FYI: It’s time to get ready for the stock-market collapse that may not happen.
There’s been much chatter about a possible selloff, which suggests many investors have already placed that bet—and perhaps a big decline isn’t in the offing. Still, it’s good to be prepared: Share prices have almost tripled since the March 2009 low, as measured by the S&P 500 index, and are now richly valued. As a precaution, consider these three steps:
Regards,
Ted
http://online.wsj.com/articles/are-you-prepared-for-a-stock-selloff-1412468241#printMode
Comments
WSJ sensationalism.
Talk about data mining.
Shouldn't these 3 steps be taken always?
WSJ is not what it used to be.
Keep in mind, too, that the MFO audience is quite financially sophisticated and has become more so in recent years. Heck, we have several here from the financial industry, and the "casual" investors are no sloughs either. So, an article telling us to assess our risk appetite and think a little about the pounding many took in '08 is going to seem superfluous to most. However, if you're just starting out investing and looking for guidance, it's not bad advice - and probably cost the writer and Journal little in time or money to churn out.
I actually agree with the advice.
Just think it should have been coached in more general way...good advice when investing in the markets, always.
Not just when market has recovered. Steep declines can happen at any time and for many reasons.
What rubbed me the wrong way was the headline and lead in, which plays on people's fears that another steep decline is right around the corner.
Sometimes I think most of these folks are the ones that got out and/or did not get back in in 2009, so a steep decline would help justify their decision.
But, in any case, I think the lead-in to this article borders on fear-mongering - the action of deliberately arousing public fear or alarm about a particular issue.
Regards,
Ted
Recently, a bunch of MFOers have posted negative assessments of financial writers and their current crop of articles. You fellows are tough consumers of financial advice. It’s perfectly legitimate to have high standards and high expectations. Many business journalists do disappoint.
However, I don’t count Jonathan Clements in that cohort. He rarely disappoints, although, on occasions, I’m sure a sophisticated and experienced veteran investor would not learn much from any given article. Remember, Clements writes for the general investing public. I grant him a little slack on these infrequent occasions. Not even Warren Buffett or John Bogle offers brilliant insights every time they take pen to paper.
Jonathan Clements has a storied career as a financial writer that is equaled by few. He has been a columnist for the WSJ for almost two decades, and has composed thousands of pieces. I agree that not all carry equal weight.
The Japanese have a saying that a protruding nail must be hammered down. Not always. For some of us the nail might well need the hammer; for others, it might well be a place to hang a picture. Some investors benefit from the solid advice proffered by Clements. For those who don’t need that advice, at worse it is innocuous and will do no harm.
I’m sure we are all aware that editors design article titles to capture attention. Fear is a proven motivator and attention gatherer. I really did not think that the title of the referenced Clements’ article was all that frightening. The article’s Clements byline immediately added credibility and trustworthiness to the work. He is universally respected within the industry.
I too was rather dissatisfied with the referenced text; it was pedestrian, standard stuff. It was not one of Clements’ top writings. They all can not claim that exalted position. I’m certain that a legion of his loyal readers would disagree with me. Given our diverse needs and goals, we are likely all right in our individual judgments.
In general, I too conclude that current US journalism skills, research, and ethics have eroded over time. Far too often, journalists have become advocates. They distort their information reporting not by providing misinformation, but rather by carefully selecting only facts that support their positions while totally ignoring disconfirming evidence.
One easy answer to that deficiency is to seek many alternate sources of information. But if I only had one choice for a hitter, I would choose Ted Williams every time, Ted.
Best Regards.
My grumpy response was just about this particular article and its lead-in style.
Glad you like Mr. Clements. That adds to his credibility in my book.
Will look for his byline in future articles.
Hope all is well.
c
Perhaps the question might be, if the equity portion of your portfolio declined by a third between now and year's end, what would be (a) your reaction and (b) your action plan?
David
Given the number of times steep declines have happened and the variety of reasons they can happen (overvaluation, or perhaps more precisely "overheated," being only one), investors should always be asking "if the equity portion of your portfolio declined by a third...what would be (a) your reaction and (b) your action plan?"
"Actually the Japanese saying is "The protruding nail will get hammered down."
This was in reference to wooden floor boards if I remember rightly.
As for Jonathan Clements, he is one of the better writers out there but this article is junk. I might be wrong but does the writer have control over the headline?
But, as long as new (and presumably floundering) investors take it upon themselves to read a broadly diversified mix of opinions, I think they'll be alright.
http://www.jonathanclements.com/articles.html
The following website has a lot of data and appears to be very useful in this regard:
http://www.multpl.com/
It has the trailing twelve months' P/E for every month from 1871 to the present. As well as a great deal of other info.
I find these arguments and attendant disagreements as bad as those on passive versus active. They tend to go nowhere. Each side defending its position based on past data and/or perception.
Maybe the valuation argument is even worse, since it is always about correlating past data to help predict future performance. A premise impossible to know until it plays out.
So, it's Hussman vs Arnott vs Akre. Or, Shiller vs Siegel vs Fama. Forever, seemingly. Each steadfastly holding their position.
Thinking about it...a little less hubris in their arguments (Akre seems most moderate here) would go a long way.
Clements helps fuel the fire in this debate... Selectively pick a metric that supports your position, then state your conclusion. QED.
I would probably have reacted better if he just came out and stated that he believes the market is overheated. And, his advice to those that believe the same way should...
@hank. Thanks man. I will read through, see if I can get better appreciation.
Since these discussions have taken a serious turn towards using P/E Ratio formulations as a prediction tool, I thought a repost of a Vanguard study might just be in order.
The Vanguard study is titled “ Forecasting Stock Returns: What Signals Matter, and What do They Say Now”. It was issued in October, 2012. Here is a Link to it:
https://personal.vanguard.com/pdf/s338.pdf
The study examined about a dozen candidate indicators including several forms of P/E ratios.
Using P/E ratio regression-to-the-mean concepts is not a novel idea. John Bogle addressed this issue in his classic “Common Sense on Mutual Funds” book. Bogle identified an Occam’s Razor approach to estimating long term (decade) equity returns.
His model included three elements: (1) current dividend yield, (2) subsequent rate of earnings growth (correlated with GDP growth rate projections), and (3) estimated changes in price to earnings ratios (like regressing to the mean). His work emphasized decade long rewards.
The referenced Vanguard study basically reinforced Bogle’s findings, All candidate forecasting parameters failed to adequately project future equity returns with high precision. The 10-year P/E ratio proved to be the most influential single parameter. Over the long haul it captured roughly 40% of equity returns.
Vanguard’s overarching conclusion was “Although valuations have been the most useful measure in this regard, even they have performed modestly, leaving nearly 60% of the variation in long-term returns unexplained.” And, “This underscores a key principle in Vanguard’s approach to investing: The future is difficult to predict.”
Please give the Vanguard report some of your valuable time. It just might better inform your market modeling and decision making. I hope it helps.
Best Wishes.
Thank you for the precise Japanese “Nail” quote. I’m sure you realize that I was just paraphrasing this favorite Japanese saying since my original post purposely did not isolate it with quotation marks.
My primary purpose in introducing this Japanese wisdom was to differentiate that most US investors do not subscribe to the confirmatory receptivity that the “Nail” saying implies.
As a very broad generalization, the Japanese population treasures conformity and uniformity much more highly than the US population does. Again, broadly speaking, Americans encourage and expect departures from the "road most frequently traveled" when the situation demands innovative thinking and action.
Whenever I reflect on the uniformity and conformity of the Japanese cultural tendencies, I fondly recollect a now distant visit to Kobe, Japan. My wife and I were staying at a posh hotel on a hilltop that overlooked the city. Although the hotel’s modern elevators were entirely automatic, they were staffed with three well groomed, identically uniformed, attractive women who spoke perfect English.
The first was armed with a short pointer and guided us to a waiting elevator; the second assisted us into the elevator; the third punched the requested buttons. All three women were college graduates. What a waste of human resources, especially when contrasted against the utilization of human capital in some of the modern Chinese cities that we also visited.
In investing, departing from the norm offers the potential for outsized rewards; it also presents the prospects for the most spectacular failures. We get to choose the relative certainty of Index-like returns or a higher returns active target that is more risky and uncertain. In the latter instance, historical performance data suggests that our misses exceed our hits by a huge margin.
Best Wishes.
For me stocks, in general, are not cheap by any means ... however, when compared to bonds, in general, they seem like a bargain by my thinking.
For me, I have been lately buying based upon the following rational …
I anticipate full year 2015 earnings on a TTM basis for the S&P 500 Index will be somewhere around the $120 range. If one is willing to pay $16.00 for a dollars worth of prospective earnings at the anticipated earnings of $120 (share) then this puts a value on the Index somewhere around 1920. With this stocks are still trading, by my thinking and measure, at a slight premium even by looking out to their 2015 prospective earnings at $120.00 range.
Oh well, I guess I over paid when I just recently bought in the 1960 range.
Sometime investors, me included, just get carried away with what they are willing to pay for an anticipated reasonable return.
Old_Skeet
Great paper.
Thank you!