Why is everyone so optimistic?

[Hawks]

Years ago on this board, I think 2009, I started a thread  "Why is everyone so pessimistic"? I learned a lot from the numerous responses to that thread and have done well on the investing side too. Back then, it was difficult to find anyone who thought that there were bargains galore in the market. The main concern then was "is the whole capitalist system going to implode" or "how low will the market go".  Looking back, as others have said on this board, that was a chance of a lifetime to load up on values we may not see again for a long time, if ever.

But that was then and this is now.

 

It is now very obvious that the opposite is true. Lot of investors have had gains of +30% last year, pundits are predicting 3-5% growth in the U.S. for 2014, gold is dead, America is the new oil giant of the world (no more dependence on the MidEast), Dow and S&P hitting new all time highs (minus slight blip last Thursday/Friday) so how high will they go, bargains very hard to find, AAPL drops one day and now its a great bargain, etc etc.

 

If John Templeton was still alive, I think he would be warning us all to be more careful. Go where there is "maximum pessimism" to be successful in investing. I don't see much of it now here in the U.S. and that has me very, very concerned. Could be wrong here, but I'm moving more and more to cash.

 

Would love to hear others views on this topic.

[wisdom]

Look at retail for maximum pessimism. Apparently americans have stopped shopping in malls - whether it be abercrombie, JCP, SHLD, best buy, etc.

[Cevian]

I agree with you Hawks. I'm seeing a lot of interest and pressure from clients seeking to get into the markets now. No one wants to sit on cash and to even suggest that is causing client frustration since they're hearing that the markets are up every month. I recently saw a report on fund inflows in the fourth quarter and the numbers were settings records (similar picture here: https://www.hedgefundresearch.com/index.php?fuse=products-irglo)

 

Also, another good sentiment indicator: I attend a CFA dinner each year where participants are asked to complete a survey with their 12 month predictions on prices of a few markets. I like wandering around seeing what people are thinking. The bullish sentiment could definitely be felt in the room this year with many predicting an S&P of above 2,200.

 

Its frustrating but I'm happy sticking to the bottom up value strategy the masters have taught us. I have also grown accustomed to higher cash levels in the portfolio without feeling like I'm being left behind.

[racemize]

I had very similar feelings a few months back.  However, I changed my mind for a number of reasons (and I will squarely admit that it may be a very painful change of mind, but nonetheless):

 

1) I modeled a lot of investors returns and S&P returns to determine whether holding cash would have enhanced or hurt their returns over long periods of time.  While holding cash reduced volatility, there were only a few portfolios that should have held cash (2/3 of Pabrai's funds).  95%+ would have done better over the long term not holding cash.  The opportunity cost is very high (e.g., see at least the portion of FFH hedges that was a macro call).

 

2) I'm sticking with bottom up investing.  I've still found investments that look to be good over the long term, so holding cash because of macro concerns seems foolish.

 

3) With relatively low amounts of capital, I still have access to portions of the market that may be under-appreciated.

 

4) What's a list without a Buffett quote (Kraven please feel free to make fun of me with impunity)? "If I was running $1 million today, or $10 million for that matter, I'd be fully invested."  Here's a good site of quotes on the subject: http://valuebin.wordpress.com/2011/01/27/warren-buffett-on-investing-small-sums-of-money/

 

 

All that being said, I'm generally with Marks on the issue, when people are optimistic (certainly seems to be getting that way) "move forward, but with caution".  Hopefully, I am.

[Vish_ram]

Yield curve is upward sloping

Fed is accommodative

Unemployment is still high

Inflation is low and commodity prices are subdued

 

Fed controls the market and they aren't relenting now without getting their job done.

[alertmeipp]

I don't know, the index up a lot, but some sectors are still pretty beat up.

[Uccmal]

For reference:

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/all-the-negative-news/

 

 

[ERICOPOLY]

Dear Prudence, won't you come out to play

Dear Prudence, greet the brand new day

The sun is up, the sky is blue

It's beautiful and so are you

Dear Prudence won't you come out to play

 

Dear Prudence open up your eyes

Dear Prudence see the sunny skies

The wind is low the birds will sing

That you are part of everything

Dear Prudence won't you open up your eyes?

 

Look around round

Look around round round

Look around

 

Dear Prudence let me see you smile

Dear Prudence like a little child

The clouds will be a daisy chain

So let me see you smile again

Dear Prudence won't you let me see you smile?

 

Dear Prudence, won't you come out to play

Dear Prudence, greet the brand new day

The sun is up, the sky is blue

It's beautiful and so are you

Dear Prudence won't you come out to play

[Hawks]

uccmal

Thank you for that. Posting was 2010 not 2009; I'm a senior now so I expect these reminders. lol

Pleased that I posted that and it has worked out well for me.

We'll see about this latest one in time.

By the way, I always enjoy your postings and stock selections. Helps me do my homework.

[Grenville]

I had very similar feelings a few months back.  However, I changed my mind for a number of reasons (and I will squarely admit that it may be a very painful change of mind, but nonetheless):

 

1) I modeled a lot of investors returns and S&P returns to determine whether holding cash would have enhanced or hurt their returns over long periods of time.  While holding cash reduced volatility, there were only a few portfolios that should have held cash (2/3 of Pabrai's funds).  95%+ would have done better over the long term not holding cash.  The opportunity cost is very high (e.g., see at least the portion of FFH hedges that was a macro call).

 

2) I'm sticking with bottom up investing.  I've still found investments that look to be good over the long term, so holding cash because of macro concerns seems foolish.

 

3) With relatively low amounts of capital, I still have access to portions of the market that may be under-appreciated.

 

4) What's a list without a Buffett quote (Kraven please feel free to make fun of me with impunity)? "If I was running $1 million today, or $10 million for that matter, I'd be fully invested."  Here's a good site of quotes on the subject: http://valuebin.wordpress.com/2011/01/27/warren-buffett-on-investing-small-sums-of-money/

 

 

All that being said, I'm generally with Marks on the issue, when people are optimistic (certainly seems to be getting that way) "move forward, but with caution".  Hopefully, I am.

 

enjoyed your comments, thanks for posting

[ThanksAndYouAreWelcome]

Maybe I've been listening to Jim Chanos too much over the past couple years, but I'm very worried as well. I've been selling to build cash and increase weighting in FFH, and not for macro fears alone. I'm having a very hard time finding good deals in the market (which might have more to do with my circle of competence rather than market valuation levels). I haven't seen a new high conviction call on this board for some time now, which makes me think others are experiencing the same as myself - if there's some dollar bills lying around I'm not seeing would love to hear about them.

[JBird]

I had very similar feelings a few months back.  However, I changed my mind for a number of reasons (and I will squarely admit that it may be a very painful change of mind, but nonetheless):

 

1) I modeled a lot of investors returns and S&P returns to determine whether holding cash would have enhanced or hurt their returns over long periods of time.  While holding cash reduced volatility, there were only a few portfolios that should have held cash (2/3 of Pabrai's funds).  95%+ would have done better over the long term not holding cash.  The opportunity cost is very high (e.g., see at least the portion of FFH hedges that was a macro call).

 

2) I'm sticking with bottom up investing.  I've still found investments that look to be good over the long term, so holding cash because of macro concerns seems foolish.

 

3) With relatively low amounts of capital, I still have access to portions of the market that may be under-appreciated.

 

4) What's a list without a Buffett quote (Kraven please feel free to make fun of me with impunity)? "If I was running $1 million today, or $10 million for that matter, I'd be fully invested."  Here's a good site of quotes on the subject: http://valuebin.wordpress.com/2011/01/27/warren-buffett-on-investing-small-sums-of-money/

 

 

All that being said, I'm generally with Marks on the issue, when people are optimistic (certainly seems to be getting that way) "move forward, but with caution".  Hopefully, I am.

 

Great stuff

[oddballstocks]

I had very similar feelings a few months back.  However, I changed my mind for a number of reasons (and I will squarely admit that it may be a very painful change of mind, but nonetheless):

 

1) I modeled a lot of investors returns and S&P returns to determine whether holding cash would have enhanced or hurt their returns over long periods of time.  While holding cash reduced volatility, there were only a few portfolios that should have held cash (2/3 of Pabrai's funds).  95%+ would have done better over the long term not holding cash.  The opportunity cost is very high (e.g., see at least the portion of FFH hedges that was a macro call).

 

2) I'm sticking with bottom up investing.  I've still found investments that look to be good over the long term, so holding cash because of macro concerns seems foolish.

 

3) With relatively low amounts of capital, I still have access to portions of the market that may be under-appreciated.

 

4) What's a list without a Buffett quote (Kraven please feel free to make fun of me with impunity)? "If I was running $1 million today, or $10 million for that matter, I'd be fully invested."  Here's a good site of quotes on the subject: http://valuebin.wordpress.com/2011/01/27/warren-buffett-on-investing-small-sums-of-money/

 

 

All that being said, I'm generally with Marks on the issue, when people are optimistic (certainly seems to be getting that way) "move forward, but with caution".  Hopefully, I am.

 

This is a great post, very true. I have cash building up but it's due to inaction, not a lack of ideas. When I dig deep I can usually find a few positions worth purchasing. The easy ideas are gone, the work required to find a good idea went up, but good ideas still exist.

[Uccmal]

Lets call it optimism with a margin of safety.  The US banks are still cheap by historical standards: PEs less than 15, PB less than 1.5.  Some tech seems pretty frothy: FB, Twttr, Tesla.  Other stuff is in between. 

 

I am all in with a lean toward dividend payers, when I can get them.  I count the US banks and AIG in this group ( dividend payers - in the future). 

[bmichaud]

http://www.cnbc.com/id/101354253

 

Dalio compares this current period in the markets to 2005-2006, where we are in the middle of the business cycle with the Fed in kind of a sweet spot as far as tightening (i.e. it does not need to tighten) and we're not close enough to a recession to really roil the markets. So tough to be tremendously bearish here, especially with banks at reasonable valuations as Al pointed out.

[Palantir]

I find it more difficult to see why anybody would be bearish.

 

1) If QE continues, then market goes up.

2) QE tapers away, because economy grows. Still market goes up.

 

That's not to say that there cannot be a correction, there could be a 10% correction, this year, or maybe even a flat year, perhaps even two flat/negative years.

 

Just keep your eyes on the ball, focus on individual securities, and buy low sell high. :)

[Kraven]

 

4) What's a list without a Buffett quote (Kraven please feel free to make fun of me with impunity)? "If I was running $1 million today, or $10 million for that matter, I'd be fully invested."  Here's a good site of quotes on the subject: http://valuebin.wordpress.com/2011/01/27/warren-buffett-on-investing-small-sums-of-money/

 

Well, that's no fun if you say it in advance.

[Kraven]

Dear Prudence, won't you come out to play

Dear Prudence, greet the brand new day

The sun is up, the sky is blue

It's beautiful and so are you

Dear Prudence won't you come out to play

 

Dear Prudence open up your eyes

Dear Prudence see the sunny skies

The wind is low the birds will sing

That you are part of everything

Dear Prudence won't you open up your eyes?

 

Look around round

Look around round round

Look around

 

Dear Prudence let me see you smile

Dear Prudence like a little child

The clouds will be a daisy chain

So let me see you smile again

Dear Prudence won't you let me see you smile?

 

Dear Prudence, won't you come out to play

Dear Prudence, greet the brand new day

The sun is up, the sky is blue

It's beautiful and so are you

Dear Prudence won't you come out to play

 

The Siouxsie Sioux version is best.

[racemize]

 

4) What's a list without a Buffett quote (Kraven please feel free to make fun of me with impunity)? "If I was running $1 million today, or $10 million for that matter, I'd be fully invested."  Here's a good site of quotes on the subject: http://valuebin.wordpress.com/2011/01/27/warren-buffett-on-investing-small-sums-of-money/

 

Well, that's no fun if you say it in advance.

 

I thought I'd go ahead and do it for you. 

[rmitz]

For the record, I'm at 0 leverage for the first time in years.

[Cardboard]

2009: Great Recession and end of massive S&P decline

2010: BP oil spill, Euro worries

2011: Fukushima disaster, U.S. credit downgrade, Euro worries

2012: can't recall right away but, there must have been something to worry about!

2013: Cyprus

2014: Emerging markets and their currencies

 

If one looks at the 6 month S&P chart this morning, it may feel like that something big is about to happen on the negative side. If you look at the one year, it still looks like in a firm uptrend. If you look at the 5 year chart, you can barely see this correction.

 

Bottom line is just like Peter Lynch has said, there are corrections pretty much every year. Predicting a large bear that occurs once every 10, 30 or 100 year is foolish.

 

That is why I don't hedge anymore especially with SPY puts which tend to go down less than my portfolio. Even if you adjust for the higher Beta and buy more puts, it is still not 100% correlated. We are not talking about insignificant percentage points per year either to fully hedge a portfolio and imperfectly at that. Then, if by any chance you picked the top and your puts start to gain value then when do you unload? I was actually very close to do exactly that in early January but, resisted the temptation. What would I do this morning? I would be trying to figure out if the correction is over and guess when to take profits. If you chose to hang on then often the market reverses because of the Fed or some other unpredictable move and you lose the entire value of your puts.

 

The only strategy that seems to work and I have looked and tried many over 17 years is to sell cheap stocks to buy cheaper ones. It won't reduce volatility in your portfolio so the mental pain will remain but, it will increase the coil spring effect on the inevitable rebound. So if BAC or AIG goes down and you figure that they are $0.60 on the dollar and you see another equivalent story trading for $0.30 and $0.40, then the decision is to sell and buy the other. It is painful to do and sure you will miss the upside in BAC and AIG, but it will be more than compensated by the higher gains.

 

Cardboard

[twacowfca]

2009: Great Recession and end of massive S&P decline

2010: BP oil spill, Euro worries

2011: Fukushima disaster, U.S. credit downgrade, Euro worries

2012: can't recall right away but, there must have been something to worry about!

2013: Cyprus

2014: Emerging markets and their currencies

 

If one looks at the 6 month S&P chart this morning, it may feel like that something big is about to happen on the negative side. If you look at the one year, it still looks like in a firm uptrend. If you look at the 5 year chart, you can barely see this correction.

 

Bottom line is just like Peter Lynch has said, there are corrections pretty much every year. Predicting a large bear that occurs once every 10, 30 or 100 year is foolish.

 

That is why I don't hedge anymore especially with SPY puts which tend to go down less than my portfolio. Even if you adjust for the higher Beta and buy more puts, it is still not 100% correlated. We are not talking about insignificant percentage points per year either to fully hedge a portfolio and imperfectly at that. Then, if by any chance you picked the top and your puts start to gain value then when do you unload? I was actually very close to do exactly that in early January but, resisted the temptation. What would I do this morning? I would be trying to figure out if the correction is over and guess when to take profits. If you chose to hang on then often the market reverses because of the Fed or some other unpredictable move and you lose the entire value of your puts.

 

The only strategy that seems to work and I have looked and tried many over 17 years is to sell cheap stocks to buy cheaper ones. It won't reduce volatility in your portfolio so the mental pain will remain but, it will increase the coil spring effect on the inevitable rebound. So if BAC or AIG goes down and you figure that they are $0.60 on the dollar and you see another equivalent story trading for $0.30 and $0.40, then the decision is to sell and buy the other. It is painful to do and sure you will miss the upside in BAC and AIG, but it will be more than compensated by the higher gains.

 

Cardboard

 

 

Generally agree. But here's what's interesting. If one has puts in place that were bought cheaply, making money on the puts after a big decline is a double whammy.  The gains in the puts can then be used to buy bargains that manifest in the selloff.  Also, the psychological state is much better than when deciding to sell a great company that has gone down a moderate amount to buy a not so good company that has gone down a lot.

[giofranchi]

Generally agree. But here's what's interesting. If one has puts in place that were bought cheaply, making money on the puts after a big decline is a double whammy.  The gains in the puts can then be used to buy bargains that manifest in the selloff.  Also, the psychological state is much better than when deciding to sell a great company that has gone down a moderate amount to buy a not so good company that has gone down a lot.

 

I agree.

It is not about predicting market crashes… which I also think is foolish… Instead, it is about strategically and constantly adjusting powder still left dry. And I almost always leave some powder dry… Even at the bottom of a secular bear market… Because you simply don’t know and can never tell… Some great opportunities might always come along unexpected… And generally I don’t want to sell very good businesses with great future prospects, to be able to take advantage of those great opportunities… That’s why some dry powder might always be useful, and when you use it, next goal should be to rebuild your cash reserve anew… How much dry powder? Usually, I like to look closely at other investors, to understand how euphoric or depressed they are behaving, and manage my cash reserve accordingly.

 

Gio

 

[Uccmal]

2009: Great Recession and end of massive S&P decline

2010: BP oil spill, Euro worries

2011: Fukushima disaster, U.S. credit downgrade, Euro worries

2012: can't recall right away but, there must have been something to worry about!

2013: Cyprus

2014: Emerging markets and their currencies

 

If one looks at the 6 month S&P chart this morning, it may feel like that something big is about to happen on the negative side. If you look at the one year, it still looks like in a firm uptrend. If you look at the 5 year chart, you can barely see this correction.

 

Bottom line is just like Peter Lynch has said, there are corrections pretty much every year. Predicting a large bear that occurs once every 10, 30 or 100 year is foolish.

 

That is why I don't hedge anymore especially with SPY puts which tend to go down less than my portfolio. Even if you adjust for the higher Beta and buy more puts, it is still not 100% correlated. We are not talking about insignificant percentage points per year either to fully hedge a portfolio and imperfectly at that. Then, if by any chance you picked the top and your puts start to gain value then when do you unload? I was actually very close to do exactly that in early January but, resisted the temptation. What would I do this morning? I would be trying to figure out if the correction is over and guess when to take profits. If you chose to hang on then often the market reverses because of the Fed or some other unpredictable move and you lose the entire value of your puts.

 

The only strategy that seems to work and I have looked and tried many over 17 years is to sell cheap stocks to buy cheaper ones. It won't reduce volatility in your portfolio so the mental pain will remain but, it will increase the coil spring effect on the inevitable rebound. So if BAC or AIG goes down and you figure that they are $0.60 on the dollar and you see another equivalent story trading for $0.30 and $0.40, then the decision is to sell and buy the other. It is painful to do and sure you will miss the upside in BAC and AIG, but it will be more than compensated by the higher gains.

 

Cardboard

 

 

Generally agree. But here's what's interesting. If one has puts in place that were bought cheaply, making money on the puts after a big decline is a double whammy.  The gains in the puts can then be used to buy bargains that manifest in the selloff.  Also, the psychological state is much better than when deciding to sell a great company that has gone down a moderate amount to buy a not so good company that has gone down a lot.

 

I have had the same experience as Cardboard.  My problem with index puts is when to sell.  There is no way to value them.  Is the right value 1600, 1500 - you get the point.  I went into the 2008 fall meltdown with some SPY puts and made a few percent on them, if that. 

 

With BAC puts I am letting them expire worthless, which is a good thing.  It means I made money ion the Leaps. 

[twacowfca]

2009: Great Recession and end of massive S&P decline

2010: BP oil spill, Euro worries

2011: Fukushima disaster, U.S. credit downgrade, Euro worries

2012: can't recall right away but, there must have been something to worry about!

2013: Cyprus

2014: Emerging markets and their currencies

 

If one looks at the 6 month S&P chart this morning, it may feel like that something big is about to happen on the negative side. If you look at the one year, it still looks like in a firm uptrend. If you look at the 5 year chart, you can barely see this correction.

 

Bottom line is just like Peter Lynch has said, there are corrections pretty much every year. Predicting a large bear that occurs once every 10, 30 or 100 year is foolish.

 

That is why I don't hedge anymore especially with SPY puts which tend to go down less than my portfolio. Even if you adjust for the higher Beta and buy more puts, it is still not 100% correlated. We are not talking about insignificant percentage points per year either to fully hedge a portfolio and imperfectly at that. Then, if by any chance you picked the top and your puts start to gain value then when do you unload? I was actually very close to do exactly that in early January but, resisted the temptation. What would I do this morning? I would be trying to figure out if the correction is over and guess when to take profits. If you chose to hang on then often the market reverses because of the Fed or some other unpredictable move and you lose the entire value of your puts.

 

The only strategy that seems to work and I have looked and tried many over 17 years is to sell cheap stocks to buy cheaper ones. It won't reduce volatility in your portfolio so the mental pain will remain but, it will increase the coil spring effect on the inevitable rebound. So if BAC or AIG goes down and you figure that they are $0.60 on the dollar and you see another equivalent story trading for $0.30 and $0.40, then the decision is to sell and buy the other. It is painful to do and sure you will miss the upside in BAC and AIG, but it will be more than compensated by the higher gains.

 

Cardboard

 

 

Generally agree. But here's what's interesting. If one has puts in place that were bought cheaply, making money on the puts after a big decline is a double whammy.  The gains in the puts can then be used to buy bargains that manifest in the selloff.  Also, the psychological state is much better than when deciding to sell a great company that has gone down a moderate amount to buy a not so good company that has gone down a lot.

 

I have had the same experience as Cardboard.  My problem with index puts is when to sell.  There is no way to value them.  Is the right value 1600, 1500 - you get the point.  I went into the 2008 fall meltdown with some SPY puts and made a few percent on them, if that. 

 

With BAC puts I am letting them expire worthless, which is a good thing.  It means I made money ion the Leaps.

 

Yup. that 's what happened to me in 07.  Had pretty much a full portfolio hedge of S&P 500 puts in place in August, but the market looked like it was going to take forever to roll over.  Closed the puts out before the end of the year for a small gain and missed the sell off in January.

 

That could be what happens this time.  Our puts are nicely in the money now.  But if the market is sluggish in rolling over, it may be hard to hold the hedge.  We rarely hedge -- only when the market seems to be at some sort of an inflection point.  On the other hand, when we buy short or long term calls or leaps for good reasons and when the word "hedge" isn't part of our vocabulary, we've generally made money, often lots of money.