Friday, November 7, 2008


In today's regular Friday morning investment meeting, my mutual fund management partners and I discussed how to educate long-term investors and manage expectations ( How many of you, before the tech wreck, were investing before 1980? My guess is not many, either because of your youthful age or the fact that stock ownership back then was nothing like it is today.

What that means is that most of us believe that the stock market is the best place to invest if you have a long-term horizon. Well, there is long and there is long.

Last week, I posted two charts showing multi-decade trends in the market (The Decade Ahead). Looking at a century of data is nothing new for analysts but my fellow fund manager Rob Isbitts (Worth Magazine top 100 investment advisers several years running, by the way) had us look at it in chunks using

When we do it that way in two decade chunks, the message becomes crystal clear. The 1980s-1990s were an anomaly and since most of us cut our teeth in this business at that time it is no surprise we think that 5-10 year time horizons returning 10% (not even the 20% of the bubble) is a gimme. We expect to make that return if we are patient.

Of course, think again. It depends on when you do it. Right now, expect very little unless you are willing to trade the market with a time horizon of months, not years.

Here is the link to one of the charts, starting in the 1980-2000 time frame.

The chart itself is too big to display nicely in this blog. Go visit it and then click on the "previous" link at the bottom, going back in time to the start of the last century. When viewed in these chunks the message is clear. The stock market moves in secular rallies and non-rallies. This decade, and possibly the next, is a non-rally period from the long-term perspective.

Managing your portfolio - not day trading it - is paramount now and should remain that way for many years to come. We just had a cyclical bear market. I cannot wait for the next cyclical bull market to begin a la 1975.

Let's not argue in the blog post over when that rally will actually begin.


Blog do Claudio Digital said...

Assuming you are right, this could be a great period of time to start a covered call writing strategy to increase the amount of stocks you would have and waiting for the next big rally....

if you know what i mean....and thanks to our good fellow: Compound interest...


tinman said...

The following was posted on on Ocotber 23, 2008.

A friend was in a dinner where Charlie Munger gave a speech. Here are some of the conclusions of the speech by my friend:

- The longest recession ever was 16 months. He thinks best case we entered into a recession in November of 2007 or worst case January 2008. This would put us well into the later half of the cycle, which will be painful but short.

- We are setting the base for a 10 - 15 year bull run. The stock market has never performed worse in the last 10 years, yet corporate profit expansion has never been better.

- The market will not rally until bond yields come down on the long end. Right now you should be in munis of solid states that are yielding 7% - 8% risk free.

- TARP will make money. Historical yields on toilet quality mortgage packages are well above the prices people are contemplating buying them. Really smart vulture guys are buying at the 50% - 60% levels. He and Buffet are also buying at these levels.

- We will see a healthy level of deflation before we see inflation. He predicted $50/barrel oil. Demand has been slowing for a year. As long as money velocity turns to favorable, government can pull out the excess liquidity before it becomes inflationary.

- The dollar has turned the corner and will rally from here against the Euro.

- Governments will drive LIBOR down to force interbank lending. Europe is much worse off than the U.S. in terms of bank health.

- Cash on the balance sheets of corporates has never been higher. If they all bought back there stock their P/Es would be trading at a 50% discount to the historical market average.

- He and Buffet are buying U.S. equities for their personal accounts.

Hope their assessment is accurate.

Tom Johns

Doug said...

good stuff tinman, i wonder what the basis for the 10-15 year bull run is based on? interesting.

tinman said...

I think Buffet believes the market should go up six percent per year. And, based on the IBES valuation indicator, the S&P is undervalued by over 60% right now. I don't want to put words into his mouth, but that's probably why they think we're in for a long bull, after we put in a solid base.

In Buffet's op-ed in the NYTs, he stated he didn't know how long it would take for the trend to turn, but these values are so compelling that he's selling all his government bonds and buying American stocks.

Back in July 1999, at the annual Sun Valley retreat of The Allen & Co, Buffet gave a speech where he predicted that we would go into a sixteen year bear that would look like 1964 to 1981.

Buffet had a crystal ball when he told us what we'd be in for back in 1999. I hope it's working as well when he looks out into our future.

Tom Johns

Michael Kahn said...

I agree, good stuff.

What I don't agree with is the length of the next bull. I believe it will be cyclical like the 2002-2007 run, not secular like 1982-2000.

The 10-15 year bull, IMO, will happen after the 10-15 bear. I guess that will indeed be that big base Buffett see, although quite a lot bigger than he wanted.

We are 1/3 - 1/2 way through and getting those huge cyclical bull and bears within. I am not betting against Buffett. I just see only a few years of of rally after the near-term base is set. We can all still make some good coin under either scenario.

Paul O'Cuana said...

I find this disturbing. With the market down in the last week, Investors' Intelligence sentiment readings went up. People becoming more bullish as the market declines including two days with a combined 10% decline. This can't be good.

Paul O'Cuana said...
This comment has been removed by the author.
Michael Kahn said...

Devil's Advocate

It is possible that people are more bullish because they are just less bearish - meaning they were so bearish before that there was nowhere to go but up.

Be careful to differentiate between what people say and what they do. They can talk up the game but it does not look like anyone is really buying.