The Value Investor Wins When The Mad Money Crowd Panics
Thesis:
By most measures, this Nine year bull market is quite expensive. It takes discipline to wait for attractive prices in stocks, but it is always worth it.
The “Mad Money” Crowd always finds a stock to buy no matter what the valuation. The problem is that buying overpriced stocks leaves you with little ammunition during a panic and when prices are incredibly attractive.
The more you invest when the market is overpriced, the less cash you have available to invest when prices are attractive.
I run value screens on the market everyday that tell me there are only a handful of stocks that are attractive. It’s not easy to be patient.
The issue is not one of bullish or bearish. It is one of probabilities and potential returns.
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October 8, 2008: Jim Cramer Panics at the bottom
Jim Cramer: Time to get out of the stock market
Bullish investors should turn into shrinking violets as the stock market continues its shocking downward spiral, CNBC’s “Mad Money” host Jim Cramer told Ann Curry on TODAY Monday.
In what Curry called a “dramatic statement,” Cramer emphatically urged any investor who has money they may need in the next five years tied to stocks to pull their dough out.
“I thought about this all weekend,” Cramer told Curry. “I do not want to say these things on TV.
“Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now.”
2008 Crisis: Lessons Learned (Genworth, Buffett, Goldman Sachs, And Washington Mutual)
While Jim Cramer was panicking on the Today Show, smart value investors like Warren Buffett (NYSE:BRK.A) were putting money to work.
His investment in Goldman, Sachs preferred shares was an incredibly successful investment in an undervalued company.
And since 2008 the stock market has had an incredible run thanks to buybacks, low interest rates, continued spending by the debt- heavy consumer, and expanding valuations. (SPY)
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Debt: Clouds on the horizon
The Country Has Racked Up $1 Trillion In Credit Card Debt
With consumers feeling better about the economy, the amount of money borrowed on plastic has reached a high not seen since the Great Recession.
Outstanding credit card debt topped $1 trillion at the end of 2016, according to The Nilson Report, a card and mobile payment trade publication.
While household income has grown over the past decade, it has failed to keep up with the increased cost of living over the same period.
To bridge the gap, more Americans rely on credit cards, one of the most expensive ways to borrow.
The average credit card interest rate is 19.36 percent and the average household pays a total of $1,332.80 in credit card interest each year, according to a separate report by NerdWallet.
Consumer Confidence:
I listen to a lot of conference calls and this quote from the Nike (NYSE:NKE) call stood out to me as we just passed this $1T mark in just credit card debt alone.
Nike conference call:
And one other things too I’d just say, that the brand is extremely strong in North America and consumer’s appetite for our brand continues to really be almost unsatisfied. Trevor Edwards, President Nike Brand
These comments refer to $150 basketball shoes and their main customer is a millennial. The consumer appetite here with $1T in debt is almost unsatisfied. Really.
Investment Fads: FANG Stocks
FANG stocks: The popular moniker for Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), Google (NASDAQ:GOOGL).
Investing fads usually end in painful losses when a bear market comes and the price to earnings ratios contract as well as share prices.
Expensive stocks based on p/e ratios versus their nominal growth rates.
FB PE Ratio (Annual) data by YCharts
The nifty fifty were very good companies for the most part. The problem was that due to p/e expansion, they were expensive and investors suffered huge losses.
It seems quite similar to what we see today with the “FANG” stocks.
Investment fads usually run their course quickly and end badly. The Nifty Fifty captivated investors for the better part of a decade prior to its demise in 1973, but not before reviving the high-risk investing that had been out of vogue since the Crash of ’29.
The 50 stocks identified by Morgan Guaranty Trust represented some of the fastest-growing companies on the planet in the latter half of the 1960s.
Their popularity among institutional and individual investors sparked a quantum shift from “value” investing to a “growth at any price” mentality that resurfaced with a vengeance in the tech-stock bubble a quarter century later.
By 1972 when the S&P 500 Index’s P/E stood at a then lofty 19, the Nifty Fifty’s average P/E was more than twice that at 42.
Among the most inflated were Polaroid with a P/E of 91; McDonald’s, 86; Walt Disney, 82; and Avon Products, 65.
Along came the stock market collapse of 1973-74, where the Dow Jones Industrial Average fell 45% in just two years.
As a Forbes columnist described it, the Nifty Fifty “were taken out and shot one by one.” From their respective highs, for instance,
- Xerox fell 71 percent,
- Avon fell 86 percent
- Polaroid fell 91 percent.
Valuations: A very expensive market.
The best gains for the intelligent investor occur when others are fearful. Today, we have incredibly high levels of complacency. And we also have an incredibly expensive market.
Nothing to fear. Typically a bull market would climb a wall of worry. Today, there is almost nothing to worry about as evidenced by the VIX or fear indicator. (NYSEARCA:VXX)
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” –Warren Buffett
Pockets of value:
I am not saying one cannot make money in this market. In fact, a majority of my recent ideas have been very profitable.
I am saying that the probabilities of gains versus losses is now against the intelligent investor.
Every dollar of stock one purchased near the top in 2008 prevented one from buying lifetime bargains at Dow 8K and Dow 7K. There are pockets of value that I have written articles about.
However, for the index buyer of the S&P 500 stocks at 26x earnings and buoyed by buybacks, there is considerable risk both in the short-term and medium-term.
The goal is to buy when the risk/ reward is overwhelmingly in the investor’s favor. And by many objective factors, this market is more than fully valued. As evidenced by the Market cap to GDP.
Stocks in the mainstream:
1929: Shoeshine Boys
WHEN THE SHOESHINE BOYS TALK STOCKS IT WAS A GREAT SELL SIGNAL IN 1929.
JOE KENNEDY, a famous rich guy in his day, exited the stock market in timely fashion after a shoeshine boy gave him some stock tips.
He figured that when the shoeshine boys have tips, the market is too popular for its own good, a theory also advanced by Bernard Baruch, another vested interest who described the scene before the big Crash:
“Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929.”
Investing Guru Tony Robbins:
Self-help guru, Tony Robbins, has released his second book on investing since this bull market began, Unshakeable. His investing advice is in addition to his full schedule as a self-help guru.
“If you don’t sell, you don’t lose money,” says Tony Robbins. “Every single bear market has turned into a bull market.”
Conclusion:
We’ve come a long way from panic to complacency.
There are small pockets of value, but the risk/ reward is very challenging. The consumer has tremendous debt, and interest rates are set to climb higher.
This is the market we have: full panic at 8,000 and full complacency at 25,000.
Read my post, How to profit from the next panic.
Things can and do change quickly. And higher interest rates will have an impact on both consumers and investors.
I expect buying opportunities as volatility returns and uncertainty comes back in the market.
That allows me to be patient and wait for better opportunities to come.
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