Good morning,
By my count we are into day seventeen of the selling stampede that started the last couple days back in December. Jeffery Saut of Raymond James says that selling stampedes usually last for 17 to 25 days with some lasting longer. In checking the S&P 500 Index futures, as I write, the Index futures are down a couple of points followed by Greater Europe which is moderately down while Greater Asia is reflecting some good upward gains for today.
I am not sure where all this will lead, for us, today with the major world markets being mixed along with last Thursday and Friday being up days. Perhaps, today, and maybe tomorrow, will be give back days … and, so it goes.
The WSJ reported as of Friday's close the S&P 500 Index was selling at a TTM P/E Ratio of 20.7 and on forward estimates at P/E Ratio of 15.4. This puts reported earnings somewhere around $92.00 and on forward estimates at about $123.00. If estimates come through, as projected, then hopefully stock prices will follow and move upward as we go through the year. Morningstar is reporting in their Market Fair Value Graph that stocks, that they follow, in general are selling at about 11% below their fair value.
With this, perhaps a good number of investors will be finding value in the markets at these prices ... and, stock prices will continue to advance along with earnings. However, I do expect some rough patches along the way.
Have a great day … and, I wish all “Good Investing.”
Comments
This is what I found most difficult to figure out in a stepwise algorithm especially if you wanted to avoid emotions and second guessing of the market. Fighting greed that says you may miss the market up from here if it looks like going up and loss aversion which says you may lose more because it seems like it may go down. Obviously, one cannot call it correctly all tne time.
My only two buys thus far have been at 1922 (about 10% off the 52 week high) and 1880 (about 12% off the 52 week high). My next targeted buy is planned around 1820 (about 15% off the 52 week high) thus keeping instep with the first two buys. Remember, I let the S&P 500 Index enter correction territory before I began to buy. The concept is to keep lowering the average cost of the buys as the market declines and then follow it upward a ways until the average cost of the buys is approached. Currently, my average cost of my buys is 1901 and if I buy at the 1820 range then my average cost will be reduced to about 1874 or thereabout depending on where the third buy actually takes place. Then the next, and fourth, scheduled buy in the decline phase would take place somewhere around 1770 (about 17% off the 52 week high) if we get there. And, this would continue until I felt a bottom had been reached and then perhaps buy some in the upswing until I approached my average cost. At this time I am anticipating a total of about six buys (4 going down and 2 coming back up). Naturally this could change.
If all six buys are made in the first quarter this would equal a cash draw of about three percent minus the portfolio's distribution yield of about 1.25% per quarter for a net cash draw of about two percent while raising equities by about six percent thus striving to maintain a 50% allocation to them in this falling market. On the upswing, I'll probally start to off load equities once I start reaching my full allocation to equities (about 55%) or summer arives where I generally go light in equities, to play a seasonal trend during the summer, and then load equities during the fall to play the traditional fall stock market rally. History tells us that the better gains in the stock market generally come during the first and fourth quarters. Naturally, there will be exceptions.
But the problem is the market keeps bouncing around and every bounce may be the beginning of a turnaround prompting a buy for the way up as you were ready to do while it turns out to be temporary bounce and so forced you into a buy that you wouldn't have done otherwise in the straight up and down scenario.
So, if recently the market had stopped below 1890, you may have decided to buy that day as part of the upswing except that it isn't part of the upswing at all as the markets may head down further. On the other hand if you wait to see if it is real upswing you may miss the milestones entirely if it turns out to be so and hence not realizing the gains of the theoretical plan. These upswings and downswings can be seen clearly in retrospect but not when you are in the middle of it.
Was wondering how you solved that problem and whether there was some subjective intuition involved. For example, today's move up could very well be the start of a recovery going through your up milestones or it could go up and come down much further again creating unncessary buys earlier that increases the average buy price from ideal plan. It would seem that this would be critical in determining the outcome of the activity.
The margin for error is fairly small because the potential for an "alpha" is small (but any alpha is good). For example, if you moved 3% in the cycle, you would realize about .6% alpha if you timed a 20% bottom exactly and only invested all of that 3% only at the bottom. But that is impossible to do so, so in the ideal step wise plan, if you captured half of it with an ideal average cost for the 3% in the middle, you would have a .3% alpha over just sitting tight with all of that allocation. The rest of the gains from yields, etc would be the same in both cases.
The volatility moves like described above would further decrease the alpha with non-ideal buys from the "head fakes".
Is this the kind of alpha you are aiming for with your strategy and if so, are there ways to eliminate the problems that the volatility causes with false signals triggering buys?
Thanks again for sharing your moves. In most places, you hear a lot of claims in retrospect so it is very useful when someone is sharing that strategy as they go along fo see how that works.
Thanks for providing your estimated alpha generation on my most two recent buys. Actually, this is something I'd be looking at if I were buying spiffs. However, my two recent buys were not spiffs but building another position that I felt would generate enough income, when built out, that could meet about 1/12 of my annual income needs but still be a minority position within my portfolio (less than two percent). This fund has a fairly high distribution yield of about 7.5% (dividends and capital gain distributions) for 2015 and has a high weighting to the defensive sectors.
In addition, to good capital appreciation I also look for funds that pay me well to own them. Currently, DEQAX has been paying me well and one I felt worthy to take to another lelvel within my portfolio and double it's size but still keep it below 2% of the overall portfolio.
I am not sure you are aware of how I have my portfolio configured as I currently own 47 funds which are spread out over ten investment sleeves plus there are two cash management sleeves. Since, I am writting form my tablet I will provide my portfolio detail to you under another post as it is stored on my desk top. I'm thinking this will be of some help to you so you can see how I govern.
Thanks again for taking an interest in my post as I indeed find interest in your comments.
Cordially,
Old_Skeet
Additional comment:
Here is a brief description of my sleeve system which I organized to help better manage the investments that were held in five accounts. The accounts consist of a taxable account, a self directed ira account, a 401k account, a profit sharing account and a health savings account plus two bank accounts. With this I came up with four investment areas. They are a cash area which consist of two sleeves … an investment cash sleeve and a demand cash sleeve. The next area is the income area which consists of two sleeves. … a fixed income sleeve and a hybrid income sleeve. Then there is the growth & income area which has more risk associated with it than the income area and it consist of four sleeves … a global equity sleeve, a global hybrid sleeve, a domestic equity sleeve and a domestic hybrid sleeve. An finally there is the growth area, where the most risk in the portfolio is found and it consist of five sleeves … a global sleeve, a large/mid cap sleeve, a small/mid cap sleeve, a specialty sleeve and a special investment sleeve. Each sleeve consists of three to six funds (in most cases) with the size and the weight of each sleeve can easily be adjusted, from time-to-time, by adjusting the number of funds and amounts held. By using the sleeve system one can get a better picture of their overall investment picture and weightings by sleeve and area. In addition, I have found it beneficial to xray each fund, each sleeve, each investment area, and the portfolio as a whole quarterly. Again, weightings can be adjusted form time-to-time as to how I might be reading the markets and wish to weight accordingly. All funds pay their distributions to the cash area of the portfolio with the exception being those in my 401k, profit sharing, and health savings accounts where reinvestment occurs. With the other accounts paying to the cash area builds the cash area of the portfolio to meet the portfolio’s monthly cash disbursement amount with the residual being left for new investment opportunity. In addition, most all buy/sell trades settle from or to the cash area with some nav exchanges between funds taking place.
Here is how I have my asset allocation broken out in percent ranges, by area. My current target allocations are cash 20%, income 30%, growth & income 35%, and growth 15%. I do an Instant Xray analysis on the portfolio quarterly (sometimes monthly) and make asset weighting adjustments as I feel warranted based upon my assessment of the market, my risk tolerance, cash needs, etc. Currently, going into 2016, I am about 20% in the cash area, 30% in the income area, 35% in the growth & income area and 15% in the growth area.
Cash Area (Weighting Range 15% to 25% with target being 20%)
Demand Cash Sleeve… (Cash Distribution Accrual & Future Investment Accrual)
Investment Cash Sleeve … (Savings & Time Deposits)
Income Area (Weighting Range 25% to 35% with target being 30%)
Fixed Income Sleeve: GIFAX, LALDX, THIFX, LBNDX, NEFZX & TSIAX
Hybrid Income Sleeve: CAPAX, CTFAX, FISCX, FKINX, ISFAX, JNBAX & PGBAX
Growth & Income Area (Weighting Range 30% to 40% with target being 35%)
Global Equity Sleeve: CWGIX, DEQAX & EADIX
Global Hybrid Sleeve: BAICX, CAIBX & TIBAX
Domestic Equity Sleeve: ANCFX, FDSAX, INUTX, NBHAX, SPQAX & SVAAX
Domestic Hybrid Sleeve: ABALX, AMECX, DDIAX, FRINX, HWIAX & LABFX
Growth Area (Weighting Range 10% to 20% with target being 15%)
Global Sleeve: AJVAX, ANWPX, NEWFX, PGROX, THOAX & THDAX
Large/Mid Cap Sleeve: AGTHX, IACLX, SPECX & VADAX
Small/Mid Cap Sleeve: PCVAX, PMDAX & VNVAX
Specialty Sleeve: LPEFX, PGUAX & TOLLX
Spiffs: None
Total Number of Mutual Fund Positions = 47
The personal conclusions I came to with some experiments long ago is that it is impossible to exploit the market volatility this way because the ideal plan of buying in steps on the way down which seems obvious in retrospect quickly gets out of hand with the up and down movements of the market when you are in the middle. But if one gets lucky in how the market behaves it may product some good returns. However, to move the needle of performance over the total portfolio, one would have to commit quite a good portion of the portfolio to this strategy and that can create losses or severe underperformance if one was unlucky.
But I am always open to the possibility that someone may have solved the problem, that is how advances happen in my field, it just takes one breakthrough. Hence, my interest in following your updates.
I had seen your portfolio in an earlier message. Personally, I like to keep it simple than have so many moving parts to keep track of. Eventually, it is just beta exposure that produces the returns not percentage allocation since equities vary a lot in their volatility and risk profiles. This is how many fund managers seem to generate outperformance while within their allowed equity exposure.
Look at a fund like FDGRX, a highly rated fund with a highly regarded manager. Turns out his performance comes partly from sneaking in risky (not just volatile) even midcap equities like clinical stage biotechs that can fail spectacularly but can provide huge returns if he is lucky. But then he is in the asset gathering business and needs to convince/fool people of his skills. I don't need to (except to fool myself which I can do with far fewer moving parts)
But if this sleeve strategy has worked relative to whatever benchmark you use, all the power to you. Everytime a famed manager blows up, a sleeve to diversify across managers makes sense even if it risks overdiversifying to index like behavior. But you seem to have fine tuned it over time to provide that diversification across managers without seemingly overdiversifying. It would be very difficult for anyone else to duplicate or understand the risk adjusted returns of so many moving parts but it is certainly educational since just the proper vetting of the funds you use by themselves are of value even if one uses far fewer funds. So thanks for sharing.