Its Stake In Oriel Resources Limited To 88.4%-SKRIN

Thursday, 11 Dec 2008 08:07am EST  

"SKRIN reported that Mechel OAO has decreased its stake in Oriel Resources Limited to 88.4% from 99.74%, previously held. Further details were not disclosed."

"Mechel OAO Obtains Credit Lines From VTB Bank

Thursday, 4 Dec 2008 11:08am EST 

Mechel OAO announced that VTB Bank has provided the Company with credit lines in the amount of 15 billion rubles (approximately $560 million). VTB Bank has opened one-year credit lines totaling 15 billion rubles for Yakutugol OJSHC, Southern Kuzbass Coal Company OAO and CMK OAO, subsidiaries of Mechel. The credit facilities will be used to fund the operations of these subsidiaries. " 

 

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#18) On January 13, 2009 at 2:27 AM, AndreylikesMTL (98.53) wrote:

Zloj

I belive it is the first part, will see tomorrow.

Thanks.

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#19) On January 13, 2009 at 2:30 AM, starbucks4ever (97.41) wrote:

OK, you convinced me :)

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#20) On January 13, 2009 at 3:21 AM, awallejr (83.92) wrote:

Andrey, being Russian and living in the US, and being Russian and living in Russia are two different things.  If you are the former, buy Nucor; if you are the latter, emigrate to the US and sell MTL ;p

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#21) On January 15, 2009 at 11:48 AM, whereaminow (20.94) wrote:

This is a really excellent post zloj. You and I do agree on quite a few things after all :) I've been buying stocks and equities the last two months at prices I never dreamed I'd see, and watching most of them slide. But I know I'm right and the long run will prove it.

Regards,

David in Qatar

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