> Some may also wonder how long it will take the market to “recover.” It depends exactly what is meant by “recover,” of course, but one measure might be when the market returns to its pre-crash peak. The historical data is somewhat more distressing in this context.
> After the Great Depression, it took 29 years — until 1958 — for the market to reach its pre-Depression, inflation-adjusted peak. After the 1970s recession, it took 24 years — until 1992 — for the market to make a full “recovery” by the same measure. So no matter whether you start from the recent 2007 peak, or from the market’s absolute inflation-adjusted peak during the tech bubble in 2000, we may still have at least a decade to go before full “recovery.”
Although of course some of that time will be 'going back up', so won't be so bad. it's not like 74-92 were all bleak and tough, difficult years.
Well, the Great Depression had both the New Deal and the WWII to suffer through. Even if you support the former, you still have to admit that the later was a downer.
Hopefully, we won't have to worry about either of those for time being.
I think you've got your history wrong. WWII was what ended the Great Depression. From Wikipedia:
"The end of the depression in the U.S. is associated with the onset of the war economy of World War II, beginning around 1939."
Also from War Economy entry:
"On the supply side, it has been observed that wars sometimes have the effect of accelerating progress of technology to such an extent that an economy is greatly strengthened after the war, especially if it has avoided the war-related destruction. This was the case, for example, with the United States in World War I and World War II."
It didn't suffer through it at all, it got fixed by it.
WWII ended the depression if you define "the depression" by its characteristic unemployment levels. In terms of quality-of-life, WWII was much...much...worse than the depression. Rationing, regimentation, agit-prop, scam war bonds, not to mention having to march off to war...all worse than the depression by far.
The notion that WWII fixed the depression is the "broken window" theory writ on a grand scale.
Well, I'd say that whether or not life during WWII might was worse than during the depression is a very complex question, and you'd get very different answers from different people at the time. It was clearly a lot better for some, a lot worse for some, etc.
Even if it was worse overall, it gave us an economy and nation afterward that was far better than before the Great Depression. It is, of course, impossible to say where we'd be without it today, but things like the GI Bill greatly educating the American workforce or women entering it significantly undoubtedly changed us for the better.
The ramifications of that war are so complex that we're still finding new ones, but I was just pointing out that it is generally considered the end of the Depression, and much of the reason for our following prosperity.
The fallacy is that you don't know, can't know, what our economy would have been after that period, absent WWII. What if we were on the cusp of recovery anyway and we had spent 5 years building railroad and machinery rather than tanks and bombs? The end result would have been a more efficient application of industry over time, resulting in a more abundant society, right?
But I can't say that was the case, would have been the case, any more than you can say the opposite, because we don't know what would have happened if we had tweaked x or y, and can't test it. That's why economics is a social science, not a science. That's why economists are still arguing over what caused the great depression, as well as what ended it.
It's not a fallacy because I specifically pointed that out. You can, however, point to all of the various technologies and cultural shifts that impacted our economy, and the 50+ year period of unrivaled prosperity that occurred afterward and say it most likely was for the best.
Very few nations ever achieve a period like America did from that point to probably about 9/11/01. If we had to make the decision again from a purely economic standpoint, given the benefit of hindsight, we'd make it the same way.
You did state rather unequivocally that WWII fixed the economy:
> It didn't suffer through it at all, it got fixed by it.
And now, you're attempting to declare post hoc, ergo propter hoc? The whole point of what I'm saying is that there are thousands or millions of changes in policy, technology, demographics, sentiment, which had an impact on the economy, we don't know which did what.
I could just as easily explain the post-war years by saying that it's natural that any country which does not get bombed to smithereens will experience relative prosperity, whether or not it participated in bombing other countries, as we did in WWII. Perhaps it was only that advantage which overwhelmed the tax of war spending.
Again, I can't say for sure, but neither can you. I'm inclined to think you're wrong though, from the simple perspective the the allocation of resources over time.
You say that after the 1970s recession it took until 1992 for the market to make a full recovery to its inflation-adjusted peak. However, the average quality of life in 1987 was far ahead of that in 1971!
Stock index levels are not indicative of quality of life, job levels, or even the financial health of a nation. Just because the Dow has fallen 40% does not mean that as a nation we are 40% worse off, unless we happened to have all of our money in the stock market.
The problem is that the credit fueled series of booms and busts that started in the 1980s might end here. At the end of the day growth of credit and money supply must be backed by productivity growth. I don't have the numbers right now, but be assured that credit and money supply growth hugely outpaced productivity growth since the 80s.
So basically that means we've been financing bubbles. In my view, it's up for debate whether a succession of booms and busts is necessarily worse than a more steady development. But since this latest bust turns out to be rather violent there will be a political reaction. If that reaction is to end the boom and bust economy then stock markets might not rise much for the next 10 or 20 years.
I'm not saying they won't snap back some from the current very low levels, but after that I wouldn't bet on the next huge upswing.
The problem is that the credit fueled series of booms and busts that started in the 1980s might end here...credit and money supply growth hugely outpaced productivity growth since the 80s.
Bingo. This is more than just another downswing in the economy. We've reached our limit for credit and leverage-fueled growth and it will NOT be the same level of growth as experienced the past 20-30 years. The U.S. is in debt up to its eyeballs and the bills are starting to come due.
Shows that since 1980 most of our growth has been on the back of an insane amount of growing debt, which is now to the tune of $32k per PERSON! The bills are coming due, this is a fundamental correction in the economy and it's not going to be a quick little recovery back to growth of the 90s.
That's right, and the chart doesn't even show the whole problem because it shows just the federal dept. Consumer dept and dept of financial institutions is where the biggest growth has been:
http://www.ft.com/cms/s/0/a09b317e-898d-11dd-8371-0000779fd1...
(scroll down for the charts)
Another interesting question is of course who owns this dept and how much of it is owed to foreigners, because that points to possible ways of silent default ;-)
What? That is hocus pocus. And based on what? Zero analysis of what were the measures taken. And many other things unaccounted like shadow finances, global trade block, insurance chaos, etc.
Their anecdotal analysis is bad. They didn't check recent crisis in other countries, for example. The Asian crisis and the Japanese stagflation are certainly more similar to the current situation than US 1929, 1973 or even 2002.
It all depends on the next steps. Bailouts failed, inter-bank credit is still dead. There wasn't yet deleveraging.
I can do many [better] things with my cash than put in stupidly risky stocks at the moment.
I don't understand. The simplest tenant is "buy low, sell high". Most stocks are low, way low now. No need to time the bottom. Buy and hold. Buy quality companies whose business/products you personally understand.
If you already have stock, it's a nobrainer perfect time to buy more of the same. Dollar cost averaging.
Bought a stock at $20, now it's at $15? buy another. Your cost is now $17.50. Stock has to go up half as far for you to be making return.
Yes yes, buy and hold, blah blah. But you're missing the sell part. Monday was when I should've sold high, but I don't want to mistime the bottom, so I do the lazy investor's approach and leave my stocks alone until a bottom has been established and I start buying back in.
And even good investors can miss the mark bad in volatile times. Like Buffett with Goldman Sachs if they don't pick up and if more and more of the bailout money goes to recapitalization, covering a bit on swaps (directly or indirectly), and bailing out real companies (like GE, GM, and Ford.)
You are all missing the key point of Mark's whole reasoning. DON'T BUY STOCKS BECAUSE SOMEONE ELSE WILL BUY THEM. BUY STOCKS YOU WANT TO OWN, forever if need be. Why? Because they pay dividends! Mark doesn't care if the Dow goes to zero or infinity, he's got an acceptable yield on his stocks and that's all that matters.
I haven't been in the market for a couple years, but I'm salivating over this downturn. Sorry for all those losing money, but in my opinion this is a buying opportunity like there never was before.
I remember seeing this graph not too long ago that showed the P/E ratio of the stock market took off in the '90s and it never came back to its historical average range. The graph predicted that the "real" value of the Dow was in the 7,000 - 8,000 range. The people passing around these graphs would have looked like cranky perma-bears a few years ago. Now they look down-right reasonable.
It's not a crash, it's a readjustment to prudent pricing.
Usually during a re-adjustment the market swings too far the other way by a few points. So I'd be looking for value stocks that have a P/E ratio that's overly low. Find some stock that's getting beaten up beyond the normal recovery by panicked sellers.
> So I'd be looking for value stocks that have a P/E ratio that's overly low
The thing that makes me nervous about that kind of thing is that there are people who have written code that knows a lot more than my sum total knowledge of the stock market to look for those sorts of factors. Given actors like that, is there any reason to invest in anything but broad index funds?
I worked for a financial software startup from 05-07, and in my spare time there, wrote one of those programs that scans the whole market for stocks with low P/Es and consistent earnings.
I found that nearly everything was fairly valued. When a stock had a low P/E, it was nearly always for a reason, like it being a homebuilder or financial or having a shaky economic position. No way was I going to invest in those. When I did invest in one that looked like it didn't fit in those categories, they missed earnings the next quarter, reported a loss, and haven't gotten back to profitability yet. Again, the market was smarter than me.
The trick to making money in the stock market seems to be to invest when the big boys are constrained not to. They realize that they should be putting money in, but can't, for whatever reason. The best example is if they're a mutual fund and their clients are all pulling their money out. Doesn't matter how many bargains are out there, they still have to sell to honor redemptions.
As I tell one of my hedge-fund-employee friends, "You're only as smart as your dumbest creditor."
An almost risk-free way to money in the stock market is to put most of your money in fixed income while apportioning a small % in long dated options.
Eg. you think Morgan Stanley is dirt cheap at current levels ($10) and you are willing to invest $100,000 in them.
Action 1: You bought $100,000 worth of MS shares at $10 each
Action 2: You bought $90,000 in bonds that yields 11%. You bought $10,000 worth of Jan 2010 MS 5 call options at $7 each.
Scenario 1: MS gets nationalized or goes bankrupt
Action 1: You would have lost almost all of your $100,000 investment.
Action 2: If you hold out until your bond mature, you'll get back your $100,000 principal after 1 year. Your options is worthless.
Scenario 2: MS goes up to $30
Action 1: Your investment is now worth $300,000
Action 2: You get $100,000 from your bonds and your $7 options is now worth $18. So your investment is worth $125,000.
So Action 1 is very volatile and risky. Your profit range from -100% to 200%.
Action 2 allows you to sleep soundly at night, even during current market conditions. Your profit range from 0% to 25%.
Hey not bad at all. In the worst case, you'll have at least preserved your capital.
Another constraint on institutional investors is short-term profitability: they need to report annually, to compete for customers; whereas an individual is free to invest for the long-term.
We're in an unusual time period. People (especially the big funds) are right now being driven by incentives other than maximizing expectation, which is creating an oversupply of stock and pushing down prices.
I haven't run the numbers. I don't work at the financial software startup anymore, so I don't have (easy) access to the data. However, a few spot checks of stocks that were too expensive in 2006 indicated that some were getting very reasonably priced.
A friend of mine works for a small company that develops the models that many automated tradings are based on. It's so secret that he won't even tell me which companies use the software, only that it's some of the major global players. He does tell me about the software in broad terms though, and it is obvious there is a market for a new player in there. Basically almost everyone is using the same models and algorithms, just with different tweaks. And it's based on 20 year old principles. Start writing code that looks for different patterns (weather, psychological factors, etc.) and you might be able to beat them.
> The effect of the sun seems to have been quite big. For shares traded in New York, for instance, annualised returns on perfectly sunny days averaged 24.8%, compared with 8.7% on perfectly cloudy days. Moreover, unlike some stockmarket “anomalies” discovered by economists, investing by the sun would have been more profitable than simply investing in the market index, even after subtracting trading costs. Alas, this does not guarantee profitable trading in the future. Even assuming the effect really exists, investors, now they have been alerted to it, will probably arbitrage away any excess returns to be had by exploiting it.
So... it seems as if people really do think of everything - why wouldn't they, with millions or billions on the line. What hope does an individual have?
My attitude is that it's pretty clear how I can take on (or rather, simply run around) even big players as a small startup. It's less clear how I can come out ahead stock picking as an individual. So it's better to not dick around with stock picking, put my money in cash (like it has been for a while), or an index fund, and just concentrate on the startup stuff.
Knowing even the slightest basics about Einstein's random walk, I would be somewhat surprised if the percentage difference between any arbitrarily categorized sets of days weren't that large.
A whole lot of people support themselves by trading successfully. The thing is, making decent money by trading is a full time job, not an after-hours hobby.
You CAN make money designing trading strategies. People do it. The question is simply whether the EV returns on your time will be higher than working on an actual job or businesses. Someone smart enough to make a winning trading system is also smart enough to get paid a lot in other endeavors. So more often than not it's a wash. Except traders get to work in their underwear...
People who support themselves by trading successfully are likely working for a company (bank or hedge fund, etc). Often they are dealers, who make money on the bid-ask spread, so they don't bear as much risk as (say) traders working on prop desks. These depend more on the success of their trades for their income, but even so they get a non-negative income.
Now, independent day traders working in their underwear is a different story. Not only they bear all the risk of their trades, they're likely "losers" (in the game theory sense) in average.
I believe there is. The criteria I mentioned would just be the start of the search -- you should easily come up with scads of stocks that meet that criteria. There are a lot of steps after that.
Going to an index is usually a safe bet. I think it still is. But that's long term. You could end up waiting ten years just to double your money. I'm just talking about a quick hit. Now you could combine the approach and go with an sector index. But the more you spread it out the more of a slow response you're going to get, in my opinion.
There's a reason why those trailing P/E are lows. The E will decrease drastically in the future. You have to make really good guesstimate on what the E will be in the future before you can determine whether it is cheap.
There's a lot of danger in picking stocks based on P/E. You have to look at their debt ratios and short term financing requirements. You should avoid highly profitable firms that use crazy leverages in achieving these high returns.
The markets will probably bounce in the next week or two, so there's a trading opportunity, but the historical record says you're a fool if you buy to hold now. Ignoring that stocks probably have more to fall, the behavior of falling markets is that they bottom and then stay at the bottom for a long time. Things trade sideways for a long time before any secular bull kicks off. You do not have to worry about missing the boat.
You do have to worry about missing the boat. Historically, there are a few days in the year for which the daily return is huge, say 4 or 5%. You cannot guess in advance. If you miss a couple of very good days, your return might be much lower than the market's.
In a secular bear the annual return is probably negative. By miss the boat, I mean miss the start of a secular bull. We were talking about buy and hold investors.
That's exactly why you buy to hold, now. It could go lower, but if you're long, you don't really care. You don't know how much longer this will go, and if you miss the boat, you lose.
> Some may also wonder how long it will take the market to “recover.” It depends exactly what is meant by “recover,” of course, but one measure might be when the market returns to its pre-crash peak. The historical data is somewhat more distressing in this context.
> After the Great Depression, it took 29 years — until 1958 — for the market to reach its pre-Depression, inflation-adjusted peak. After the 1970s recession, it took 24 years — until 1992 — for the market to make a full “recovery” by the same measure. So no matter whether you start from the recent 2007 peak, or from the market’s absolute inflation-adjusted peak during the tech bubble in 2000, we may still have at least a decade to go before full “recovery.”
Although of course some of that time will be 'going back up', so won't be so bad. it's not like 74-92 were all bleak and tough, difficult years.