Author Topic: A sign of an inflated market?  (Read 4485 times)

giofranchi

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Re: A sign of an inflated market?
« Reply #10 on: September 11, 2012, 03:41:30 AM »
we've all gotten complacent with our value plays and are sitting on them!

That thread makes me sad though.  It is much more civil than the rest of the Internet, but it still shows how hard it is to get people to agree on anything.  I don't think people even agree with a foundation  on which to start a conversation.

I agree. And I strongly recommend reading “American Gridlock” by Mr. Woody Brock. Especially Chapter 1 “Dialogue of the Deaf”.

“All this leads to an amplification of today’s Dialogue of the Deaf, in which there is neither an interest in truth nor a logical method for discovering it, if and when it is sought. But this is precisely where the opportunity lies. For the use of deductive logic leads to better and more compelling policy solutions than does today’s bastardized logic of induction. In particular, it leads to win-win solutions that have a much greater chance of gaining  bipartisan support than the win-lose policies that dot newspaper headlines. But why is this the case?
The answer is seductively simple. In applying deduction to topics ranging from public policy analysis to pure mathematics, the same two-step process takes place. First, it is necessary to specify a set of Basic Assumptions that, by their very nature, should be “transparently true.” In number theory, we must accept: “For any integer n, there is always a next bigger integer, n + 1.” Seems reasonable to me. Or in plane geometry: “Between any two points on a plane, there will exist one and only one straight line connecting them.” Seems reasonable. Or in health-care reform, “A satisfactory health-care system must first provide universal coverage, and second cause total health-care spending eventually to shrink as a share of GDP.” Don’t these two assumptions seem as desirable as apple pie and motherhood?
Second, solutions to problems can often be deduced from simple axioms of this kind, and when this is the case, disagreement can be quelled. For if simple and compelling axioms logically imply a set of policies consistent with them, then who can disagree with such policies? If there is health-care system satisfying these two appealing axioms, who would reject it? What remains for the Right and the Left to bicker about? In accepting the axioms, you accept the conclusions. The Dialogue of the Deaf thus can be dampened. Indeed, the conclusions arrived at what seem like lessons from the syllabus of Common Sense 101. Whether mathematics is needed to proceed from axioms to conclusion, or not, makes little difference. What matters is the quality of reasoning involved, and whether the axioms are compelling to any reasonable person, regardless of his or her political leanings.
Can this elegant approach work in the case of the real-world challenges identified previously? Yes – much more so than you might imagine.”

Can this elegant approach work in the case of the stock market?
Axiom 1: “Secular bull and bear markets happened in the past: during secular bull markets stock prices appreciated much, during secular bear markets stock prices fluctuated, but did not appreciate much.”
Axiom 2: “Secular bear markets of the past always ended at historically very low stock valuations.”
Axiom 3: “Today stock valuations are not historically very low.”
Can those three “Axioms” be agreed upon? I don’t mean that they are useful for investing. Or that what happened in the past is relevant today. I just would like to ask you, very knowledgeable and thoughtful investors, if it is possible to agree on those three “Axioms”, as I tried to formulate them.

giofranchi
Portfolio: AAPL, AMZN, BABA, BOSS, BRK.B, FB, FFH, FIH.U, FINX, FWONA, GOOG, IBB, JPM, LBRDA, MKL, NKE, QQQ, SFTBF, SMH, TCEHY, V, XBI, XT


Yours Truly

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Re: A sign of an inflated market?
« Reply #11 on: September 11, 2012, 09:11:59 AM »
I wouldn't say the market is inflated, but at the same time it is hard to find anything new to get excited about.

Pretty much sums it up for me too.  Either we have to wait for a drop/scare or some special situation occurs in the companies we are watching.  It's tough sitting on your hands.

Hoodlum

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Re: A sign of an inflated market?
« Reply #12 on: September 11, 2012, 10:57:16 AM »
I lightened my BAC exposure today as it was becoming a large portion of my portfolio and I am still concerned about short term macro issues (especially Europe).  I have lots of cash waiting for the next opportunity.
« Last Edit: September 11, 2012, 12:58:48 PM by Hoodlum »

twacowfca

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Re: A sign of an inflated market?
« Reply #13 on: September 12, 2012, 03:42:43 AM »
we've all gotten complacent with our value plays and are sitting on them!

That thread makes me sad though.  It is much more civil than the rest of the Internet, but it still shows how hard it is to get people to agree on anything.  I don't think people even agree with a foundation  on which to start a conversation.

I agree. And I strongly recommend reading “American Gridlock” by Mr. Woody Brock. Especially Chapter 1 “Dialogue of the Deaf”.

“All this leads to an amplification of today’s Dialogue of the Deaf, in which there is neither an interest in truth nor a logical method for discovering it, if and when it is sought. But this is precisely where the opportunity lies. For the use of deductive logic leads to better and more compelling policy solutions than does today’s bastardized logic of induction. In particular, it leads to win-win solutions that have a much greater chance of gaining  bipartisan support than the win-lose policies that dot newspaper headlines. But why is this the case?
The answer is seductively simple. In applying deduction to topics ranging from public policy analysis to pure mathematics, the same two-step process takes place. First, it is necessary to specify a set of Basic Assumptions that, by their very nature, should be “transparently true.” In number theory, we must accept: “For any integer n, there is always a next bigger integer, n + 1.” Seems reasonable to me. Or in plane geometry: “Between any two points on a plane, there will exist one and only one straight line connecting them.” Seems reasonable. Or in health-care reform, “A satisfactory health-care system must first provide universal coverage, and second cause total health-care spending eventually to shrink as a share of GDP.” Don’t these two assumptions seem as desirable as apple pie and motherhood?
Second, solutions to problems can often be deduced from simple axioms of this kind, and when this is the case, disagreement can be quelled. For if simple and compelling axioms logically imply a set of policies consistent with them, then who can disagree with such policies? If there is health-care system satisfying these two appealing axioms, who would reject it? What remains for the Right and the Left to bicker about? In accepting the axioms, you accept the conclusions. The Dialogue of the Deaf thus can be dampened. Indeed, the conclusions arrived at what seem like lessons from the syllabus of Common Sense 101. Whether mathematics is needed to proceed from axioms to conclusion, or not, makes little difference. What matters is the quality of reasoning involved, and whether the axioms are compelling to any reasonable person, regardless of his or her political leanings.
Can this elegant approach work in the case of the real-world challenges identified previously? Yes – much more so than you might imagine.”

Can this elegant approach work in the case of the stock market?
Axiom 1: “Secular bull and bear markets happened in the past: during secular bull markets stock prices appreciated much, during secular bear markets stock prices fluctuated, but did not appreciate much.”
Axiom 2: “Secular bear markets of the past always ended at historically very low stock valuations.”
Axiom 3: “Today stock valuations are not historically very low.”
Can those three “Axioms” be agreed upon? I don’t mean that they are useful for investing. Or that what happened in the past is relevant today. I just would like to ask you, very knowledgeable and thoughtful investors, if it is possible to agree on those three “Axioms”, as I tried to formulate them.

giofranchi

Disagree with your axiom about secular bear markets.  It references survivorship bias.  In historical truth many secular bear markets ( think Tzarist Russia  or tulip mania for a more cyclical example ) went to zero or nearly zero.  If market values survived, one could say that it was a secular bear market rather than a cyclical bubble that popped.

Cheers!
« Last Edit: September 12, 2012, 03:50:46 AM by twacowfca »

Uccmal

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Re: A sign of an inflated market?
« Reply #14 on: September 12, 2012, 05:10:21 AM »
Quote from: twacowfca link=topic=7433.msg85167#msg85167


Disagree with your axiom about secular bear markets.  It references survivorship bias.  In historical truth many secular bear markets ( think Tzarist Russia  or tulip mania for a more cyclical example ) went to zero or nearly zero.  If market values survived, one could say that it was a secular bear market rather than a cyclical bubble that popped.

Cheers!

Very insightful. 

We have been in a sideways market for 13 years.  It has hit at least two bottoms.  By many accounts the retail investor has left the room.  Bonds have undergone the biggest rally in two geneations.  Bond rallies usually indicate a prelude to stocks turning up.  Financials worldwide are rallying which indicates that other stocks will soon rally as well.  IMO, that is where we are right now. 

It will of course be choppy with major swoons thrown in just to screw with everyones heads.

People overthink things.  BAC is by all measures safer than any bank was from the mid 90s to 2007, and is trading at its lowest levels relative to that safety in at least 30 years.  What more do you need to know?
GARP tending toward value

giofranchi

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Re: A sign of an inflated market?
« Reply #15 on: September 12, 2012, 06:40:55 AM »
Financials worldwide are rallying which indicates that other stocks will soon rally as well.  IMO, that is where we are right now. 

Of course, you might be right. And a new secular bull market may be starting now. If that is the case, any long/short strategy will lag behind a long only strategy. It is just that I have yet to find an historically convincing analysis to justify the beginning of a new secular bull market in equities. Secular bear market of the past tended to last 17-20 years, so tended to be longer than the one we are living through. Financials in secular bear markets of the past rallied many times, before always coming down again. And the general price level at the end of any secular bear markets of the past had always been lower than the general price level we witnessed in march 2009. The fact that the general price level in equities is historically very low is the most significant reason why secular bull markets begin. I believe we need one more shoe to drop, before a new secular bull might start. I am not saying: “don’t buy BAC”. If BAC is a good investment, I am saying: “Buy BAC and buy some protection”. Just in case the last shoe finally drops, and everything (yes, even BAC!) comes down with the market.

giofranchi
Portfolio: AAPL, AMZN, BABA, BOSS, BRK.B, FB, FFH, FIH.U, FINX, FWONA, GOOG, IBB, JPM, LBRDA, MKL, NKE, QQQ, SFTBF, SMH, TCEHY, V, XBI, XT