Brooklyn Investor is a writer I followed on my RSS feed. Writes well but doesn’t write often and that suits him fine.
A good piece recently stating that based on the CAPE we are not in a very cheap state.
[The Brooklyn Investor | Tapering, Market Overvaluation]
If you are at the peak of CAPE should you sell all your stocks?
If you tell these guys the market PE is expensive around 1966, these guys would probably shrugged their shoulders and continue finding good stocks.
These guys got an EDGE. The question is as an active manager do you have that EDGE.
What I find of great value add is the conclusion to the article:
So what to do?
- If you own individual stocks, review them and make sure you like them. If you don’t, or aren’t sure, you’ll feel horrible when it goes down 30% or 50%. And you would sell out in fear. If you really like it, you should be able to hold it through the storm and not blink. As someone said about guiding the ship by the lights from a distant lighthouse and not the waves crashing against the boat, just make sure the business will be doing well in five or ten years (and hopefully doing a lot more business). If so, sit tight.
- If you have stuff in your portfolio that is not high conviction, or even stuff you bought as a punt or on a tip, now is the time to clean house. Dump that stuff. You got lucky. Now dump that stuff while the tide is lifting all boats.
- If your portfolio went down 50% tomorrow and you would be upset, then that means you own too much stock. Sell down to a level where you won’t lose sleep if it went down 50% because it will at some point. OK, to say that it will happen in one day is a bit extreme. This is Joel Greenblatt’s idea; the mistake people made in the financial crisis is not that they didn’t sell before the crisis, but that they owned too much stock and they freaked out and had to sell in the decline out of fear. If you were comfortable with stock market volatility, you wouldn’t have sold out and you would’ve been fine (unless of course you owned too much of the ones that went bust!).
I thought that is how an investment thought process is. Very rational and well thought out. There will be stocks like Aims Amp, Soilbuild that you went for yield that you know wasn’t purchase at a good margin of safety.
Have a good profile of a fundamental yardstick for them. There will be the Starhub, SIA Engineering that will tide through a difficult time and quite positive you got them with margin of safety and good for keeps.
Then there are the absolute mistakes. You should know what to do with them.
To do that, you had to have a good fundamental idea about the business you bought into.
It’s important to remember, though, that just because the market level is not cheap doesn’t necessarily mean that you shouldn’t own stocks! It’s nice to buy stocks when the market is really cheap for sure, but that has only happened very rarely in history. Again, the 100 year performance in stocks includes holding through a 7x p/e and 30x p/e market!
If you only bought stocks when the whole market was cheap based on the Shiller p/e, you may have only bought in 1920, 1932 or 1982. If the market was at average valuation, you might hear the argument that the market doesn’t bottom out until the valuation goes well below the average. In fact, I did hear that argument after 1989, 1990/1991, 1994, 1997, 2002, 2009 etc… (that the market won’t bottom until the p/e gets to 7x like it did in 1932 and 1982).
You wouldn’t have bought any stock since the early 1990s since the Shiller p/e would have been above the historical average (well, I am just eye-balling the above chart; the average up until the early 1990s would not have been the same as the average shown above!).
This is rather interesting and agreeable as well.
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