Author Topic: The Markets Achilles Heel  (Read 1855 times)

Uccmal

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Re: The Markets Achilles Heel
« Reply #10 on: April 25, 2017, 02:14:48 PM »
Uccmal,

Good to have you back posting - I have missed your posts recently, holding me in check.

Have you considered, to which degree your original post in this topic is based on your own actual leverage?

Hi John, In so far as I am biased and prepared for a downturn, I suppose.  I was prepared by the summer of 2007 the last time.  I got caught off guard over a year later when I thought the worst had past and did some stupid investments on the way down.  Washington Mutual comes to mind as one. 

With inflows like what we are seeing into an overvalued stock market, things IMO are getting dangerous.  Part of the problem is outside of oil cos. I am not seeing any value.  And I am tentative with oil because it will get pulled down in a market crash, recession scenario. 

People have forgotten, as usual, how fast and how badly things can turn.  As usual I am probably early but in this case it doesn't really matter.  I am not losing any opportunity cost.  Snapping up a bunch of blue chips in a downturn when their yields go above five or six percent is worth the wait. 
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Parsad

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Re: The Markets Achilles Heel
« Reply #11 on: April 25, 2017, 10:29:29 PM »
Uccmal,

Good to have you back posting - I have missed your posts recently, holding me in check.

Have you considered, to which degree your original post in this topic is based on your own actual leverage?

Hi John, In so far as I am biased and prepared for a downturn, I suppose.  I was prepared by the summer of 2007 the last time.  I got caught off guard over a year later when I thought the worst had past and did some stupid investments on the way down.  Washington Mutual comes to mind as one. 

With inflows like what we are seeing into an overvalued stock market, things IMO are getting dangerous.  Part of the problem is outside of oil cos. I am not seeing any value.  And I am tentative with oil because it will get pulled down in a market crash, recession scenario. 

People have forgotten, as usual, how fast and how badly things can turn.  As usual I am probably early but in this case it doesn't really matter.  I am not losing any opportunity cost.  Snapping up a bunch of blue chips in a downturn when their yields go above five or six percent is worth the wait.

I'm firmly in the camp that any sort of congregation of investors in any one strategy will result in some sort of large correction.  That correction in ETF's will simply take a much longer time to come to fruition, because you are talking about such a large overvaluation in the broad market...not simply in one sector.  Seth Klarman talked about this two years ago in his annual letter.

Can anyone tell me that the economic cycles for the stock market have not compressed with algorithmic trading, ETF computer trading and huge interventions in monetary policy?  We've seen this accelerate in the last 15-20 years.

As someone else said on here, Buffett and Bogle are correct long-term about index investing...but that is completely based on investors ignoring all emotion and simply holding or averaging into an index fund over the long-term.  But that is not how portfolio managers or the average investor behaves, and certainly not how computers will behave, if their programming directs them to push a sell order with no triggers to stop a cascading market.

I remember an encounter with a certain investment manager and his professor in Omaha, and we had a discussion on the markets.  I said at that time I was concerned about systemic risk and agreed with an article that Larry Sarbit wrote about how even money markets would break the dollar level in such an event.  It was why Sarbit was getting out of many financial investments, including Fannie Mae and Freddie Mac.

The professor turned to his protege and asked him the question I posed.  The protege thought about it for a moment and said that the likelihood of such an event occurring would be small because the treasury market was so large that a liquidity event was unlikely to occur to the money market industry on any given day.  The professor agreed and there you have it!  Two great intellects that clearly indicated how such an event could not occur.

Well a few years later in 2008, money market funds for the first time in their entire history of some 70 years, finally fell through the one dollar mark.  There is a reason why this Buffett quote is always on the inside cover of our annual report:

  “…Over time, markets will do extraordinary, even bizarre, things.  A single, big mistake could wipe out a long string of successes.  We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered.  Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions.

Temperament is also important.  Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success.  I’ve seen a lot of very smart people who have lacked these virtues…”

Cheers! 
« Last Edit: April 25, 2017, 10:32:17 PM by Parsad »
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LongHaul

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Re: The Markets Achilles Heel
« Reply #12 on: April 26, 2017, 04:02:55 AM »
As a general rule when you hear a lot about something it is usually too late and overdone and I think the S&P 500 is currently like that.  It is a similar theme to history.  Stocks get overvalued - investors lose a lot and get scared and sell cheap.  The S&P 500 is very overvalued in my opinion and most people don't have know what the S&P 500 really earns or approx what it is worth.  People are acting like there is no risk out there.  But fear can spread in a flash.   Nice point about August 2015.  Markets got a whiff of fear about China and tanked quick.

Here is something to think about - if there is a housing boom that should of went bust in year 5 but then went to year 10 before it busted what are the effects?  I think this is what has happened.   
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Uccmal

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Re: The Markets Achilles Heel
« Reply #13 on: April 27, 2017, 04:04:26 PM »
Longhaul.

Are you the friend who does the o&g consulting?  :-).
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stahleyp

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Re: The Markets Achilles Heel
« Reply #14 on: April 27, 2017, 07:00:41 PM »
Klarman is a good investor but isn't perfect. He called index funds a "fad" twenty years ago and has been bearish since 2010.
Paul

Parsad

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Re: The Markets Achilles Heel
« Reply #15 on: Today at 12:11:58 AM »
Klarman is a good investor but isn't perfect. He called index funds a "fad" twenty years ago and has been bearish since 2010.

Could be Klarman remains incorrect.  I just think there are certain systemic events that take much longer than expected to reach a tipping point.  People could be making money hand over fist during the cycle, but that doesn't mean that the risk doesn't exist.

If you have massive coordinated global quantitative easing combined with a broad concentration forming in index funds, I would imagine that could create such a circumstance where any change in policy or some sort of crisis, could result in a rapid correction as algorithmic trading systems kick in.

Klarman may get the end result correct, while looking foolish for a very long time.  Cheers!
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Uccmal

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Re: The Markets Achilles Heel
« Reply #16 on: Today at 04:49:27 AM »
As a general rule when you hear a lot about something it is usually too late and overdone and I think the S&P 500 is currently like that.  It is a similar theme to history.  Stocks get overvalued - investors lose a lot and get scared and sell cheap.  The S&P 500 is very overvalued in my opinion and most people don't have know what the S&P 500 really earns or approx what it is worth.  People are acting like there is no risk out there.  But fear can spread in a flash.   Nice point about August 2015.  Markets got a whiff of fear about China and tanked quick.

Here is something to think about - if there is a housing boom that should of went bust in year 5 but then went to year 10 before it busted what are the effects?  I think this is what has happened.   

Yeah, the S&P 500 PE is 25 x.  That means it takes 25 years,to get your money back if you invest in SPY units for example or any kind if index fund.  And thats if you believe the Earnings as reported. 

Thats a 4% return, which is better than treasuries, at the moment.  But,  Its priced as if we never see interest rates going up again. 

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stahleyp

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Re: The Markets Achilles Heel
« Reply #17 on: Today at 05:53:49 AM »
I agree Sanj that sometimes these things take a very, very long time to play out. And I really don't think the move to indexes is a fad though. In a downturn, the active funds (at least mutual) won't do any better, I'd imagine. And unless fees come down across the board, the hedge variety won't beat the market over the long term either.
Paul

Parsad

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Re: The Markets Achilles Heel
« Reply #18 on: Today at 06:27:17 AM »
I agree Sanj that sometimes these things take a very, very long time to play out. And I really don't think the move to indexes is a fad though. In a downturn, the active funds (at least mutual) won't do any better, I'd imagine. And unless fees come down across the board, the hedge variety won't beat the market over the long term either.

Oh, I agree it's not a fad.  It makes long-term sense.  But you have a congregation of capital of enormous size going into them.  When a correction happens it will be bigger and faster.  The recovery will also be quicker.  Cheers!
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LongHaul

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Re: The Markets Achilles Heel
« Reply #19 on: Today at 07:25:47 AM »
Longhaul.

Are you the friend who does the o&g consulting?  :-).

Uccmal,

Haha.  No I am not the friend.  I thought I would just help advertise his business as I think he has already helped people in the oil and gas area.  I have actually never invested in oil and gas in my life and know little about it.  My friend will be in Omaha if anyone wants to meet him.  Good guy and can often cut through the total nonsense that gets sold to O&G investors by mgmt teams that are full of BS, lying etc.   I generally think consultants are BS but if one has specialty technical expertise that can add a lot of value in a specialty then it can help a lot.

And your 25x was spot on regarding the S&P 500.   Index Funds may makes sense at most times - but not at 25x.  That is a ripoff.
This is a friend who is a very capable consultant for oil and gas investing. 

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