when the current P/E was between 10.4 and 13.3, the one-year forward return was 7.3 percent. When it was higher, between 16.4 and 18.9, the one-year forward return averaged 11.7 percent. And when the current P/E was above 19, the one-year forward return averaged 10.0 percent.
Monday, November 23, 2015
Tuesday, November 17, 2015
The counter argument to the bear argument can be seen in the chart below which compares the same 15 year historical returns on the x-axis with 30 year forward returns on the y-axis. As outlined in my previous post, returns tend to smooth out over 30 years, thus it matters a lot less what you pay for stocks over 30 years than over 5, 10, or even 15 years because more of the return is composed of fundamentals (i.e. dividends, buybacks, etc...) than multiple expansion / contraction as compared to shorter periods. Thus even extreme valuations have historically delivered 30 year returns I think most investors would find acceptable at the moment.
My take? Right between the two. I am not nearly as scared by current valuations, peak margins, etc.. as bears (especially over longer time frames) and I am not remotely a bull either. That said, I'm also not worried about a short term correction that would likely create a much better buying opportunity in the future.
Monday, November 9, 2015
Ben Carlson of A Wealth of Common Sense blog (and author of a great book by the same name), had a recent post Playing the Probabilities outlining that time has been an investor's best friend (for those investors that have had in some cases quite a bit of time), pointing to the following table.
The worst total return over a 20 year period was 54%. But the worst 30 year total return was 854%.While I certainly agree with everything he outlined, he did ask the following question.
Has anyone figured out a better way of compounding your money in stocks beyond increasing your holding period? Not many.
Simple rules (for more... see Meb Faber's record downloaded white paper):
- If the S&P composite TR is > 10 month moving average, stay in stocks
- If the S&P composite TR is < 10 month moving average, move to bonds (in this case 10 year treasuries)
While there is no free lunch (in this case, an investor gives up some upside over shorter time frames), using these basic momentum rules resulted in no negative returns over any ten year period and actually increased the long-term returns over this 1926-2015 time frame, making time an even better friend for an investor.
Thursday, November 5, 2015
As unnecessary as it may seem, contrarian investment managers need to be even more consultative with their clients than managers more aligned with market sentiment, otherwise clients won't be able to handle the extended periods of relative underperformance a contrarian investor is likely to face from time to time. In the case of GMO, while the long-term performance of many of their strategies is pretty strong (and tend to materially outperform when markets turn), the performance captured by their investor base is typically quite poor.
One example being the GMO Benchmark Free Allocation III, a fund in which the average investor has underperformed the fund by 3-5+% over 3, 5, and 10 years. As a result, despite a 16th percentile Morningstar rank in terms of fund performance over 10 years, investor performance only ranks 74th.
In other words, their investor base historical zigs when they should zag... adding money to the contrarian GMO after markets have tanked (when they should be taking market risk) and piling out of the contrarian GMO after markets perform well (when they should be taking risk off the table). Thus, it was relatively alarming to see that funds flows at GMO have been negative $4.2 billion over the twelve months through 9/30/15, including almost $3 billion of outflows the last two months of the third quarter alone.
How poorly have investors timed GMO? Let's take a look at how well a model doing the exact opposite of GMO flows would have performed going back 20 years.
- If twelve month flows to GMO funds are positive, allocate the next month to stocks (S&P 500)
- If twelve month flows to GMO funds are negative, allocate the next month to bonds (Barclays Agg Bonds)
The result of which is more than 100% of the S&P 500 with almost half the volatility and drawdown.
But what good are strong long-term returns if an investor is unable to capture them?