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TheDumbMoney (78.56)

Risk On, Risk Off



September 07, 2011 – Comments (4) | RELATED TICKERS: SPY , KO , AMZN

I feel like Danny LaRusso:  Wax on, wax off.  The market is like Mr. Miyagi.  One day everything is in the red, the next day everything is in the green.  One day "the market is down because of x, y, z," the next day "the market is up because of a, b, c."  Purportedly.  Except that unlike with Mr. Miyagi it all feels like a crock of sh!t to me.  I have never been so depressed as I am today to see everything I own (temporarily) in the green today (after all but two or three were in the red yesterday, and all but one was in the red on Friday).  Really?!?!?  Really!?!?!  I ask myself.  Are things changing that much on a daily basis?  Of course not.  We are 100% in the hands of the algorithms and the algorithmic traders.  Risk on (buy stocks, sell gold and bonds), risk off (sell stocks, buy gold and bonds).  I have no problem with that philosophically, and I don't know that it is a bad thing for the market even.  But stock-picking feels almost pointless right now.  I know it's not really.  But I feel like we are in the twilight zone.  Half are convinced we are at a bottom and corporate earnings reports this fall will drive stocks up.  Half are equally convinced that the downward revisions to earnings have only just begun.  Nobody is euphoric.  Many are depressed, but nobody has thrown in the towel.  Thus, even contrarians have no clear tides to fight against. 

Can anyone provide any past market analogies?  Here is how it feels to me:  2000 was like October 1965.  We may have a long, long time yet to go before the next top is reached and permanently breached. 


-- The market went nowhere (ex-div) from January 1937 to July 1949.  Nowhere, for 12 years. 

-- From the peak in 1928, the market went nowhere until 1954 (ex-dividends)! 

-- The market when nowhere from 1965 until 1981.  16 years.  Nowhere.

So where do the 1999 and 2007 euphoric peaks fit in?  How many more years of market and general stagnation do we have?  I don't know.  What I do know is this:  The time to buy is in the time of stagnation and nonsense, late in it.  Since I don't know what late is, but I do know that lots of high quality companies sell for decent prices for the first time in a decade or more, I can only surmise we are at least halfway through.  It may take two more years to work this off.  It may take ten.  It's an interesting insight though for me, which I have had over the last year or two, to think that all of the major gains of an investor's lifetime may occur in ten years of that lifetime.  Period.  All of them, at least on the capital side.  Start in 1928 and you may see none at all.  For your entire investing lifetime, at least on an indexing level.  That's pretty sobering.  Just you hope October 1999 was not July 1929.... 

Which brings me back to Mr. Miyage.  There seems to be no reason to believe that the market (and by extension the psychology of all of us that drives the economic relationships that drive profits and losses) do not operate similarly in large time-frames to the way they/we operate on a daily basis.  A day of green.  A decade of green.  A day of red.  A decade of red. 

It's for these reasons that I tend to favor solid dividend stocks, that increase their dividends, and with reinvestment of dividends.  Not exclusively.  But I favor them.  You can survive ten years of no capital gains if you are getting three to four percent in dividends; and when the next boom comes, those stocks are going to shoot up to absurd P/E ratios as well.  You can also be the genius who buys Apple and Amazon in 2002 and never sells them (me:  bought Apple at under $15/share, sold between $20 and $22, =  f^cking moron).  But what if you're not?

4 Comments – Post Your Own

#1) On September 07, 2011 at 11:57 AM, mhy729 (30.48) wrote:

(me:  bought Apple at under $15/share, sold between $20 and $22, =  f^cking moron)

Wow...that made me wince  :( 

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#2) On September 07, 2011 at 12:44 PM, TheDumbMoney (78.56) wrote:

mhy729, yes, one of my many regrets.

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#3) On September 07, 2011 at 4:34 PM, BillyTG (29.04) wrote:

Yes, welcome to an epiphany that will help your future investing. The RISK ON/RISK OFF is what this game is all about today. It's why I quit value investing.  Its why I adopted a much bigger, global perspective.  The market is broken. We are running off a global fiat solvency crisis, a highly central-bank manipulated economy, and computer/quant/HFT-driven markets. Put it together, and long term buy and hold stock picking is stupid.

What's better is learning to trade with the swings or, better for us value-driven TMF types, locate secular bull markets like PMs and commodities, and secular bears like the US dollar, and buy on the big dips. Generate cash on the big peaks, and buy back in again lower.  Having a macro perspective is a SUPERIOR style to stockpicking. I think Mr. Miyagi would agree.

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#4) On September 07, 2011 at 5:57 PM, TheDumbMoney (78.56) wrote:

Well, Billy, I'm unconvinced that long-term buy-and-hold is stupid.  One of my greatest trades is buying XOM in 1998 or so and simply holding onto it and reinvesting all dividends.  I'm up I don't know, somewhere between 200-300%, on a company that was one of the world's largest when I bought it, but traded at a cheap valuation yet still had growth in it.

[[I do think buy-and-hold (if one buys MSFT at a 60 P/E and a $600 billion market cap in 1999/2000, to hold it forever) is stupid.]]

I am also unconvinced that the market is broken.  What I am actually trying to say is that this "broken-ness" has always existed.  We always just have a different reason why the market is broken for a decade or so.  Risk on, risk off is not a new phenomenon I think, though automated trading perhaps has accentuated it.

We shall see.  I understand the macro-trading perspective, and I think that is absolutely where the short-term money is right now.  I'm not 'there' in my real life investing, but in my other "trading" experimentation account here on CAPS I am trying to use such a strategy.  But not with real money.  With real money, I'd have to say I'd still rather just own KO and XOM and AAPL and MSFT at today's market valuations.  As absurdly over-valued as KO was at last decade's euphoric market-peak, it is at least approaching reasonability now (through from a free-cash-flow calculation perspective it has a ways to go before it is actually undervalued).

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