# For all the index investors - We're in a sideways market for at least 6 years



## ringledman (30 Jun 2011)

*http://www.marketoracle.co.uk/Article28881.html*

Best to understand history and emperical evidence. Secular bear markets grind sideays for a good 16 years to 21.

Index investing is going nowhere for the next 6 years at least IMO for the western stockmarkets. 

A pity really because index investing is excellent during long term secular bull markets (i.e 1982-2000) to keep management fees low. Index investing during secular bears is not a good strategy IMO.

Best to stick to value defensives that have already hit P/E and div yield secular lows for a few years yet.

Discuss...


> *New Stocks Bear Market? *
> 
> *Stock-Markets / Stock Markets 2011 Jun 24, 2011 - 12:28 PM *
> 
> ...


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## Marc (2 Jul 2011)

WARNING This is a Market timing subscription newsletter and you should ignore it as there is no evidence in a multitude of academic research papers that attempting to follow a market timing strategy adds value to a portfolio.

As the USA celebrates it's 235th birthday, Wall Street was in a generous mood by giving nearly a trillion dollars in gains this week. To be more precise, the US stock market rose every day this week, increasing by a total of 5.6 percent, as measured by the broadest US stock index, the Wilshire 5000. This 5.6 percent gain translates to about $910 billion dollars. Damn these "Secular Bear Markets" are expensive for investors!

Stocks are always risky. It’s not like when you go to the beach—if there’s a green flag it’s safe, and if there’s a red flag you stay out of the water. There’s never a green flag for stocks. People may think it’s safe like they thought it was safe in the late ’90s. But stocks are always risky. It has to be so. Otherwise there would be no risk premium.

The problem is there’s a difference between risk and uncertainty that many people don’t understand. Most investors focus on the wrong thing. They’re trying to manage returns somehow—either by themselves or by hiring active managers to do it. They’re all playing what Charles Ellis called a loser’s game. You can’t control what you can’t forecast.

As legendary Fidelity fund manager Peter lynch said more money has been lost worrying about the next bear market than is actually lost in the bear market.

Remember the market has a habit of handing out large tuition bills to those who ignore the fact that current prices are an unbiased predictor that is to say they are the best estimate of fair value at anytime.

[broken link removed]

For an explanation of this graph see [broken link removed]

Investors who bet against the market are arrogant enough to believe that they know more than the combined views of all other market participants. In other words EVERYONE else is wrong and I am right. 

Of course this may turn out to be the case simply by luck. If i keep saying the market is going to go down ill be right eventually. What does the evidence say? In large studies or market timing newsletters, few manage to achieve even a 50 50 success rate that i would expect from my two year old randomly selecting buy or sell recommendations.

Perhaps Warren Buffett was right when he said: ‘‘We have long felt that the only value of stock forecasters is to make fortunetellers look good. Even now, I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children"

Ill happily offer a subscription service to my sons guesses on the future direction of the market but are you willing to bet your retirement on it?


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## ringledman (2 Jul 2011)

> *An Analysis of Secular Bear Markets and Secular Bull Markets since 1900*
> 
> From a historical perspective since 1900 there have been 3 Secular Bull Markets and 3 Secular Bear Markets as shown by the tables below of the Dow and S&P 500. As you can see during a Secular Bull Market the Average Annual Return (highlighted in red) is considerably higher than during a Secular Bear Market (highlighted in blue). Thus the long term Buy and Hold strategy that worked well in the 1980's and 1990's for investors may have not worked very well during the Secular Bear Markets of 1906-1921, 1929-1949 and 1966-1982.​
> *Secular Bear Markets vs Secular Bull Markets and Dow Performance*
> ...


 

Based on history, index purchasers now will be lucky to break even after inflation over the next 4 to 10 years. 

I guess _'its different this time'_? 

A different strategy from index investing is required until the next secular bull market begins. We are 4 years away as a bare minimum. 

I am happy to index invest during a secular bull at a nice 0.15%-0.25% in fees but now is still not the time to do so. 

With the Western markets peaking on their highest ever P/Es in 99/00 then we have a serious regression below the mean before indexes become cheap enough to boom again. This implies a long drawn out secular bear. 

Even at the market low of 2009, some 9 years since the secular bear market started,  the CAPE P/E ratio bottomed at a level that was way too high and way too early to mark a secular low in order to allow a secular bull to form.

http://www.ritholtz.com/blog/2010/02/what-is-the-cyclically-adjusted-pe-ratio/


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## Marc (2 Jul 2011)

My tea leaves were also giving a strong sell signal and I saw a single Magpie today. 

Better get all our clients out of the market quickly

All these so called valuation signals have been tested empirically and none have been shown to be reliable predictors of future market returns.


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## ringledman (2 Jul 2011)

Marc said:


> All these so called valuation signals have been tested empirically and none have been shown to be reliable predictors of future market returns.


 
What I find interesting is that you would buy the market, however expensive.

The Nikkei in 1989 at 50-100 times earnings and dow in 2000 at 35 times earnings, would be fine for the index investor?

Personally I rather look at history at it often goes in long cycles to give the decades in which index investing is probably worthwhile and the decades in which it probably isn't. No exact science but currently proving exactly as history shows.

We are currently in the latter in which index investing is not a good move.

I rate equities a lot at present (value defensives), I just don't rate the Western indexes (Except Japan, the rest are half full of highly cyclical and expensive trash).

Regarding the graph you posted - a 100% rise followed by a 50% fall equates to a zero move. Therefore the upward percentages should be half the height than the downward falls to put it into better perspective. Likewise it represents 'cyclical' moves up and down, these are not the same thing as 'secular' long term trends. 

Cumulate all the minus figures in the secular bear of 1966-1982 or the secular bear of 2000-2011 against the positive figures and what you get is a sideways market. add in inflation over these periods and what you get is negative returns or break even at best for index investors during these secular bears. its a sad fact of life and one that every investor needs to be aware of.


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## ALBERT* (8 Jul 2011)

Marc said:


> My tea leaves were also giving a strong sell signal and I saw a single Magpie today.
> 
> Better get all our clients out of the market quickly
> 
> All these so called valuation signals have been tested empirically and none have been shown to be reliable predictors of future market returns.



Valuation methods may not work in market timing sense, but surely when Hussman's peak to peak earnings method, John Bogle's expected returns method, GMO asset class expected return, Gordon Eqn all point to low expected long term returns on the S+P that it v likely that will be the case. I don't believe such models should be used as market timers but to give the investor a realistic expectation of future longterm returns. Such evaluation models are most valuable IMO when stocks, as must surely happen, fall out of favour as an asset class and become very cheap to help assure the investor to invest in a climate of pessimism and high expected returns.


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## elcato (8 Jul 2011)

I got a puncture on my cycle this morning. Boy, did I not see that coming. On the plus side it's gonna be six years before I get another one.


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## ringledman (8 Jul 2011)

elcato said:


> I got a puncture on my cycle this morning. Boy, did I not see that coming. On the plus side it's gonna be six years before I get another one.



It's all to do with valuation. 

The market goes in long term (secular bull) uptrends that peak on high P/E multiples followed by which the market then goes on a long term sideways trend (secular bear).

The secular bear usualy last 15-25 years or so until the valuation of the market as a whole becomes exceptionally cheap.

This is merely what history shows us time and time again. 

[broken link removed]

Valuation is everything when it comes to expected returns. Everything.

Buying the index now is a better thing to do than buying thr index in 2000 (when P/Es were the highest ever) but based on history, buying the indexes in 5-10 years or so will likely be a better thing to do than pile into indexes now. 

After the biggest bull run in history with P/Es peking in 2000 on their highest level ever, then it would imply that we are in for a correspondingly long secular bear market until P/Es hit rock bottom. This process usually takes a couple of decades.

As albert said, no one can predict the market on a short term basis, however valuations and the regression cycle of valuations over time (from overvalued to undervalued to overvalued again) is everything when it comes to expected future returns.

Buyng Western indexes in the middle of a secular bear is likely to result in sub par performance against inflation over the course of a number of years.


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## mercman (8 Jul 2011)

Marc said:


> All these so called valuation signals have been tested empirically and none have been shown to be reliable predictors of future market returns.



Wish more people would realise this is fact not persons out there trying to act GOD in relation to their market knowledge. In fact working on historical facts really means that know damn all.


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## onq (9 Jul 2011)

I'd be more interested in who is buying what right now.

ONQ.


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## Jim2007 (9 Jul 2011)

ringledman said:


> It's all to do with valuation.



Actually it's not!!!  Valuation does play a part in the equation, but there are others and asset allocation is one of the primary ones.

You make the assumption in your analysis that what you call "Index Investors" simply blindly just buy an index and carry on.  Based on my experience, I would say that a majority of what you call "Index Investors" are in fact practising an asset allocation strategy using index ETFs as an easy way to execute the strategy.   That being the case, they would not as you suggest be pumping money into over valued indexes, but would in fact be at that point putting money into other asset classes. 

Furthermore, more actively managed portfolios tend to make use of sector index ETFs so that they can make tactical allocations over and under weighting sectors based on valuation and expected performance.  They don't simply buy the S&P 500 or the MSCI Europe or what ever and have done with it.

The use of asset allocation and tactical allocations will produce a very different result over the time period your suggesting.

Jim.


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## ringledman (9 Jul 2011)

mercman said:


> Wish more people would realise this is fact not persons out there trying to act GOD in relation to their market knowledge. In fact working on historical facts really means that know damn all.


 
I think basing one's future investment decisions on economic history is a better base than basing your decisions on blind faith.

'Stock markets always go up in the long term'.

unfortunately they don't.


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## ringledman (9 Jul 2011)

onq said:


> I'd be more interested in who is buying what right now.
> 
> ONQ.


 
Yes me too.

I like large mega-cap stocks in defensive industries like pharmaceuticals, telecoms, consumer staples. 

Those on decent yields of 5%+ which have had major regression below the mean in terms of P/E valuations. 

i.e. the parts of the indexes which aren't overvalued cyclical trash.


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## ringledman (9 Jul 2011)

Jim2007 said:


> Actually it's not!!! Valuation does play a part in the equation, but there are others and asset allocation is one of the primary ones.
> 
> You make the assumption in your analysis that what you call "Index Investors" simply blindly just buy an index and carry on. Based on my experience, I would say that a majority of what you call "Index Investors" are in fact practising an asset allocation strategy using index ETFs as an easy way to execute the strategy. That being the case, they would not as you suggest be pumping money into over valued indexes, but would in fact be at that point putting money into other asset classes.
> 
> ...


 

Jim, I agree asset allocation is exceptionally important to an investor, probably the most important factor above the need to keep fees low in determining overall investment returns. 

However, this does not detract from the point that overall indexes contain a number of overvalued sectors as well as undervalued sectors. On this basis buying the overall market as based on emperical evidence suggests that the market as a whole has further to grind sideways before becoming exceptionally cheap (the CAPE is still way too high and we are way too early to be entering a new bull market in the FTSE, S&P 500 etc).

In buying the overall market indexes, starting valuation is everything. Everything. 

Buying individual sectors through ETFs, I agree is a good move. Many sectors I see as cheap on valuation (pharma, healthcare, telecoms) or have a secular reasons to invest (ie oil and gas as a result of demand/supply imbalances).


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## Marc (13 Jul 2011)

So I had a look at this link [broken link removed]

And in true company accounts style I started reading from the back and found that page 21 presents the return on the S&P 500 since 2000 based on a price only index.

To be clear a price only index simply tracks the change in share prices and excludes the returns from dividends.

Yet on page two of this document it is explained that dividends account for 4.5%pa of the total return from stocks some 45% of the total return over the last 100 years. 

This misleading representation of facts has to call into question the validity of the claims made and would certainly mean that the document isn't of a standard suitable for publication in a respected finance journal.

Draw your own conclusions readers


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## ringledman (13 Jul 2011)

Marc said:


> So I had a look at this link [broken link removed]
> 
> And in true company accounts style I started reading from the back and found that page 21 presents the return on the S&P 500 since 2000 based on a price only index.
> 
> ...


 
Pretty much the same conclusion from the FPA Journal in 2006 - 


(need to register to download)

Some of the salient points -





> As a profession that has spent decades establishing itself in the midst of one of the greatest bull markets in history, it is understandably difficult for financial planners to conceive of the possibility that the markets of the future might be fundamentally different from those of the past. Although we all have repeated the ubiquitous phrase, "past performance is not an indicator of future results," we produce financial plans that are predicated on historical average market returns, and then try to design portfolios that will be most likely to match those long-term averages.
> 
> However, since March of 2000, it is probable that most financial planners have delivered a level of investment performance that is far below the assumptions made in their clients' financial plans at that time, even if the planner had used "reasonable" historical averages rather than the remarkable returns of the 1990s.
> 
> ...


 
Every investor should review the table on page 4 that shows the P/E level on which secular bull markets end and secular bear markets end.

The USA 2000 bubble had a market P/E of 42 a level unheard at the end of previous secular bull markets (typically a P/E in the tens or twenties).

Likewise previous secular bear markets finished on P/Es of 5-12 times.

This implies that the 2000 bubble bust will take a significant time to play out as it was the largest stock market bubble ever recorded (except for Nikkei in 1990). 

Likewise the current market hasn't bottomed out at a level anywhere near 5-12 times (except for certain value defensive stocks) to deduce that it is yet time to return to market indexes.


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