Here’s an insightful study by Oppenheimer concerning the differences between India and China as investment venues. While emerging markets represent some of the fastest growing economies in the world, they also contain a lot of political risk, currency risk, and financial opacity. Often we can’t clearly see what is really happening! That means we can’t always recognize true bargains, so we can’t make well-supported decisions. Nevertheless, over the long term, carefully-targeted emerging market investments have a real probabilty of doing quite well. With that in mind, our emerging market holdings are diversified, analysis-driven, cautious, and small, as well as placed with experienced managers.
Most families lose their wealth by the third generation. But it doesn’t need to be that way. https://www.theatlantic.com/business/archive/2015/09/richest-families-grandkids-gilded-age/405892/
It really IS possible to blow a billion dollar fortune. In fact it’s probable. Study how the Vanderbilts lost the unloseable fortune: drama, lack of diversification, and dissipation. You will see why it’s so hard to master intergenerational wealth. https://www.forbes.com/sites/natalierobehmed/2014/07/14/the-vanderbilts-how-american-royalty-lost-their-crown-jewels/#33c197bf353b
My last entry on January 30th, 2018, suggested that US stock markets were potentially overvalued. Apparently others agreed with that assessment, because early in February, in the face of rising interest rates, American stock markets dropped (almost) 10%. At that point I was guessing…a perfect word for it…that the financial markets would continue to decline to more reasonable levels. However, I chose to do no trading because I wasn’t confident.
Good choice. This week, U.S. stock markets strongly reversed, producing one of the best weeks in years. I suppose that had I been courageous we could have bought the dip, but I was too conservative for that.
Meanwhile international markets fell more, and have recovered less.
With the prospect of rising interest rates in mind, I perceive that the possibility of a downturn more wrenching than what we have experienced is still quite possible. Where we were before somewhat vulnerable, we are now substantially more vulnerable. My guess is that this week’s recovery is driven by FOMO, Fear Of Missing Out, not from any rational expectation.
Meanwhile I’m watching the bond market, and interest rates finally seem to be stirring, moving up. That’s a real, genuine game changer, potentially negatively, for many reasons.
Bottom line: for the time being, I’m maintaining our current asset allocations. But I’m targeting potential bargains, and I’m watching the horizon. Something profound may be happening. Frankly probably not, because most warnings don’t actually materialize into anything real. But what if…? Read more here.
As the accompanying article spells out, the Value Line Manager’s Appreciation Potential statistic is now 20%. This suggests that the stock market is more overvalued than it has been since 1969.
Read the article here.
The Value Line Appreciation Statistic has been giving off overvaluation signals since 2013. It’s been screaming of imminent disaster since 2015. THIS IS WHY we have been so conservatively allocated. Yet, in hindsight, our allocations have been too conservative because not even the VLMAP can beat central bank stimulus.
As the article indicates, the VLMAP statistic has also been accurate in the long term.
In my 2012 book, “Dollars and Common Sense: Taking Charge of Your Investments in the Tumultuous 21st Century”, I wrote on page 166:
- The Value Line Estimated Median Appreciation Potential statistic is BELOW 50%.
- The Price/Earnings ratio for the S&P 500 or its proxy index mutual funds is OVER 20.
Move back to the next-lowest risk level in your portfolio allocation, and adjust your portfolio accordingly.”
The Price/Earnings ratio for the S&P 500 is now 22.85.
Classically, this suggests a rather large downturn is ahead. But the VLMAP and the P/E statistics also hinted at downturns in 2013, 2014, 2015, 2016, and 2017, albeit not as extremely as they are now. Central banks won the day, and now investors are convinced that they will always save us. Always. But what if investors’ expectations are wrong?
If, like the proverbial broken clock which is right twice a day, we DO experience a substantial correction in the financial markets, then we are poised to take advantage. If stocks are worth owning for their wealth-creating power now, then the same will be true when they are cheaper. Patience. Our portfolios are already relatively safely allocated.
I was reminded of that today when a client called up and asked what return he could expect on his investments. I said we really can’t predict, but a long term average of 7% has historically been both attractive and doable, with discipline. We really can’t say what the future will bring.
What does “discipline” mean? To some degree it means that we ignore the day to day noise and focus on long term realities.
Reality: Bitcoin is probably a bubble. Thus we should approach cautiously if at all.
Reality: The economy is profoundly leveraged, “in debt up to our eyeballs”. That always has negative consequences.
Reality: The financial markets are probably overvalued. A downturn in the future is probably inevitable. The downturn will probably be followed by an upturn, as day follows night.
Reality: history tells us that we really can’t guess. In the decade or longer time horizon, by buying low and avoiding bubbles, we will probably steer our investments towards attractive gains. In other words, in the long run, most of the above doesn’t matter. Stay the course. Stay diversified. Patience pays.
2017 has been an astonishing year so far, and the most amazing part of it has been the rise of the cryptocurrencies, such as bitcoin. They are up literally thousands of percentage points in 2017 alone.
Yet many of us (me included) are still struggling to understand what essential function is fulfilled by the creation and existence of cryptocurrencies, unless you need complete stealth in your financial transactions.
One possible value is that by design there will be a limited number of cyberunits (called “coins”). However gold is also scarce, and unlike cryptocurrencies, it is actually tangible. Cryptocurrencies are literally unreal.
When we own mutual funds, we own baskets of stocks, and for better and for worse those stocks eventually own something real. When you buy a share of Apple you are buying the profit stream from all Apple products and you own a tiny share of all the assets of Apple: factories, bank accounts, and whatever else is real. When you own Bitcoin you own…well, what DO you own? Clearly you own something or bitcoin wouldn’t exist. Nobody can agree on what the “something” is.
Meanwhile, some researchers are estimating that the odds of a downturn in bitcoin are now quite large: Read here!
Stay tuned. This IS something completely different.
Thirty years ago this week I was beginning what was then a very novel business model: fee-only, no commissions. I was working at Christopher Weil, Inc, after a few years at E.F. Hutton. The consensus among the veterans was that fee-only could never work. Now it’s the industry standard, and I was present at the beginning.
Much to the chagrin of some of my managers, I had moved my clients’ accounts to safer positions because I thought the stock market was overvalued. As the Quotron…a primitive computer…kept posting lower and lower numbers, I looked over at the office manager. His face registered horror. We turned on a speaker from the floor of the New York Stock Exchange, where the trading was done with paper and voice, and we could hear a roar from the crowd. Everyone was trying to sell.
After that, I bought stock mutual funds for my clients and for myself at bargain prices. The market fully recovered within months. Our portfolios benefitted much more than any losses hurt us. Black Monday 1987 was the first time that awareness of overvaluation produced a big win for us.
Since then, calling out overvaluation has been much harder. In the 1990’s we were right but it took YEARS before the 2000 Tech wreck, and many clients became discouraged before it happened. The 2007/2008/2009 Financial Panic was different because recovery took a long, long time. Many clients were discouraged by that as well.
Now the financial markets are overvalued again, but the central banks have changed the game by stimulating. We don’t really know what will happen. Eventually I expect that a correction must occur, but it may or may not replicate the sheer terror of Black Monday 1987. Meanwhile, all we can do is pay attention and stay diversified. As my life illustrates, patience pays.
Ten years ago today, the S&P 500 U.S. stock market index hit its record high before falling about 57% in the Financial Panic of 2008. It recovered in March, 2013.
Before the meltdown, there were already major issues in the financial system which were larger and more dramatic than what we are facing today. So is such a meltdown imminent now? If so, I can’t see it. But valuations and debt levels are again high.
How soon we forget. Read more here.
The stock markets of the world appear to be impervious to every current geopolitical event, including the threat of nuclear terrorism and serial hurricanes, while a growing number of writers are shrieking that the end of the financial world is nigh. (Read the latest apocalyptic broadcast here.) Hmmm. I have my doubts, but there’s a lot of smoke in the air. Conditions being what they are, last week I moved 5% in many clients’ accounts from stocks to short term bonds. That’s very unusual for me. I’ve learned the hard way that even the best-calculated predictive indicators are easily undone by Fed easing. So usually nowadays we simply stay invested. The long-term force is with equities.
However, bonds aren’t deeply attractive right now either, except as a place of relative safety. Some bonds, especially longer-term issues, are overvalued like stocks. And the perception that the Fed Will Make All Things Good is strongly at work in bond-world as well. Here’s an interesting article which details the almost nonexistent difference in three year performance between top-end bond funds. Some of our conservative clients have portfolios which are 60% bonds. Those bonds aren’t producing much. Granted, bonds are traditionally holistically safer than equities, but in terms of gains, they historically don’t do much.
Right now, because of valuations, we temporarily have clients with 60% invested in boring. My hope is to eventually get them into equity bargains, and make some real long term gains. Patience pays.