It's a Great Time to Be a Value Investor 27 comments
J.D. Steinhilber
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It is unknowable when and where this bear market will bottom, but the important point for long-term investors is this: Global stock indexes are now valued at their most attractive levels since the early 1980s and are once again reliably priced to deliver attractive, double-digit annualized returns over a multi-year time frame.
Accordingly, investors who are deciding how best to allocate long-term investment capital should consider the following math. A hundred thousand dollars invested in global stock indexes compounding at 10% per annum will grow to $160,000 in five years. That same $100,000 invested in a money market fund compounding at an assumed 3% will grow to $115,000, and if in a taxable account, the after-tax residual amount could be less than $110,000.
But aren’t we facing the worst economic recession since the 1970s and early 1980s? That is certainly not a foregone conclusion, although it is easy to extrapolate that scenario given the current abysmal economic data and the staggering hit to balance sheets from the global financial meltdown. Although it is difficult in an age of media saturation and short attention spans, investors should now be reminding themselves of two things. First, the economic and financial world does not end. It only seems to be ending. This time is never different. Second, stocks are a claim on the long-term earnings power of corporations. Earnings in the current or subsequent quarter or year have very little impact on the long-term value of a stock index.
Global stocks are already priced for a severe recession. Valuations and sentiment have plunged to their lowest levels in decades. Evidence of the latter can be found in (1) record low consumer confidence readings, and (2) record levels of investor redemptions from stock and bond funds in September and October. These are the conditions that excite contrarian, long-term, value-oriented investors, who are the most successful over time.
The primary uncertainty a patient investor faces today is not whether future returns over a multi-year period will be attractive (that is now assured by current valuations barring a collapse of global capitalism…), but rather how long this bottoming process will last, and when a new bull market will begin. Investors should be prepared to be patient for a new bull market to get underway and should take an incremental approach to accumulating cheap financial assets. There may be retests or temporary violations of the October lows while the market digests all the negative news on the economy and while the forced and voluntary selling runs its course.
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This article has 27 comments:
But what did the U.S. Treasury Department and the Fed do with $3 TRILLION -- YOU GOT IT! $3 TRILLION DOLLARS:
www.bloomberg.com/apps...
How do you expect ANYONE to invest when the United States Government is going around and shilling-up companies with taxpayer money and then not telling us where the money is going?
Ho do you expect investors to have confidence in a sham like this?
Paulson and Pelosi are spending taxpayer $$$ without the presentation of soemthing that could be even called slightly a *business plan* just becuase they are GE, GM, AIG, etc.
How is this a good deal?
Are stocks over/under valued?
How would an investor know?
Is the company you are touting as so great getting secret loans from the Fed?
What about transparency of PUBLICLY TRADED companies?
Is the SEC helping hide financially unsound companies and shill stocks?
You want confidence?
How?
You would be a fool to invest a dime in this environment and this is exactly why the government is doing it for you! Nobody else will!
Soon, even the shilled-up companies will be penny stocks...
Agreed!
Pelosi and Paulson are killing the village to save it.
Welcome to Vietnam -- the economic version.
Stocks are still overpriced
Earnings are terrible and not predictable
World Economic conditions and currencies are in flux and could be a game changer
Governments worldwide are on a spending or bailing spree.
These add up to a terrible time to be a value investor.
Call me again when the big picture stabilizes and the earnings STOP DROPPING.
3% div yield is only good compared to 1% savings interest. But in its own self 3% is pitiful, as it includes the equity risk; risk of losing the principal totally.
Much better opportunities in small business, where returns can be anything from 10% to 30% to even 300% per year. Stocks at current valuations look good only to salaried people who never knew another way to make money, or people so rich they've stopped caring.
The slew of negative comments on this post actually supports the article: that investors aren't looking at long term valuations, but are overcome with negative sentiment.
Most of the other articles focus on P/E ratios, which E is totally unknowable making the entire "value" argument moot.
The value of an enterprise is summarized as:
Assets = Liabilities + Equity
If the Asset is government, the Liabilities are the national debt, and Equity is the power remaining with the citizens, then our government is technically bankrupt. Just like bankrupt companies, we are being liquidated to compensate the owners of liabilities. Expect to see more of the government acting to benefit our Chinese, Russian, and Saudi debt owners - especially since they have the leverage to turn off the debt at any time, while we citizens face jail if we refuse to pay taxes.
On Nov 11 05:05 PM aloha e wrote:
> Why invest in stocks when the corporate bonds will do so much better
> under the new socialist government. They are saving the overseas
> bond investors, not the equity investors. Look at AIG and FNM stock
> to see what i'm talking about.
Based on the negative comments, I'd say we are giving birth to a new bull market and we're arguing about how the long labor will be...
All based on "value investing" .
Where are we? 1929.
Consider this wouldn't know value anything if it bit him. Every whine in his lament is of concern only to momentum, trend, and news traders. Which is almost everyone, and why prices are so cheap. Value investors don't give a darn about any of those things, all they care about is what the price is for future dollars in today's dollars. And today, it is dirt cheap.
I disagree with the statement that this is the best time to buy since 1980, as there were much better values in the early 1990's, and even in the short 2002/2003 bear market, particularly in European stocks. Values today do not begin to compare with what was available in these bear markets.
We're in for a world of hurt and a deflationary spiral. Your other comments also showed you agreed we're in a deflation quicksand.
Fed's, China's, EU's, Japan's CB's action are all indicative of a change. Some huge game change is coming. It's not predictable, and definately can change the perception of "value". How do you do value investment when that is being redefined?
Additionally, with the E in P/E ratio in jeopardy, the definition of money in jeopardy, the DEMAND CURVE being shifted unpredictably; how would you value whether something is worth it or not?
The value to invest in stocks just isn't there. Not for 5 years, not for 10. Not for Japan for 18 years and counting. (Nikkei was 45,000 at one point)
Now's the time for value investor? I say now's the time for true gamblers to invest. Gamblers may win or lose, but it won't be due to skills or foresight.
We need more blood on the street and genuine despair on investments in general; AS WELL AS more stability before a value-investment call can be made.
Gambling calls masking as value call simply because "it couldn't get any lower than now", calls can be made any day. People in GD made it daily, until they're left with no money.
Your call.
reward4risk,
I agree that risk is needed to make profits but that should be based on fundamentals. I'm basing my argument on the actions of the government in USA. With all these bailouts for undeserving companies and no oversight and responsibility for bad mistakes, how am I to believe the bull market will come? What is fundamentally right about the government that inspires investor confidence? Bailout and make the dollar worthless? A stock for a million dollars will not be worth anything if it takes one million dollars to buy a piece of bread.
When this mess is over a year or two from now, we will see many great american stocks in low single digits and many will be gone forever.
Citi at $10 already just right before the abyss. People loved it at $25, it was a terrific buy at $15 and right here at $10 is "the best ever"! There is no value in this enviorment - NOTHING!
Its not far fetched--look at the Nikkeis decline of 39,000 in 1989 to today's 8800 or so (give or take). Ouch. Twenty years and a 77% decline.
Where is the markets pe now? Who Knows? Earnings predictions for the future are extremely uncertain. I am certain that in 5 years oil will be higher, and natural gas will be much higher.
I'm not so much a betting man as a hedging man. Hedge against extreme outcomes. One possible extreme outcome that I am hedging against is DOW 5000, Gold $5000. Its not probable, but it is possible.
Long: HGT, DVN, APA, SLW, GG.
this recession continues to display elements very different than past recessions. prudence whispers in my ear to be careful.
Why are so many investors short term, always trying to make money quickly rather than buying a company with fundamentals unaltered and then sitting back. The most successful investors I can think of have always done this.
China has over 1.3billion people, most of which now leaving farming and becoming consumers. In the 5-10 year time frame those fundamentals will override the current crisis.