Monday, October 13, 2008

Pick up the pieces

Consider how much effort has been wasted by stock pickers and market experts over the past several years.

My early mentor Bob Brinker has held on to his Market Timer mutual funds for this entire drop in the stock market, and it has nearly wiped out all of his gains since the previous market bottom in 2002-2003. Month after month, for $185 per year, he's discussed inflation, money supply, unemployment rates, earnings forecasts - and he never once concluded that stocks were over-priced.

In the middle of the day on Friday I visited the Motley Fool website and was bowled over by what I saw. They have several monthly stock- picking news letters with multi-year track records, and as of Friday all but one had resulted in net lifetime losses for their subscribers. The only winning newsletter was sitting on a total gain of 3%.

Over the years the Fools have made hundreds of stock picks, written thousands of pages of analysis and earnings calculations, and conducted dozens of interviews, and yet they would have done their subscribers better to simply recommend cash or Money Market funds until stocks reached more reasonable valuations. Instead, the Motley Fools have been some of the most vocal proponents of stock buybacks, and have always managed to conclude that stocks were good investments -even at the tops of both the 2000 and 2007 bubbles.

The folks over at Bespoke published an eye-opening table on Friday showing the forecasts for the S&P 500 from the top investment strategists on Wall Street. In January, when I made my S&P 940 call, the "experts" were predicting anything from 1525 to 1700. Even on Friday the forecasts were still between 1300 and 1500.

I don't know if Bespoke is a proponent of Fibonacci grids or not, but they've also published a chart of the Dow 30 diving through Fibonacci support levels like the phantoms that they are.

It's strange that people cling to various fantasies about how the market works, but those of us who know better can take advantage of the bubbles and crashes that happen as a result.


vv said...

I've been following your blog on and off for over a year now. I am sorry that I haven't commented and thanked you for all the excellent analysis so far. I am 28 and I opened my IRA back in July. I feel pretty happy now that I didn't invest (fully) into the market back then. I stayed mostly in cash and was able to take advantage of the Wachovia and Fannie Mae ups and downs.

According to yahoo finance the ETF IVV that tracks the S&P 500 has a P/E ratio of around 12.36. Does this mean that the bubble is almost deflated? Do you see an overshoot happening over the next few months further dragging down the P/E ratio? Or will the steps by UK and US Govts of injecting capital damp the overshoot? Or do you think that the "markets will not be denied" ?

Jody said...

Congratulations on starting your IRA!

IVV is essentially identical to SPY, since they both track the S&P 500. It comes down to a choice between the slightly lower fee (IVV) or slightly greater liquidity and volume (SPY).

The P/E ratios that you get on Yahoo! Finance are calculated from the overly-optimistic "operating" earnings numbers. The more accurate "as reported" P/E ratio of the S&P 500 is 18 for the 3rd quarter of this year, and is projected to be 18.8 for the 4th quarter of 2009. So, believe it or not, the stock market is still overvalued compared to historical averages.

The bubble is almost out of the picture now, but the bear market that it created is still alive and well until further notice. Bear market "sucker" rallies always occur near the bottom, no matter what governments do, so today's action may be the beginning of one.