Technically Speaking: Think Like A Bear, Invest Like A Bull

Think-Like-A-Bear

With the markets closed on Monday for the holiday, there is nothing to really update from this past weekend’s “Market Review & Update.”

My friends over at the wonderful investing site “SA”, which should be part of your daily reading, picked up the newsletter which generated several comments. The most interesting of which was the following:

“Thanks for the good dialogue concerning the markets. I will say that most often after I read your articles, I am ready to dig the bunker deeper to the next level lower and load it with another month of food and water. Hopefully, I can muster the courage to manage coming market volatility.”

While I certainly appreciate the comment, and understand his concerns, it also highlights one of the biggest mistakes many investors make over the long-term.

You Think Like A Bear But Invest Like A Bull?

The answer to this question is what I have come to term the “Broken Clock Syndrome.” There is relatively little argument that Dr. John Hussman is probably one of the smartest individuals in Finance. His analysis of market valuations, understanding of market dynamics and long-term secular cycles is rarely disputed. His analysis, along with many others such as Crestmont ResearchJohn Mauldin, and even Jack Bogle, has suggested that forward returns in the markets should remain low.

Even the math suggests the same as I pointed out previously.

“If we use a market cap / GDP ratio of 1.25 and an S&P 500 dividend yield of just 2%, what might we estimate for total returns over the coming decade using John Hussman’s formula?

(1.063)(0.63/1.25)^(1/10) – 1.0 + .02 = 1.3% annually.

We can confirm that math by simply measuring the forward TOTAL return of stocks over the next 10-years from each annual valuation level.”

“Forward 20-year returns get worse.”

SP500-20yr-Avg-TotalReturns-080816

This suggests our commenter is correct and that cash is likely to be the best investment going forward. However, the flood of liquidity by Central Banks globally continues to elevate asset prices at historic extremes. The “Broken Clock Syndrome” is where investment decisions based solely on fundamental analysis can lead to poor outcomes when other dynamics take charge.

Like Hussman, and many others, I too am a value-oriented investor and prefer to buy assets when they are fundamentally cheap based on several factors including price to sales, free cash flow yield and high return on equity. However, being a strict value investor can eventually lead to a variety of investment mistakes, which I will discuss momentarily, when markets become both highly correlated and driven by speculative excess.

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Disclosure: The information contained in this article should not be construed as financial or investment advice on any subject matter. Streettalk Advisors, LLC expressly disclaims all liability in ...

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Danny Furman 5 years ago Contributor's comment

As always great stuff. Less than a handful of analysts have spoken this way for the last decade. You, Gary Savage, Joshua Hayes come to mind