Comments on: Lessons from stock-market volatility A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: TFF Thu, 11 Aug 2011 16:25:34 +0000 hsvkitty, it really depends on whether you expect “slow growth” or “no growth”. If you expect “slow growth” in the global economy (not necessarily the US and Europe), then there are already bargains on the table. If you expect the global economy to shrink, or to completely stagnate, then we should expect prices to fall further.

I started buying again yesterday, and will continue to buy as money comes in as long as the market stays in its present range.

Buffett also claims to be buying.

By: hsvkitty Thu, 11 Aug 2011 16:02:21 +0000 TFF wrote “Agreed. As I wrote a week ago, the market was positioned for a big drop — the debate over the debt ceiling may have triggered that drop, but it didn’t create the conditions.”

Well I am of the mind that the conditions that created the big drop are all there and will be for a very long time. I may be wrong, but I am more concerned about my age and my future.

I feel lucky to have exited everything (sadly I have some retirement funds that aren’t self directed) the week before the drop and I am not returning until I see those conditions change. (and I am one of those who held steady and never, ever panicked)

By: TFF Thu, 11 Aug 2011 12:08:42 +0000 “I believe that the drop in the market has very little to do with the S&P’s downgrade in spite of what a lot of pundits are saying.”

Agreed. As I wrote a week ago, the market was positioned for a big drop — the debate over the debt ceiling may have triggered that drop, but it didn’t create the conditions.

Am beginning to see reasons to buy again, though.

By: dwb3 Thu, 11 Aug 2011 12:05:05 +0000 setting aside the flaws on your own analysis (there is no statistical or scientific way to dicern a AAA vs AA rating, historically neither have defaulted), a country with debts in its own currency and ability to print fiat money cannot default. France, Ireland, and Greece can default (debts are in Euro), the U.S and Japan
can’t. WHich is why the Japanese downgrade meant little.

Yes, that means if push came to shove, mustering the political will to inflate away the debt and print money, but ultimately thats what governments end up doing. Not that its going to happen anytime soon in the U.S. or Japan.

By: breezinthru Thu, 11 Aug 2011 07:53:16 +0000 BTW, I believe that the drop in the market has very little to do with the S&P’s downgrade in spite of what a lot of pundits are saying. The downgrade was just a coincidental event that happens to reflect a lot of real, underlying downside factors that are exerting sustained harm and risk to our economy.

The stock market sometimes responds to a harmful economic environment by dropping and sometimes by closing its eyes to the harm and focusing on a few strong earnings reports. The market and the economy aren’t connected at the hip like it seems they should be.

By: breezinthru Thu, 11 Aug 2011 07:29:30 +0000 As you mention, Felix, dollar cost averaging is a time-honored investment practice. I have a pension plan that operates on that premise.

On the other hand, I have my pension money in a self-directed account through TDAmeritrade. It allows me a much wider selection of investment choices. I like LGPSX, a no load fund that allows me to enter and exit whenever I choose.

In my opinion, TDAmeritrade should allow me to make instantaneous moves with my mutual funds like my Scotttrade account allows for individual stock trades, but as you surely know, mutual fund transactions are only conducted in the after-hours market. There ought to be a law against that. I understand that when mutual funds first became popular investments, it wasn’t technically feasible to instantly shift allocations, but times have changed.

I know better than to try to guess which way the market is going on a day to day basis. I have moved my money 100% out of stocks only twice since 2007. In October of 2007, I closed out all of my stock funds and put them 100% into bonds. I advised my coworkers to do the same. It wasn’t until several months later that anyone realized that October 2007 was the all time high in the stock market. I could have done better with picking the bottom, but I did all right. I was able to forgive myself for being a little too pessimistic about the market’s trough.

Because of the kind of work I do, I can’t conduct these transactions unless I’m not working on a particular day. Then I like to wait for the end of the day so I have an idea what the market is really going to close at.

For that reason, I got out of the market again a couple months before the end of QE2. I knew I was probably exiting early but I was anticipating another big drop and I didn’t want to get caught holding the bag.

This time, I moved 100% out of stocks and into a 100% cash position because the bond market didn’t look as safe to me as it did four years ago. I missed a little upside, but like I said, I’m usually not in a position to watch the markets when I’m at work and I can’t conduct transactions from work. It was worth it to me to be safely in cash while waiting for the big drop. I again warned my coworkers to get out of stocks. I have only warned them away from stocks twice and I was right both times. I’m proud of that and I have records to prove it.

I was only a little disappointed that the recent plunge took so long to arrive, but it’s here at last. I think the debt ceiling debacle delayed the inevitable by taking everyone’s focus off what was happening in Europe among other downside factors.

I’m still 100% in cash and I have a little anxiety about missing a move up in the next couple days, but I think any upside move that comes along this week will be a short-lived optimist’s pipe dream. I’m taking a couple weeks off from work beginning next week and I hope to come fairly close to picking the market bottom during that time.

I hope the European witch’s brew comes to a boil quickly. Trichet added some cold water to the concoction to cool it down but Angela Merkel is pretty unhappy about that and there is still a lot of unburned wood in the fire. The Chinese have a cauldron on the fire, as well, but it would take a little kerosene to bring that one quickly to a boil.

Double, double, toil and trouble
Fire burn, and cauldron bubble

By: Dyske Thu, 11 Aug 2011 01:48:35 +0000 Hi Felix,

I need your advise. Given the high volatility in the market now, do you think I should go ahead and buy a Dow 10K hat? I see that it’s still available on Amazon. It’s only $18 but I’m afraid that the Dow may climb back up again from here, and I may never be able to wear it. I don’t know… Maybe I should look at it as a long-term investment like you suggest in your post; that is, “more likely to earn a decent real return over the long term”. I might not be able to wear it this month, but I’m sure at some other point(s) in the future I will be able to. What do you think?

By: y2kurtus Thu, 11 Aug 2011 01:06:59 +0000 Hey Felix,

Remember when I said yesterday’s blog was your all time best out of the thousands you’ve written…

…this one just topped it. You should be on CNBC calming everyone down after Kramer. At the end of every show you could showcase a reasonable bottle of wine… I’m telling you this could be ratings gold!

By: FBreughel1 Wed, 10 Aug 2011 20:52:23 +0000 Felix, MarkWolfinger is right. Even if you follow your ups and downs theory this was NOT a SUDDEN crash. Every riskmanager should have been alert in July and have noticed that “a last minute deal” by US government was risky business. Even put options would not have been out of order. You take an insurancy on all other stuff that you have as well (I hope).

By: TFF Wed, 10 Aug 2011 18:44:49 +0000 “I find Bodie’s argument the most compelling; if stocks are less risky in the long run, put options should be less expensive.”

Is there a market in 30-year put options? I can’t find any listed for the SPY with an expiration beyond 2013. To me, it seems intuitively obvious that the uncertainty in the market two years from now (either up or down) is greater than the uncertainty in the market next week. Note also that the SPY does not account for dividends, which represent something like half the long-term return of stocks.

Yet the earnings stream ought to exert a persistent upward bias. A broad uncertainty around a higher result may nonetheless trump a narrow uncertainty around a lower result. This is particularly relevant in today’s bond environment, with long-term expected returns that are less than 1% ahead of inflation.

“Besides, what happens if when I retire I stumble across a market like this one?”

Your typical retiree faces a life expectancy of 20+ years, and must plan accordingly. If you fund your retirement through asset sales, or if you hold the majority of your assets in cash/bonds, you will have a VERY hard time keeping up with inflation through retirement. Conventional advice is that a 4% draw rate is sustainable for retirement. In the present market environment, following conventional asset allocation, that may be too high.

Yet a 3% draw rate can be sustained WITHOUT asset sales, simply by holding high-quality dividend stocks. And that dividend income has a better chance of rising with inflation than bond income would offer. That might not be an optimal plan, but it seems safer to me than the alternatives.

“The market is still down well over twenty percent from three years ago. Is that part of the short-term canned speech? To most brokers that’s not just long-term, it’s an eternity. ”

Three years is an eternity?!? If your investment horizon is shorter than five years, you have no excuse for playing in the stock market in the first place!!! And when the market is trading at a 25+ P/E, as it was then, you probably ought to anticipate negative ten-year returns. The positive earnings bias works much better at lower P/E ratios than at higher P/E ratios.