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You Are Not as Dumb as You Think
I was going to write something smart and pithy about this recent market decline, but then I realized that I’ve written about this in the past (more than once). So here is an excerpt from the Little Book of Sideways Markets. In addition, here is a copy of the presentation about sideways markets. – Enjoy.
Secular sideways markets are comprised of many cyclical bull and bear markets [take a look again at the chart below]. Though cyclical bull and bear markets can provide great buying and selling opportunities, our emotions will try to get in the way between us and the right decisions. Markets will constantly try to brainwash us into doing the opposite of what we should be doing. I hope [excerpt from] this chapter provides an antidote to this as it contains two missives. Read the first one [You Are Not as Dumb as You Think] during cyclical bear markets and the second [You Are Not as Smart as You Think, which I did not attach] during the cyclical bull markets. Good luck!
You Are Not as Dumb as You Think
(Psychotherapy for Cyclical Bear Markets)
Lately I’ve been getting this nagging feeling that everything I touch turns to dirt. Every time I buy a stock that is already down a lot, the one that my analysis leads me to believe is cheaper than dirt, it declines more. Did I completely lose my ability to value stocks? Did I start ignoring Will Rogers’ advice to buy stocks that go up, and if they don’t go up, don’t buy them?
No, I didn’t get dumber, and my stock-picking skills haven’t diminished. I was simply a willing participant in the latest cyclical bear market. Bear markets make you feel dumber than you are, the same way bull markets make you feel smarter than you are.
Feeling dumb makes you do the opposite of what you should be doing. Fear and pain—yes, continued losses cause a lot of pain—are dangerous things because they can make you and me panic, lose confidence, and do the opposite of what we should be doing. To alleviate pain we sell, we react, we default to the only asset that made us money so far in the bear market—cash! Cash is only king when other assets are princes. When you cannot find a stock with a long-term superior risk/reward profile, then cash is King with a capital K. However, during a cyclical bear market, cash is slowly demoted to a prince as great companies are thrown out the window with the junky ones. You have to actively remind yourself of the eight-letter word T-O-M-O-R-R-O-W! Yes, tomorrow. Think of the lyrics from Annie:
When I’m stuck with the day that’s gray and lonely
I just stick out my chin and grin and say, ohhh
The sun will come out, tomorrow
So you gotta hang on’ til tomorrow
Of course, we don’t know if tomorrow is really tomorrow or five years from now. But investing is a marathon, not a sprint, and do not let the bear market turn you into a sprinter. First of all, remind yourself that you are not as dumb as your portfolio makes you feel. You have occasionally bought a stock that made you money. This is what I do: I pull out a chart of a stock on which I made a boatload of money or one I sold for the right reasons before it declined. I do this with pleasure, trying to relive my smart days. We all have these stocks, the ones we nailed. We tend to forget about them during the bear market phase. But I suggest you remember them now, when you feel lonely and miserable, so you’ll have more of these names to remember in the future, since cash will not bring the pleasure of victory in the long run. The cyclical bull market is still there; it is just hiding under the ugly sentiment of the cyclical bear market. Believe me, it will show its happy face. It is just a matter of time.
In a bear market, it is easy to forget about buying. Selling is a much easier decision to make. Every time you buy a stock you look dumb because it usually goes down afterward. I recently bought a couple of incredibly cheap stocks and, of course, they declined. I don’t feel smart about these buys right now. However, a while back I analyzed these companies, figured out what they were worth, determined an appropriate margin of safety, and got my buy prices. The stocks declined but fundamentals had not changed, so I bought the stocks.
You cannot worry about marking the bottom in every buy. My objective is not to buy at the bottom and sell at the top. No, my objective is to buy a great company when it is cheap and sell it when it is fairly valued. I suggest you do the same. Will Rogers’ advice is great, but unfortunately I have yet to meet a human being who has figured out how to apply it in real life. No, you are not as dumb as bear markets make you feel.
Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of The Little Book of Sideways Markets (Wiley, December 2010). To receive Vitaliy’s future articles by email, click here or read his articles here.
Investment Management Associates Inc. is a value investing firm based in Denver, Colorado. Its main focus is on growing and preserving wealth for private investors and institutions while adhering to a disciplined value investment process, as detailed in Vitaliy Katsenelson’s Active Value Investing (Wiley, 2007) book.
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Here is the standard deviation of daily closing price changes of the S&P 500 by year from 1950 to 2010:
1950 1.04%
1951 0.67%
1952 0.50%
1953 0.60%
1954 0.61%
1955 0.96%
1956 0.78%
1957 0.82%
1958 0.56%
1959 0.59%
1960 0.66%
1961 0.64%
1962 1.04%
1963 0.54%
1964 0.33%
1965 0.44%
1966 0.74%
1967 0.53%
1968 0.59%
1969 0.64%
1970 0.96%
1971 0.64%
1972 0.50%
1973 1.00%
1974 1.38%
1975 0.96%
1976 0.70%
1977 0.58%
1978 0.79%
1979 0.69%
1980 1.03%
1981 0.85%
1982 1.15%
1983 0.83%
1984 0.81%
1985 0.64%
1986 0.93%
1987 2.03%
1988 1.05%
1989 0.83%
1990 1.00%
1991 0.90%
1992 0.61%
1993 0.54%
1994 0.62%
1995 0.49%
1996 0.74%
1997 1.14%
1998 1.28%
1999 1.14%
2000 1.41%
2001 1.35%
2002 1.65%
2003 1.06%
2004 0.70%
2005 0.65%
2006 0.62%
2007 1.01%
2008 2.59%
2009 1.71%
2010 1.18%
Great companies make great buys when the horizon is not in societal, paradigm change mode, and incidently, when the market playing field appears level. We be living in profound game changer times. This is no more cyclical continuation of the 60-70-80-90-00 era. IMO. We have changed gear under the inexorable turn of global events. Those who ran the world of that era do not control the course of events having put into self destruct mode their own old paradigm.
The global market now is like a buffalo herd on the move not knowing which way to go; as the poachers, the PD-HF FIRE brigade, have shot down the herd leaders, who set the "safe" market trends for the herd instinct to stay "good" and virtuous. We are now in an organised poacher's world and the herd is on the run. Even those poachers can't control a stampede...They don't know this in their arrogant hubris, with their Remington repeaters, thinking they be gunslingers who won the west, but who'll lose the whole shooting match when the herd disappears over the cliff...But these stampedes have occurred in the past as history teaches us of collective consequences.
Nazi soup for everybody will soon be on menu... com n get it! Seinfeld...where are you??
There was this guy over at Seeking Alpha that loved to follow Tyler and put forth his rosy optimist's/government propagandist, not knowing any better bullspit, all over the place. He loved to tell us how smart he was, how great his picks were and how anyone that was speaking about reality was nothing but a doomer.
Seems his name was Cecil? Cretin? Something like that?
You look a lot like him, even the same type pic (oh yeah, if you are truly a published author, why aren't you using your jacket photo? Bet it makes you look more professional).
I just had to read your posting, to see if it really could be the same guy.
My guess is that it is, he has just gotten better at bullshit and doesn't come out and call the (still) upcoming recovery that is going to make him rich like he used to. His "I am smart, you are dumb" bit wore on everyone's nerves, even those that would otherwise agree with him.
But, just like my good buddy from SA, Mr. Katsenelson is ignoring the reality that this is a credit disaster that has been "fixed" with more debt. Until the entire freaking Western world (and part of the East) purge these debts, it is neither a secular bull, nor bear.
It is a shit sandwich and should only be used in lieu of your nearest tax revenue generator, 'er casino.
Good luck with all that
if you end up posting the entire book right after i bought it, well, i'm gonna have to crack the bridge of your nose...actually, on second thought; i guess i would encourage you to do just that.
ZHealots!, got it in the mail this afternoon, and, bruthahs, it's a MUST. i think the title should read: "how to make bitchez out of bulls, then force-feed them their own excrement in times of volitility"
really, just TOP SHELF!!!
lil advice: get you a good anglocized nick-name or something. that's fucking four thousand syllbles!!! how am i gonna remember that at like cocktail parties, "oh, yes, it's fantastic...his name? oh, well, it's like...mmm...i wanna say it had a bunch of consonates in it; yup, that and a ton of vowells. both of em, just jumbled together in this indecipherable pattern."
so you see, it's like your grandfather said (and mine, too BTW) "think yiddish; act and dress british"
it's one hell of a formula!,
janus
"Dress British, think Yiddish" was coined by Carolina Israelite editor Harry Golden on a visit to Madison Avenue in the early fiftes. He looked around at the ad men and said that seemed to be their motto.
Janus, this is the weirdest endorsement I ever received. About the name - I guess it will require you to use some brain cells to remember it. Or you can just say that guy who writes for ContrarianEdge.com
Vitaliy
Love your article Vitaliy! Now I can't wait to go read your (what must be very fun to read) book...thank you!!!
It helps more if you estimate that you are at least twice as stupid as your worst self-estimate.
It also helps that there are "no brainer" buy decisions (PMs).
"I have a simple method that never fails. I never buy at the bottom and I always sell too soon. As long as I follow those rules I find I can't lose"
-some rich old fat guy at a dinner party.
You must really know the business to make money in this market, for your typical 401K investor trying to build a retirement nest egg, it's like trying to tap dance in a whirling Cuisinart...
What other puffery is this guy involved in?
The puffery of thinking he can increase his purchasing power in an end spiral that mimics a cyclical bear/bull market that isn't.
Vitaly is going to lose everything if he really belives we're in secular sideways market.
I'm buying, short.
"In a bear market, it is easy to forget about buying. Selling is a much easier decision to make."
I think for traders there is a much easier attitude: in an uptrend, always watch out for reversal to downtrend (and hence opportunity to sell), and in a downtrend, always watch out for reversal to uptrend (and hence opportunity to buy).
That ought to be the real contrarian position, buying a stock as it bounces off from a bottom, not as it races towards one (of course, the problem is it's not that easy to tell when a stock has bounced off from an actual long term bottom, not just a short-term oversold bounce).
IMO, expect a choppy market marked by higher lows with the next big stimulus coming early next year. Step one was the FED twist forcing mortgage rates to below 4%. But this will make little difference as "lending standards" i.e. FICO scores are near 750 to qualify. So expect another type subprime (if you can fog a mirror you can buy a house) type program to be announced early next year. This will trigger a another housing boom and make Obama a shoein for reelection. O is not stupid. He is waiting for the right time to make the tea baggers look stupid. Wait and see.
"The cyclical bull market is still there; it is just hiding under the ugly sentiment of the cyclical bear market. Believe me, it will show its happy face."
Sorry, Sir.
I was forced to stop reading right there.
The happy faces might return when Truth returns.
And you mentioned nothing about Truth at all.
Never buy a stock going down. Let some poor sap do the hard work for you. It takes a lot of bottoming to really kill all speculative elements in the trade. When the stock finally comes back from the dead that is when you buy. Pretty simple and it works. Your upside is often a bounce and then another down leg if you try to catch falling knives. You might win 3 times but that 1 serrated knife you catch badly is all it takes to really ruin your month/quarter/year. Shouldn't even be giving this valuable info out for free. but the devil is in the details...
Yup. Let that c*** s****** liar Warner Buffett catch the falling BAC knife even though he gets special preferred stock that will insure he is made whole.
You should publish AIMR-compliant, audited performance numbers with your posts or shut up.
The best move is not to play.
If we didn't have the stock market people wuld have to resort to *gasp* working to make money and actually building products of worth. Sure you may say analyzing stocks for 50 hours a week takes a lot of work, I say no it takes a lot of time just like playing World of Warcraft for 50 hours a week. They are pretty much the same since you really can't find anything of worth in both pursuits.
Sure if we didn't have the stock market there wouldn't be as many billionares and real estate in NYC would really stink. Is that such a bad thing. Without the hope of cashing out big on bogus IPOs a whole bunch of really bad business ideas would never have launched preserving capital for people that actualy have a plan to use actual business models to make money.
We wouldn't need as many lawyers. Politicians would be harder to buy off. orporations wuldnt have that pesky legal obligation to maximize revenue for shareholders so employees would probably have more value. Outsourcing would actually harm wealth creation instead of helping.
Wow a world without the stock markets. It would probably be a whole lot better.
Sure, we'll just capitalize businesses with rainbows and unicorns instead. Or better yet we'll leave it up to the banksters. I'm sure they'll do a much better job than the stock market ever did.
Just cause the market's broken doesn't mean it's the poor market's fault.
Manipulated would indicate some dectectable vestige of order - and someone would exploit it. It feels to X.O.E. that too many decision makers are innumerate.
If the cogs of the machine were still turning against the same play book that we have experienced in the past 50 years, I might agree with your value investing methodology. Wall Street has always told the small retail investor to invest for the long haul and for value. The problem here is that the machine, I believe, has fundamentally broken and all the kings horses and all the kings men won't be able to put it back together again. The problems of a long term malaise....stagflation....huge debt....loss of the manufacturing sector.....behind on innovation.....are starting to take hold in real and meaningful ways. There are no simple answers and no quick formulas to navigate this period because its not the typical bear market. Personally, I think you should be recommending a more nimble approach with a short term horizon....... the fact is, as you indicated, most of us can't or won't be able to play in this high speed game. When I see CEOs, Congressmen, Senators, Presidents, Banks and Companies start acting and moving for the long term, then the time for value investing may once again return. But not today and not tomorrow.....duck and cover with fast feet will allow you to survive and pull small returns.
As Joe Biden might say, "A three letter word.. P. U. T. S.".
Just the medicine for a secular bear.
No you're not dumb. Just blind. Blind because you do not realize that this market is so manipulated, your investments do not rise and fall based on supply and demand. They rise and fall based on central bank intervention across the globe. And the only way to make a good investment is to read the minds of the various global central bankers in order to know their next move before they make it. That's the only way you'll win. For a long time, it was a simple game to play because the ponzi scheme didn't have too many troubles to deal with. However, after several decades, the troubles have stacked up. So, momentous decisions have become far more frequent. And violent market swings have become more frequent as a result. In order to ride the next violent market swing, you must be able to read minds. And that's the simple reduction of what's going on today in the markets ... nothing more complicated than that.
Geez, you sound like you believe in the Efficient Market Hypothesis and that markets follow a formula. Supply and demand? Maybe, whatever that means. In the days of the dot.com boom, higher prices increased demand, since people began to think the sky had no limit. Plot that curve.
No, it was not more simple before. It might be slightly more difficult now, though I cannot say that conclusively, but it was never simple. If it was, you and everyone else would be billionaires.
Read some of the older literature on markets and traders. Read about Jesse Livermore. Same old thing. Even two manipulators have to outsmart each other, so those outside the loop are only at a slight disadvantage. Large players can always move the market temporarily. The only recent change is that the large players have been replaced; hedge funds out, central banks in.
Most people lose because they think they know something. They think they are using logic, when they forget their logic might already be priced in the market, the logical trade might be crowded, and a move in the opposite direction of the "logical" trade might cause maximum pain. In that instance it only takes a few weak hands to get a fire roaring. People don't want to admit they are wrong. Long in a rising asset and everyone's a genius; long in a falling market and "somebody" is manipulating it. That is wrong, not to mention harmful to one's financial health.
The fact that your post---as of this writing---is 19-0 green, suggests yours is the majority view. The majority is quite often wrong.
chindit13,
i admit i've been eyein you. you've caught janus's attention; which is a good thing -- most of the time.
i'm still concerned, but then i read something like the above, and, well, all i can say is that i couldn't have said it bettah.
now i'm not so sure i have you figured out.
hew always to the Truth.
"that man who thinks he is wise does not know what he ought."
janus
Agreed, let's not forget about Hi freq trading, front running, quote stuffing, naked shorting, daisy chains, insider trading, and that doesn't even count the overt manipulation thru interest rate shenanigans and QE's and secret swap lines, bribes to ratings agencies, SEC porn watching.....need we say more? How the FUCK can anyone put their trust and/or money in ANY market today???
http://www.youtube.com/watch?v=hTJH4ZZU_oA&feature=related
http://swingforceultra.blogspot.com/2011/09/q-wlarry-almost-time-for-qe4.html
DUMB & THINK do not co-exist, you are not as smart as stupee you are......