There's always people trying to predict what's gonna happen in the market. I never believe anybody, because nobody is always 100% correct regarding the market. And the better you are, the less you try to predict what's gonna happen.
There's some people like Angelo Dallas (in the comment section) who seem to deeply believe that things will get worse and worse. I don't believe that. Well, in the short term, it could get worse, but I'm a big believer of historical datas and in the long run, things will get better. I don't look 6 months from now, I look 5-10 years from now. And during that 5-10 years time frame, things will probably tend to their historical mean.
If we take a look at the performance of the market VS Berkshire coming with Berkshire Hathaway annual reports, we can see the performance of the S&P500 with dividends from 1965 to 2017. That's more than 50 years. And the annual returns of the S&P500 with dividends has been 9,9% (let's round the number to 10%). I don't believe that things are different this time. Yes, there are tensions between China and USA and between Russia and USA and between some other countries. But, is it worse than the cold war? Is it worse than Vietnam War? Is it worse than the crash of 1987 or the crash of 2008-2009? No. And everytime, the market recovered. A lot of people lack perspective. As human beings, we are very-short sighted. We tend to believe that what we see and what we live at the moment have a lot of importance. There's people like Donald Trump saying the most stupid things on twitter like: "Climate warming? It's never been so cold over the last 10 years here in Washington!" (or something like that). Just like if what that mofo saw through his window could have more significance than what's happening everywhere around the world. When you judge a phenomenon by what's happening in your city or your country that represents at best 5 or 10% of the emerged lands on earth, we could say that you're a dumbfuck. And that dumbfuck leads the most important country in the world. Fuck, if he can rule the USA, I could rule the earth. I should be Emperor of the emerged lands.
So, if we return to the performance of the S&P500 over the last 53 years, we can see that a negative annual performance has happened 11 times (11 years). Which means one year out of five. So, 4 years out of 5, when you have money on the market, you achieve a positive performance. That number alone justifies to stay on the market forever.
Then, if we dig a little deeper, we can see that, over the same 53 years, the performance of the market has been negative two or three consecutive years on only 2 occasions (1973-1974 and 2000-2001-2002). The market has never been negative for more than three consecutive years. Given these numbers, there's less than 10% chances that the next year's gonna be a negative one on the market.
I know that Trump is crazy and stupid and there's probably never been such a stupid president like that over the last 53 years. But a president doesn't control the economy all by himself. And given the fact that Trump believes that his efficiency is related to the performance of the stock market, he's surely gonna do everything he can to do something positive for the market (like concluding a deal with China). Perhaps that 2019 is gonna be a hard year, but the probability of 2019 being a positive year is more than 90%. That's how I see things. And if it's not a positive year, 2020 will compensate, and probably 2021 and 2022. And I should achieve at least a 10% annual performance, if I project myself in 2028.
So, you have 90% of chances to make money next year. You really want to stay sidelines?
"I look 5-10 years from now. And during that 5-10 years time frame, things will probably tend to their historical mean."
RépondreSupprimerI agree. So, let's look at what kind of annual returns the S&P 500 has had in the last nine years:
2009 26%
2010 15%
2011 2%
2012 16%
2013 32%
2014 14%
2015 1%
2016 12%
2017 22%
That is not an average performance. I calculated an average 15.5% return over those nine years. So, if we are to get back to the historical 10%, we are going to have some lean years ahead.
What are the keys to stock market performance? Earnings + interest rates. We had a decade of lower and lower interest rates. We are also coming off Trump's huge stimulus (giant corporate tax cut) at the TOP of the market which really grew earnings by a lot.
Why is the trade war with China different from sanctions against Russia or the Vietnam war or wars in Iraq and Afghanistan? China made it possible for American multinational corporations to earn SUPER PROFITS by out-sourcing labour at slave wages. Now, America feels they must cage the Chinese dragon. They need to rule the world. They cannot risk China getting any stronger and challenging their global dominance. So...We just send our supply chains to even cheaper countries like Vietnam, right? Not that simple. It turns out that it is expensive to switch things up and the rest of the third world is not as efficient and skilled as the Chinese who have been serving our multinationals for a very long time.
The earnings estimates of most companies are going to go down...again and again and again. They are not realistic. Every other country in the world is already in a bear market. Do the Americans think that the rest of the world can still afford their expensive products and services (especially with the u.s. dollar so fucking expensive right now?)
Everybody else in the world is suffering and your dollar is so expensive compared to their local currency, but they will continue to buy your Nikes and Fords and other expensive American products? What is the exchange rate on the Canadian dollar? You need to see it for yourself to believe it...
https://www.xe.com/currencyconverter/convert/?Amount=1&From=USD&To=CAD
How much American stuff are you buying with a 36% exchange rate?
In the last couple of trading days we've seen about 25% of the stocks on the NYSE and the Nasdaq make NEW 52 week LOWS. On Friday, the market went down sharply with 3x as much volume as the average of the previous couple of weeks. You better hold on to your testicles come Monday morning. This is incredible volume and momentum. But I'm not asking you to predict next week or this year. Let's focus on the next ten years.
If we revert to the historical mean then the next ten years should average about 5% per year (to make up for the 15.5% of the past nine years). It's not that bad. But it's not realistic to expect another 15%+ decade ahead.
We don't own the market, we own individual stocks. All I care about is if these companies can continually take a larger share of the market over the long term. That way I don't care if the market isn't growing as a whole. Volatility (or paper losses) are part of the game. I rather hold and add to my holdings over time and ignore the commentary.
RépondreSupprimerI agree that expecting the market to perform at 15% per year is unrealistic. The past 10 years were anomalous because the starting point had an abnormally low price. I expect the index to perform at around 4-8% for the next 10 years. Therefore, if you want to do 5% better than the index, you need to select stocks that return 9-14% per year. I believe there are such stocks in the market today. Therefore I am fully invested into them.
RépondreSupprimerIf you can time the market, you can get even better returns, but then you also run the risk of lagging the market in case there are sudden upturns.
I have a feeling the next uptick will start as unexpectedly as this downturn. If you cannot predict when the next upturn will start, it's probably better to be fully invested in stocks that will grow at 15% or higher.
Just my 2 cents.
Quality Investor,
RépondreSupprimerRecall that the Dow and S&P were down 2% and the Nasdaq were down 3% on Friday ON TRIPLE THE NORMAL VOLUME. In a truly free market that level of fear and negative momentum would probably cause another Black Monday. Afterall, who is going to go out and BUY BUY BUY right now? Even if you believe there are great values out there, you want to see the stock prices stabilize and show some signs of positive momentum. Friday left us feeling like a giant boulder was rolling down a hill and coming straight at us.
Since the late 1980s (after the crash of '87 and a near crash in '89) the Americans have something called the PLUNGE PROTECTION TEAM. The head of the FED, the secretary of the treasury, the head of the SEC, the head of the futures and commodities exchange and the heads of the six biggest american banks basically conspire to keep the market afloat and reverse a horribly vicious negative momentum. The PLUNGE PROTECTION TEAM saw action at the beginning of the year (Jan. - Feb 2018) when things were starting to get nasty.
Just now, The Secretary of the treasury let the world know that he is calling in the PLUNGE PROTECTION TEAM (while vacationing in Mexico no less). If they do nothing, look for the market to tank very badly on Monday. Something tells me that the prevailing market sentiment of extreme fear will still result in a hugely positive Monday. These guys do not interfere all the time, but when they feel the stock market is about to go off a cliff, they move in and miraculously the day that started with extreme fear turns positive.
If you are curious as to how the Plunge Protection Team operates, a former Reagan Administration insider (assistant secretary of the treasury back when the Plunge Protection Team was put together) spills the beans in a series of columns from earlier this year:
https://www.paulcraigroberts.org/2018/02/06/another-arrested-equity-correction-paul-craig-roberts/
https://www.paulcraigroberts.org/2018/02/08/stock-market-rigged-paul-craig-roberts-dave-kranzler/
https://www.paulcraigroberts.org/2018/02/12/financial-markets-still-exist/
here's today's Reuters article announcing what's happening next:
Top Trump official calls bankers, will convene 'Plunge Protection Team'
https://www.reuters.com/article/us-usa-treasury/top-trump-official-calls-bankers-will-convene-plunge-protection-team-idUSKCN1OM0LJ
I wasn’t going to get into this but I feel so strongly about what is being discussed, I can’t help myself.
RépondreSupprimerI’ll admit the sell-off has been worse than I thought. I also feel that the worst is over. The big institutions have already liquidated the majority of their holdings. I think it has gotten to the point where everybody who wanted to sell has already sold. In other words the market is sold out. But as there has been a lot of technical damage done it will probably take awhile for the market to adjust to the change in circumstances.
Focus on the fundamentals of the companies you own and ignore the mindless media who have no clue…Stay rational…I’m not going sell a great asset for money I don’t need. Remember when you buy the stock of a company; you are buying the future cash flows it will generate in the years ahead. It’s got nothing to do with the next quarter’s earnings and it’s got nothing to do with the price action of the marketplace.
At times of extreme emotion, be contrary.
I'll add my 2 cents. I strongly recommend reading anything Dalio is putting out these days. Unfortunately at this stage of the game I think having a good sense for macro economics trumps our understanding of the types of companies we normally like to own. That being said, if your time horizon truly is 10+ years, forget everything I'm going to say and keep buying the likes of CSU and such. Most people will say their time horizon is decades but when stocks fall 50% they freak out... so be VERY clear on your time horizon and your likely behaviour when growth stocks get taken out back.
RépondreSupprimerThat being said Dalio believes we are at the end of BOTH the short term debt cycle (2008-2018) and long term debt cycle (1950s to present). What worked from 1950 to now may not work during this type of environment. I'm not going to bore you with the details as you can read up on this stuff on your own. What I will say is I've looked at all the stocks we know and love and compared their current (high) valuations to that of 2008. Let's just say that current valuations (say 20% off the highs) are still double to triple the valuations at the nadir of 2008 AND THAT ASSUMES CURRENT PROFITS ARE MAINTAINED which I find very unlikely should we head into recession. Very few people actually predict recessions correctly because we are human and we assume that everything will just keep going as it has in the recent past. At the very least we are much closer to the next recession than we are removed from the last and I would suggest the likes of Canada is already in recession. Yes, this is a contrarian view but real estate is dead in this country and it represents a disproportionate % of GDP... oil is also toast... and the consumer is the only thing keeping this ship afloat. We'll see but let's just say the macro backdrop is uncertain at best. What will work going forward is unlikely to be what worked over the past 10 years. There will always be companies that can buck the trend and continue to grow their earnings and create shareholder value and I'll present to you the companies I feel can do this BUT I would strongly urge us to imagine things differently than we have over the past decade. WHEN (not if, WHEN) the next recession hits (if we aren't already in one as I contend we are) let's follow the bouncing ball:
1) central banks will ram rates down to 0%
2) when that's not enough, they will start printing money
3) when that's not enough, they will start putting money directly into the hands of consumers (helicopter money)
When that is finally enough to prevent GDP from dropping, will be the time to back the truck up and buy en masse the stocks we like. BUT if you don't have cash at that time, all you can do is say 'wow, these stocks are so cheap, I wish I had money to buy them/more.'
So what I'm describing will be incredibly deflationary... what will work in that type of environment?... long dated govt bonds (be careful with US treasuries as their deficits will explode in the scenario I painted), precious metals, real estate, dividend paying stocks with strong balance sheets.
The stocks we know and love that I think can at least grow their earnings through a recession are IMO as follows:
DOL
ROST/TJX
CSU
ATD.b (maybe)
ORLY
ULTA (maybe)
BYD.un
So... I would strongly consider raising some cash during the next rally (we could be in the middle of one now)... owning some of the stuff I noted above that we would never thinking of owning in a 'normal' environment such that if the scenario I painted plays out you have some cash on hand to buy in what will likely be the buying opportunity of our generation (yes; I think better value than 2001 and 2008). As Angelo said, I hope I'm wrong but I'm pretty sure we haven't cured the business cycle and we're going to have another recession... so... all the best in 2019. JDV.
Oh and add RX to the list of companies I think can grow their earnings through a recession.
RépondreSupprimerMaybe RX can grow their earnings but they’re not comparable to the rest of your list.
SupprimerVicario,
RépondreSupprimerI agree the investing landscape will be different over the next ten years. I also agree that interest rates will stay low over that time frame (too much global debt for higher rates to be allowed.)
I prefer to have a nodding acquaintance with the macro environment, while concentrating on individual companies from the bottom up and putting a lot of emphasis on the senior management teams of those companies I’m investing in…I’m not a quant.
Everybody’s investment philosophy will be their own and reflect their world view as well as their psychological makeup (both pro and con). There’s nothing wrong with having different opinions on investing as that’s what makes a market after all. So I’m not suggesting you are wrong in what you are saying, just that I have my own take on things.
I am in the Brookfield Asset Management camp…in that the place to be over the next ten years will be in hard assets. I get my take on the macro picture by reading Bruce Flatt’s letter to the shareholders which are particularly informative. Brookfield invests into the arteries of the world economy and started to recycle their capital about a year ago in lieu of the next economic slowdown.
I’m heavily invested in companies that grow their dividend so selling out my positions in view of a slowdown makes no sense to me. I’ve held BIP.UN since the summer of 2010, it’s yielding over 10 per cent on my original cost and with the ten year bill where it is, there is no way I’m selling it…but that’s my situation. Everybody’s situation will different and personal to themselves.
The biggest problem I think any investor will have over their time in the market will be dealing with their own ego. I find myself constantly straining to reel it in and contain it. Actually my ego did a lot of the talking just now…what can you do?