I was thinking about holding stocks for the long run after reading a post by Jim Cramer on RealMoney today.
I think we have entered into a particularly difficult moment for equities. They have made us no money as an asset class for a decade. They have become, on a daily basis, simply impossible to game. The notion of "buy and hold" has been decimated by the action as buying and holding even the most blue of "blue-chips" has become a total loser's game.
And we are soon about to see the recognition that you will not be able to retire on stocks, not able to retire with a 401(k) that's so, so low.
My own bias is that holding stocks for the long run simply to hold them for the long run is a foolish proposition for most investors.
Generally, the theory's advocates cite that in almost all cases, over a 20 year period, stocks outperform all other asset classes. This may be true, but my question is, who has got 20 years?
Most people do not start saving until their mid-40s. From 1966 to 1982, the Dow Jones Industrial Average rose exactly 0%. After inflation, the Dow did not produce a positive return until 1991. Can you imagine a person who is 45 diligently saving year in and year out, yet when they turn 65 and are ready to retire, having less in real terms than they did two decades earlier? This is horrible advice.
This decade, investors in stocks have lost money in aggregate. If you put your money into a broad market index of US stocks on January 1, 2000 and left it there, you have less money. And woe to the investor who invested in the Nasdaq at that time.
The idea that investors should always invest in the stock market at any time for the long run does an enormous disservice to investors. At times, investing for two decades is extremely profitable, as it was at the beginning of the 1980s. But it is not all the time.
Especially when there are other options. Essentially, always investing in stocks for 20 year periods is an exercise in dogmatic ideology that presupposes investors are not intelligent enough to know when to invest in other opportunities over multi-year periods. We are not talking about day trading here. If you had invested in bonds or commodities or real estate or currencies or even fine wines at the beginning of this decade, you would have done better than investing in US stocks.
However, a time comes when investing in stocks over multi-year periods makes good sense. Which gets me back to Cramer's article as we may be approaching one of those times now.
The advice that Cramer gives in the above quote was great advice - 10 years ago. He was not giving that advice then, however.
Stocks tend to move in long cycles, with a decade or two of strong returns followed by a decade or two of volatile consolidation and violent bear markets. One follows the other, and I am willing to bet that stocks are closer to the end of this secular bear market than the beginning.
I run two market models, a price/earnings model and a dividend discount model. Near the lows Friday, both were projecting 12% per annum returns over the next two decades, the highest level of expected return by my models in many years. Since the rally off the lows Friday, the expected return has fallen to 10%-11%, a bit lower, but higher than it has been since the bottom in stocks in 2003.
Do not get me wrong. I am working from the thesis that the economy will be difficult for some time, that stocks are in a trading range, and we will probably go back and re-test or break through the lows set on Friday. I am actively trading this market and intend to continue doing so for a while.
However, if one wants to buy stocks for the long run, it is a more prudent strategy now than it was a a decade ago.
Back In
At noon today, I bought ETFs. I am now long stocks.
I am expecting a vicious bounce similar to the ones seen during the last bear market in 2001 and 2002 when stocks collapsed and were then followed by substantial bounces retracing 50%-60% of the losses. I am guessing we saw the near-term lows on Friday, with the intra-day reversal on big volume followed by the huge gains today.
I do not think the market has ultimately bottomed, as I believe we will retest the lows and perhaps break through to the downside. However, I think there is an opportunity on the long side for a trade.
The Dow closed at 9388. A 50% to 60% retracement would take the Dow to 9900-10300. The S&P 500 is at 1003. A retracement would get the index back to 1075-1130. The Naz finished at 1844. A bounce into range would mean 2000-2100 on the Nasdaq.
But it is only a trade, and I will quickly cut my losses if I think I am wrong.
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This article has 9 comments:
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Smarty_Pants
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1128 Comments
My Website
Oct 14 09:37 AMAt this point in the cycles of the market a stock can't be called undervalued until it has a P/E in the single digits and is paying a regular dividend of at least 5% with growing sales, healthy margins, and no government ownership.
That would be a buy and hold equity. Anything less is probably overpriced and likely to surprise to the downside.
We have strayed from the 'old fashioned' model of expecting a good return on our money so that we can chase fleeting capital gains. The eventual result being Greenspan's irrational exuberance and collapsing prices which were based on speculative bubbles. Those bubbles will deflate until the market once again produces a true return for the money invested.
Any serious gains to be made in this market are, as the author points out, going to come from trading and not holding for the long term.
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Right in San Francisco
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195 Comments
My Website
Oct 14 09:58 AMThe squirrel saving nuts for the winter doesn't count on growth. One should not be deterred from steady saving just because he may go a decade without growth. You've got to save, and most of us cannot predict which asset class will do better than another. Over time equities are good.
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petyaczar
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85 Comments
My Website
Oct 14 10:45 AM"I think we have entered into a particularly difficult moment for equities. They have made us no money as an asset class for a decade. They have become, on a daily basis, simply impossible to game. The notion of "buy and hold" has been decimated by the action as buying and holding even the most blue of "blue-chips" has become a total loser's game."
A decade has 3650 sets of data points. And so within a decade there are 3650 sets of start/end point combinations. That means to choose only one such set out of 3650 possible combinations means there merely a .03% chance. (probability) of your global decade long investment conclusion regarding buy and hold.
You should avoid making such meaningless statements -as should Kramer - as they negatively affect your credibility.
Instead I suggest you run a series of comparisons. Run the data on ALL 3650 such start/stop data points and then see how many of these resulted in Gains/No movement/Losses. This will provide a basis for a reasonable statistical assertion as to the expected outcome of a "buy and hold" investment strategy.
IMO, from someone who wentto school before the educational system was "dumbed down" and destroyed by the NEA.
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audi2008
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2 Comments
Oct 14 11:34 AM-
stonebluff
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14 Comments
Oct 14 11:38 AMIf you want to get rich, buy income producing real estate. Real estate has the advantage of leverage to jack up the returns. But you've got to be willing to deal with tenants and even occasionally get your hands dirty, or have a spouse who'll do those unpleasant tasks. I have a friend who followed that route for 45 years and he now spends half his time cruising with his girl friend. (he's a widower) and his son looks after his properties, about l50 now. Right now is probably a better time to buy residential real estate than stocks.
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hrant
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34 Comments
Oct 14 12:19 PM.BUT i believe ,this coming decade ,after all this correction, is different . i am now investing SLOWLY in the s p 500 and energy stocks.
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EDT
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23 Comments
My Website
Oct 14 11:13 PMRobert Prechter is predicting the Dow (which got headlines today in the
Chicago Sun-Times as the "Wow Dow" after Monday's Manic near 1000
point blimp) will return to the 577-1051 range according to his interpreta-
tion of the Elliot Wave theory. Of course there are arguments pro and con concerning this and other historical market cycle theories, but at least I see you were able to understand how Cramer's off-beat predic-
tions and advice are out of sequence, in fact often out of this world and south of the border mind wise!
EDT
Chicago, Illinois
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mouth
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47 Comments
Oct 14 11:27 PMWhen stocks crash we do not buy. Of course falling knifes are dangerous. But look at solid companies, ala AA and PFE. Are we going to sceam in two years because we could have bought then in the 13 to 17 dollar RANGE
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Ed O in PA
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11 Comments
Oct 15 08:07 AM