What do folks think or do while markets are at highs?

[villainx]

I've been through a few cycles, but do the current market highs lead to any new thoughts on investments?  I started investing heavily during the highs in 07, and was lucky to be in fairly resilient companies/industries so muddled through passably.  I haven't had to "hedge" (other than some diversification) because the recovery seemed sustainable.  But is there a time to start considering adjusting the portfolio?  I mainly hope to learn or not miss learning any lessons from 07-09.  Or do most folks just try to stay consistent with the process and - while not ignoring - not overthink current market conditions (or otherwise believe current market conditions are ok)?

[Cigarbutt]

To be or not to be, that is the question.

I'm wrestling with that question also now. I'll give it a try.

First, are markets high?

Even if markets are high, easy answer is to guide decisions on the long term outlook of your holdings. So, keep them unless overvalued++. Here, it depends where your trigger to sell is.

The harder answer is to lower your trigger to sell (ie more à la Graham). In general, a lower trigger definitely helps to avoid market collapses but 1- significant deviation to the norm may occur for long periods and 2- sometimes markets can remain irrational longer than you can remain solvent (Keynes) and then, you may miss out on compounding for some time. Maybe the worst scenario is to change your mind at the bottom or the top (a certain CDN company comes to mind here).

It really depends on your criteria.

In my own anecdotal and personal situation (ie not worth very much), I don't find anything exciting now but my universe is limited. Also, AFTER this evaluation of opportunity set, I find many reasons pointing to high valuations. Many of my premises  though are influenced (biased?) by the fact by I hate debt and there is a LOT of that around these days. Allergy to high cash positions may also influence your decision process.

What is challenging is that you may have to wait for a very long time before validating your capacity to "manage" cycles. If you do try, my take is that you have to have very high confidence in yourself and be ready to be disappointed. Live and learn, some say. I personally think that is worth the try. Value investing is about buying low ans selling high, isn't it? Good luck.

 

[kab60]

I'm reading Talebs book Antifragilty and have been giving this a lot of thought. I don't give a shit about macro, way too complicated for me, but I would like a portfolio of companies that could take advantage of a downturn in its business and stock price - ie. growth via M&A as well as very opportunistic stock buybacks. That draws me to owner-operated companies without a lot of debt, but I don't really have many of those in my portfolio due to valuation issues (considering Auto Nation atm - talk about a cannibal). Instead I have some pretty levered entities which might hurt on a mark-to-market basis in a downturn but which have also provided me with some pretty large gains since I started two years ago (these levered companies I've flipped pretty quickly after they ran up). Sooo, so far I'm staying put and enjoying the rally. But I haven't experienced a real downturn yet and I'm thinking I might get shaky hands so perhaps it's a dumb strategy.

[Haasje]

I think it isn't a stretch to say at least large parts of the US stock markets are trading very rich.

 

I got out of all SPY stocks.

 

Short Low Vol ETF

 

Western World Treasuries seem very, very rich. I'm short Euro bonds. I dont think the thesis has much to do with market timing but more assymetrical risk/reward.

 

Like Kab I prioritize owner/operated companies, imitating Stah from Kinetics and its an important Taleb suggestion. I think the logic behind backing owner/operators vs agent operators makes sense. Kab is right they CAN trade at high valuations but I find that only currently true if you want to back owner/operators that are on a hot streak or with a very, very good reputation. Owner operators tend to do worse in bull markets so many are very cheap. I've completely loaded up on this "factor".

 

You can get David Einhorn, Dan Loeb, Ackman, Stahl, Howard Marks and others at very undemanding valuations. At micro caps etc. it hardly seems like owner operator companies trade at a premium at all.

 

What I really like about owning Loeb, Einhorn, Stahl, Marks etc. is these are either long/short or will likely benefit from market crashes while still having a real shot at creating value if the bull run continues although they are dogs to the market obviously.

 

Cutting back on some of the highly levered positions.

 

Looking hard to get more global diversification on good terms.

 

 

 

 

 

 

 

[scorpioncapital]

Define high. The fed balance sheet was minimal in 2007 it's 4 trillion today. That could quickly turn what looks high into quite moderate. Who knows.

 

 

[TwoCitiesCapital]

Define high. The fed balance sheet was minimal in 2007 it's 4 trillion today. That could quickly turn what looks high into quite moderate. Who knows.

 

I'm trying to follow what you're saying. You're suggesting equities would do well in an environment of exploding inflation due to monetary expansion?

[scorpioncapital]

They could be flat. But what is flat in that scenario? Flat could be twice the price, but not because they are more valuable, but because it now costs $2 to buy that $1 stamp :) So higher yes, but not more valuable.

 

[CorpRaider]

I think it isn't a stretch to say at least large parts of the US stock markets are trading very rich.

 

I got out of all SPY stocks.

 

Short Low Vol ETF

 

Western World Treasuries seem very, very rich. I'm short Euro bonds. I dont think the thesis has much to do with market timing but more assymetrical risk/reward.

 

Like Kab I prioritize owner/operated companies, imitating Stah from Kinetics and its an important Taleb suggestion. I think the logic behind backing owner/operators vs agent operators makes sense. Kab is right they CAN trade at high valuations but I find that only currently true if you want to back owner/operators that are on a hot streak or with a very, very good reputation. Owner operators tend to do worse in bull markets so many are very cheap. I've completely loaded up on this "factor".

 

You can get David Einhorn, Dan Loeb, Ackman, Stahl, Howard Marks and others at very undemanding valuations. At micro caps etc. it hardly seems like owner operator companies trade at a premium at all.

 

What I really like about owning Loeb, Einhorn, Stahl, Marks etc. is these are either long/short or will likely benefit from market crashes while still having a real shot at creating value if the bull run continues although they are dogs to the market obviously.

 

Cutting back on some of the highly levered positions.

 

Looking hard to get more global diversification on good terms.

 

Looked at the Loeb and Einhorn re's.  Might look at greenhorn more closely if he wasn't paying himself 2 and 20 off the top.  Not convinced of Loeb's after tax and fees skill/alpha.

[rb]

Looked at the Loeb and Einhorn re's.  Might look at greenhorn more closely if he wasn't paying himself 2 and 20 off the top.  Not convinced of Loeb's after tax and fees skill/alpha.

When you put greenhorn next to berkshire and you realize that greenhorn has nowhere close to the underwriting intellectual horsepower of BRK and you pay 2 and 20 on the investing side, BRk has to be trading at a ridiculous valuation to make sense of picking GLRE over BRK.

[Haasje]

"When you put greenhorn next to berkshire and you realize that greenhorn has nowhere close to the underwriting intellectual horsepower of BRK and you pay 2 and 20 on the investing side, BRk has to be trading at a ridiculous valuation to make sense of picking GLRE over BRK."

 

Did you really do this? Does it not matter where Greenlight Re trades as well?

 

"Might look at greenhorn more closely if he wasn't paying himself 2 and 20 off the top"

 

That's a weird way of saying you want to look more closely  :P

[zippy1]

I don't know whether this is the right time to push this thread up.

 

But with long bond yield moves recently, I wonder whether we should discuss what we can do to protect ourselves?

[rb]

Well I think it's better to do nothing when rates are going up. Now you at least get something on your cash.

[LC]

Bought a house and am knee deep in renovations.

[valuedontlie]

Working to improve private businesses as I find less (or stretched) actionable public investments...

[Viking]

While I try not to be a macro guy, my spidey senses are tingling right now.

1.) QE juiced financial assets when it was implemented by central governments; it makes senses to me that unwinding QE will not be good for financial assets.

2.) It appears that the 30 year bond bull market is over; constantly falling interest rates was very good for financial assets for the past 3 decades. If interest rates indeed rise by 0.75-1% this year and another 0.75-1% next year then this will at some point start to act as a drag on financial assets.

 

As a result, in the short term, I have gotten much more cautious with my portfolio. I have locked in some stellar gains from the past 16 months and now sit at 33% cash and 67% equities. If I find well managed companies at what I feel is an attractive valuation I will buy; as an example I bought a little BRK 2 weeks ago (wish I had bought more). I also recently bought some FFH.

 

And I am going to keep reading and learning about QE and interest rates. I am watching bond yields. If they continue higher I expect we will get another sell off in stocks. I will be ready with my cash.

 

If stocks continue higher and bond yields begin another leg higher I will likely sell more stocks (lock in more gains) and happily sit on more cash and wait for the next big sell off. I also think volatility is back so I am pretty confident patience and cash will be rewarded with bargain prices at some point later this year. If I am wrong and stocks go to the moon I am ok with that too.

 

If you are sitting on cash, now is a great time to get your list of stocks ready that you want to buy when the next sell off happens. Sell offs tend to be violent and it can be hard to think clearly when everyone is losing their mind. The more you can’t think out and prepare for in advance the better.

[rb]

Very well reasoned Viking. I'll probably do the same. I'm less eager to sell because of tax issues but after a certain level it's hard to ignore prices/valuations.

[nickenumbers]

I agree that Forward PEs, revenue growth rates, and GDP growth is important.  And put that all relative to itself on a graph over time to give it comparison, context and background.

 

Market corrections and panics will happen, and that is something to be prepared for.

 

With that said, I try to remember that being in record territory is actually normal.  Whenever a graph moves upward to the right over time, it continues to break previous records.  It makes mathematical sense.  Ignore the dollar sign, and just think of the math of it.  The fact that we broke another stock record is somewhat irrelevant in a growing economy with a little inflation.

 

What is more relevant is if the current price has outpaced the underlying value, and forward growth rates.

 

Don't be afraid of record breaking.  If we are all committed to compounding over time, we will continue to move upward and to the right.

[Viking]

rb, as I have said before, all of my investments are in tax protected accounts (RRSP, TFSA, LIRA, RESP) and this greatly simplifies my decisionmaking process. They are also in self directed accounts so  I only pay $10 per trade (so my transaction costs are essentially zero as I do not make a lot of trades) - my trading fees each year run about 0.1 of 1%. Peter Lynch is certainly correct when he says small investors have so many advantages over the big funds.

 

I really do believe that QE and rising bond yields COULD be a game changer for equity markets. So until I better understand this dynamic I am going to get cautious (part of my capital preservation thesis).

[Viking]

nickenumbers, I have not been overly concerned about stocks hitting all time highs for a few years. Buffett has consistently said with US 10 year bonds at 2% yields stocks were cheap at elevated PE’s. The US 10 year is now approaching 3%; my guess is if it moves towards 3.5% we will get a big sell off in stocks. I have no idea what WILL happen. I do think their is a decent chance (20-30%) we could see the US 10 Year at 3.5% in the next year.

[EdWatchesBoxing]

Like Viking has mentioned, I am watching US treasuries. I imagine at some point the rate increases will likely point to a drop in stocks, and I'll be busy then.

 

Over the past year and a half, I have been studying volatility/VIX and options. I have been reverse engineering Feb 5 (XIV/SVXY drop) and look forward to seeing that type of event return.

[Cardboard]

"I'm less eager to sell because of tax issues but after a certain level it's hard to ignore prices/valuations."

 

While in the U.S. there is a large change in tax rate if you hold more than 1 year, there is no such thing in Canada. Therefore, thinking about taxes should never enter the decision to sell IMO. Whenever this has entered my mind in the past it clouded my judgement and I almost always made mistakes.

 

Tax loss selling is another glorified waste. Sell things because you no longer want them. Not because it provides a deduction.

 

Cardboard

[rb]

"I'm less eager to sell because of tax issues but after a certain level it's hard to ignore prices/valuations."

 

While in the U.S. there is a large change in tax rate if you hold more than 1 year, there is no such thing in Canada. Therefore, thinking about taxes should never enter the decision to sell IMO. Whenever this has entered my mind in the past it clouded my judgement and I almost always made mistakes.

 

Tax loss selling is another glorified waste. Sell things because you no longer want them. Not because it provides a deduction.

 

Cardboard

I agree that one should make investment decisions based on the face value of the proposition. Focusing too much on the tax aspect can induce one to loose his mind and make stupid decisions just to save a little tax.

 

However facts are what they are. When you pay the deferred tax you surrender part of the capital. The magnitude of which depends on the marginal tax rate and the value of the deferred liability. Mathematically it makes sense to accept a lower return for existing investment A as opposed to prospective investment B up to a certain threshold. The bigger then gains and the higher the marginal tax rate, the bigger the threshold.

[writser]

I watch porn.

[DooDiligence]

I watch porn.

 

http://uglymule.com/images/PG-Peep-Show.gif

[Cigarbutt]

When the consumer sentiment/savings rate ratio is high, I tend to consume more stuff unrelated to investment and to save time to re-visit classics like "That which is seen, and that which is not seen", by Frédéric Bastiat.