James O'Shaughnessy: Market Returning to Rationality

James O'Shaughnessy
Chairman & chief executive
Stamford, Conn.-based O'Shaughnessy Asset Management

Q) When did you know this was no ordinary stock market correction?

A) The collapse of Lehman Brothers (LEHMQ.PK) led us to conclude that the market had moved into a ‘sell at any price’ stage and that fear—not rationality—would price the market. Essentially, the market priced in a depression but what it failed to understand was that it would just be a severe recession.

Q) How did your clients react? With panic?

A) Our clients, like many investors, were shocked and worried about the dramatic fall in prices. We did everything we could to reassure them that we would not being going into a depression and that the worst thing they could do was sell into the panic.

Q) What was the best move/trade you made during that initial sell-off?

A) I bought heavily for my personal account into several of our strategies and advised all of my clients to do the same. I was early but publicly stated that I thought the market was offering a generational opportunity to buy equities at valuations we had not seen since the early 1980s.

Q) What is your view of the market now?

A) We think that the market is returning to rationality and that over the next ten years equities will be one of the best performing asset classes. We think the new “bubble” is in treasuries and other bonds. We believe that people moving their portfolios to an overweight in bonds will be disappointed over the long-term and will significantly underperform an asset allocation that over-weights equities.

Q) How are you playing it now?

A) We continue to advise that investors remain committed to a patient, long-term outlook and that the best way to do well in stocks is to use a disciplined, time-tested strategy that has the benefit of empirically tested results over a variety of market environments.

Comments

[chap08:]

I agree that treasuries are in a bubble, but the bubble could last for some time given that a critical sub set of investors (governments) are not motivated by investment returns. It would be interesting (and very scary) to see what happened if these governments started pulling out (rather than diversifying), but that's not going to happen any time soon.

Sep 18 07:12 AM

[jerrydd:]

The rational market, LOL!!! There is nothing about the markets that is rational. It's now just a big gamble stealing stockholder's money for CEO's, directors, hedge funds, etc.

Much of the market is now in a bubble, far above it's true value.

Let's take a look at the next 2 yrs. In the next yr commercial real estate is going to drop deeply due to all the short term loans coming due. The home market will dip again as far more foreclosures from underwater, unemployment, sub prime ones fall.

And sometime late next yr when the world economy recovers, oil will hit $150/bbl again throwing us, it back into recession. For these reasons investing in the market except a few places will be a bad idea.

The best investment areas will be energy except coal but much of oil, RE is in their own bubbles so pick wisely. Sell oil before it gets too high and it crashes again next yr. Best is pay off debts, lower your costs and get into cash for the next crash buying opportunities.

Sep 18 08:55 AM

[thiazole:]

I think if you really believed that the markets were rigged so that you always lost money that you wouldn't be investing in energy. I've made plenty of money in the market since I started investing, and I'm not a wall street fat cat / CEO / etc.

You are right that energy costs will come back, but you are wrong that $150 oil will trigger another recession - at least not by itself.


On Sep 18 08:55 AM jerrydd wrote:

>
> The rational market, LOL!!! There is nothing about the markets that
> is rational. It's now just a big gamble stealing stockholder's money
> for CEO's, directors, hedge funds, etc.
>
> Much of the market is now in a bubble, far above it's true value.
>
>
> Let's take a look at the next 2 yrs. In the next yr commercial real
> estate is going to drop deeply due to all the short term loans coming
> due. The home market will dip again as far more foreclosures from
> underwater, unemployment, sub prime ones fall.
>
> And sometime late next yr when the world economy recovers, oil will
> hit $150/bbl again throwing us, it back into recession. For these
> reasons investing in the market except a few places will be a bad
> idea.
>
> The best investment areas will be energy except coal but much of
> oil, RE is in their own bubbles so pick wisely. Sell oil before it
> gets too high and it crashes again next yr. Best is pay off debts,
> lower your costs and get into cash for the next crash buying opportunities.

Sep 18 10:25 AM

[sgt.red.blu...:]

Buffett has said the same...over the next 10 years, it will be equities not government debt.

Sep 18 07:40 PM

[untrusting ...:]

Interesting that Mr. O'Shaughnessy, as a professional asset manager, was not close to fully invested prior to Oct/08 just like most other asset managers were . After all an asset manager can't have too much in cash at any time with the low returns from cash. One wonders where the brillant Mr. O'Shaughnessy got all the cash from over the past months to make all his purchases? Without spending the time to research O'Shaughnessy's calls prior to Oct/08 ... one has to guess that he was also advising his clients that equities were the place to be in 2008 as well.

Oh... just took a few minutes to check on O'Shaughnessy's fund record. Here are the real facts for just one of his great funds, his core All Cap Fund. 1 year return of his All Cap Fund = (35.2%) vs. Russell 3000=(26.6%), his benchmark. 5 year return of his All Cap Fund=(1.15%) vs Russell 3000=(1.88%). Since inception, his All Cap Fund=4.1% vs. Russell 3000=3.3%

Hmmmm ... looks like Mr. O'Shaughnessy is just another fund shrill trying to get more money under management so he can collect his outsized fees and make himself more money. Nothing in his performance indicates he has done even a remotely decent job of making any clients any money nor was he successful in avoiding large losses for clients.

By many reported accounts, both bonds and even treasuries have outperformed O'Shaughnessy's record and with far less risk over decades of performance.

Everyone claims to be an investing genuis when markets are rising, but as we all know markets do not keep rising forever. The real talent is able to identify times to be out of the market as well, but apparently O'Shaughnessy does not have that talent.

For our money others such as Doug Kass have provided much more realistic comments and advice that O'Shaughnessy. And Kass is not bullish on the market at this point, though he did call an interim low back in early March.

Sep 19 11:13 AM