When will it be safe to begin value investing?

Hi everyone! I am your typical uneducated emotional terrible investor. All the money I've made in the past through investing has pretty much been on accident. But I'm seeking to change all of that! Have spent the last year or so listening to The Investors Podcast and Meb Faber's podcast, and reading the occasional investing book when I have time. Have convinced myself that value investing works. Specifically, I read Greenblatt's "The Little Book that (Still) Beats the Market" twice and I'm interested in following the Magic Formula for a portion of my portfolio.

My main question is: in the current economic climate, when will it be safe to begin value investing?

For example, the Magic Formula (as per the book) beat the pants off of the S&P 500 during the dotcom crash of 2000-2003, but performed just as badly as the S&P 500 in 2008. I've heard Preston discuss on the podcast how holding cash right now is wise, and on the podcast Preston and Stig have discussed how Berkshire Hathaway has a very large cash position. So, can someone offer a red light / green light of when to be out of the market and when to be in the market? Should I simply wait until the end of the next crash, whenever that is, to begin value investing?



  • Here is the answer: http://mebfaber.com/timing-model/

    I was quite against technical analysis before, but after looking into the historical performance, I have been more into using trend/momentum in addition to value. The reason is the huge draw down reduction this strategy has had historically. Meb has a brilliant white paper on this: http://www.cambriainvestments.com/wp-content/uploads/2016/07/Trinity_DIGITAL_final.pdf

    I agree 100% with Preston that US is expensive, but I disagree that holding lots of cash is a good idea. I think holding cash is a bad idea when there are cheap and up-trending markets out there... Currently Emerging markets is a good place to be. At least for me. But you need to choose a strategy that feels good for you, a strategy you understand and believe in :smile:
  • Thank you liberty. I've started reading through Meb Faber's Timing Model, i.e., "A Quantitative Approach to Tactical Asset Allocation" (2013) (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461). Right away on page 6 it shows that real returns on cash are strictly negative, so yes, probably not a good idea to hold a lot of cash for a long time!

    I was expecting someone to come back and say, "Don't try to time the market, you should be value investing through thick and thin."

    I guess a related question would be, if you have a value portfolio (20 or 30 stocks, low P/E), how would they perform with a market crash? For example, would their P/E of 5 go down to a P/E of 3? Or would they stay at 5 and the expensive stocks would come down? In other words, is there less risk in a value portfolio than in an S&P 500, as the "Little Book that (Still) Beats the Market" says, or are they correlated so that it's a bad idea to be in stocks at all while the overall market is expensive?
  • I think you should check out Mohnish Pabrai's 2nd interview. He talks about analyzing businesses individually instead of analyzing the market.

    I know that a lot of TIP fans are fans of Meb Faber but I have failed to see Meb's claims backed up by anything that resembles evidence of successful application of investing skill. I think this is one of the not so rare situations of someone who is a smooth talker who has fallen flat every time he's tried to put his grand theories to the pavement.
  • Also earnings go down in a recession. So if for example the price goes down 40% and the earnings 25%, a P/E of 5 will become a P/E of 4. I think the downside risk is around the same for value as for the overall market, maybe slightly less. Warren has lost 50% or more of his wealth 6 times. That's okay for him. He tolerates it, but I don't think I do. I have never lost 50% of my porfolio and don't know how I would feel about that. That's why I want some downside protection. Trend following has even outperformed the market with around 4%-points historically although it holds cash 30% of the time.
  • Hi,
    Good Morning to All,

    I am a new member & i want to share a post (by mr. james altucher) < https://dailyreckoning.com/three-magic-words-investing-money/?curator=alphaideas >

    it seems be an eye opening post,it can be v. helpful/equally hurting for every beginner analyst/investor who want to learn/jump in to value or other investing arena/having any pleasant hope about investing.

    I have a query & i’m sure your answer to that’d be highly beneficial to all guys who are financially challenged today but having a vision of financially better tomorrow by practicing value/other investing–

    Should we believe the jargon i.e. Value/Midcap dividend/Momentum Investing,multibegger stocks etc?
    How can a person who’s having very less money and resources can profitably practice value/midcap dividend/momentum or other investing styles ?
    Whether Value/Midcap dividend/Momentum Investing is practically having significant edge over any form of
    trading in stock market for such financially challenged guys who want to get financially freedom & to escape rate race?

    Pl.Guide how to develop profitable investing methodology in Indian context.

    Sir feel free to say no/any reply,i understand the professional/other limitations.

    Thank you for your time and consideration.


  • Hey guys. I don't make a lot of posts on the forum (not nearly as many as I would like), but one of the things I pay very close attention to for "Market Timing", or rather "positioning in the credit cycle," is the trend in unemployment. I learned from Jeff Gundlach that this is one of the most important metrics he uses to see where he's at in the business cycle. So today, when you see this chart, it's getting very close to an all time low. Once this happens, the Federal Reserve (usually) starts adjusting money supply so tightening occurs. This is a great point to start minimizing your exposure to equities with high premiums. Especially if the products or services are cyclic (i.e. car manufactures...things like that).

    So with that said, I know cash is a losing proposition (-2% ish) per year, but your downside risk is -2% with an upside of -2%. I would argue the stock market is currently positioned with -40%+ downside risk with about a 1.5% (real return) upside. Therefore if we would apply probabilities to those array of returns, I think you'll find the -2% to be a hell of a deal relative to the equity positions. Now I'm talking about the market as a whole. You might find an individual company out there with great cash flow at a low price that might be worth the entry today. If you do, post the ticker and we can have a conversation around the potential array of outcomes and probabilities that are associated with that pick. Curious to hear your thoughts! Love the conversation!

  • hi @Preston ,

    You are talking about the US market as a whole? Then I agree. But the overall world's equity market is priced just slightly above historical average. Many single countries are cheap based on CAPE and P/B: Czech, Portugal, Hungary, Singapore, Norway. Wouldn't it be better to invest in some of these cheap countries instead of holding cash and loosing 1 or 2% per year?
  • Liberty, absolutely. One of the things we are building on the new TIPmoney platform is an international value investing page. On this page you can see the estimated yield for each country's coorisponding stock market. For example, Russia is currently priced in excess of 10% (even after accounting for 5% inflation). You could buy a low cost ETF that represents that market if you wish. One important consideration is the impact that the US economy has on other global markets. For example, in 2009, The Russian ETF I follow contracted nearly 70%. Could the same happen this time...sure, but who knows. It sure is priced cheap today.
  • edited June 2017
    I have decided to stay in the market as long as the Treasury interest rate stays low. In the past few weeks I have noticed that the interest rate went down significantly from the past rate hikes. So I am pretty optimistic about the US stock market as long as the treasury rate stays low. I usually invest in NASDAQ 100 etf and made a good profit over the past few months. And since the interest rate went down significantly from the past rate hike I am even more optimistic with US stocks. Also I think that if you hold broad American index etf such as S&P 500 or NASDAQ 100 you will be diversified enough internationally since most American business conducts business all over the world. Also before the 2008 financial crisis and dot com bubble there was significant rate hikes. Since that is not happening right now I don't think there would be a stock market crash. There might be a bear market or correction but not a crash. But since I am a long term investor I wont worry too much about a stock market correction or bear market. But if it happens I will try my best to buy more stocks at a cheaper price as the market always bounces back.Even if you bought the stocks the worst day (the peak) before the 2008 financial crisis it would have taken you just 5 years to get back your invested principle. So my suggestion is even if there is a stock market crash coming and if you invest at the worst day before market crash you can still get you money back if you wait longer, but also take advantage of that market dip and buy more stocks. Trying to time the market is one of the worst decision I have ever made since I thought the stock market would crash after Trump got elected but the opposite happened. People have been saying the market is overvalued and waiting for the crash since 2014. But by that time the stocks went up about 60 percent. These are just my opinion. Let me know what you guys think.
  • I recommend everyone to pay close attention to levels of private debt relative to GDP and the growth in said levels of private debt. Professor Steve Keen is worth checking out as he argues, based upon empirical evidence that high levels of private debt and increasing growth in these levels tends to precede economic/market downturns;

    Prof. Keen, who predicted the 2008 crash based upon his work advancing Hyman Minsky Financial Instability Model and the study of private debt, argues that the following countries will almost certainly suffer a recession in the near-term future; China, Canada, Australia, South Korea, Belgium, Norway and Sweden.


  • Hi All,
    Thanks for this great thread.
    Like many, I cashed out several positions a few months ago and completely agree with Preston's argument that its better to pay a 1-2% premium holding cash in order to avoid a 30-50% drawdown.

    That being said, I am also on a look out that the major risk may be more in currency than in equities. Consequently, instead of a Minsky moment (drawdown due to contracting credit) we instead have a Mises moment ( a crack up boom) as pointed out by Luke Gromen. These crackup booms happen when currencies devalue due to debt and in contrast to fixed income, equities can partially protect one in a (hyper)inflationary environment. Consequently, equities rise due to devaluation of the dollar (see Weinmar Germany, Argentina, Zimbabwe, Venezulea etc). I don't think such a Mises moment is upon us just yet as evidenced by the flattening/inverting yield curves but I have to question the assumption that the market will always fall in grossly overvalued environments so that I can minimize loss of capital if my positioning is wrong.

    Any other suggestions to watch for in case this time is actually a Mises moment than a Minsky moment.
  • Preston,

    You should post more often. That was fantastic.

  • NetNet,

    Thank you so much. These chat boards are so much fun - I need to get in here more often!

  • Hi all. Firstly, I am relatively new to TIP but can't get enough of the shows and information that Preston and Stig provide. Thank you guys for all the information and enjoyment you provide for the community. I would like to say I'm a value investor but if I'm honest with myself I would say I am definitely still a speculator. I am Australian and have been in the sharemarket for about 8-9 years with reasonable returns. I have read the Intelligent Investor and have studied some of Warren Buffet. I invested in a global ETF and European ETF and have a few other positions in Australian shares. I am looking for some advice/clarification which relates to this post. I believe sharemarkets, particularly global are at high value levels and somewhat overpriced. The urge to sell out my positions and hold cash is tempting as I don't feel fixed interest is a good place to be either. That said from what I have read Warren Buffet looks to hold for life and says you can't predict if the sharemarket will go up or down. It will come down at some stage in the future but who knows when,selling out now may still lose upside opportunity. This leads me to my question, is selling out now the right thing to do or are we better to hold and be ready to invest more if and when a downturn comes? Thanks again for your support.
  • Thanks for your reply, Preston. I agree regarding the US economy's impact on the rest of the world. Although other markets are cheap, they might go down together with US if the US-market crashes. But then, if you for example hold Russia and they go down 40%, your stocks would be very, very cheap after the crash. US stocks, on the other hand, would only be fairly priced after a similar crash.

    @Soutttra Why do you think global markets overpriced?
  • Liberty,

    I should clarify first. I hold an ETF of the global top 100 companies which has seen significant gains over the purchase price. While this is a global ETF it is highly weighted towards the US. I also hold a European ETF which has seen significant gains. I'd like to give a more considered, and thoughtful answer but I haven't been able to find the time to do any analysis (hence my comment about speculating). I take note of the information on podcasts, newspapers, other information sources etc, and with the amount of credit in the system at the moment put all of this together and draw the conclusion that we are in a similar situation to 2008 and previous bubbles. I've started to listen to the podcasts and post on the forums to point me in the right direction and help fill some of my blind spots while I work on getting the time to truly to get into investing.

    Long answer to a short question. Thanks for the help and any insights.
  • Hey guys, I’m also new to investing/value investing and wanted to chime in because I’ve had this nagging question in the back of my mind since I started learning about value investing around 6 months ago.

    Whenever I hear someone talk about the market being “overvalued” I was curious as to what was meant by that. Typically the Shiller P/E is used as the metric to claim that the market is overvalued. The term overvalued in itself is relative. In order to be “over”-valued we have to compare it to something that is par-value. I immediately was asking myself, “Compared to what?” Most people I hear talk on the subject point to the historical average Shiller P/E being around 16, and since today it is close to 30 the market is therefore overvalued. This seems strange to me and possibly incorrect because in order to compare today to the average we need to assume that market conditions are also average. I don’t think anyone would agree that today’s market conditions are average otherwise we wouldn’t have this thread.
    So if we can’t accurately compare today’s Shiller P/E to the historical average what is a fair comparison? It seems to me that we should be using what we compare our individual stocks to, the 10 year Treasury note yield.

    As I understand it P/E is a “quick and dirty” way to estimate future returns of stocks in the market. So a P/E of 30 estimates a 3.3% return in the market. When we compare that to the current yield on the 10 year of 2.2% it seems that the market as a whole is not overvalued.

    I make this argument because I feel like the average investor essentially has two choices: stocks or bonds. With bond yields so low, it only seems natural that stocks would be bid up to a point where they yield less than we are used to. But as long as stocks yield more to account for the extra risk involved they are not overvalued. So in effect yields on bonds and Shiller P/E should have an inverse relationship. As interest rates rise Shiller P/E should fall, as interest rates fall Shiller P/E should rise.
    To test this hypothesis I went and looked at some historical data of some markets we know where overvalued.

    01/01/1929 Bond yield =3.6% Shiller P/E= 27.06 or 3.6% expected yield
    01/01/1987 Bond yield= 7.08% Shiller P/E =14.92 or 6.7%
    01/01/2000 Bond yield 6.66% Shiller P/E= 43.77or 2.3%
    01/01/2007 Bond yield 4.76% Shiller P/E= 27.21 or 3.6%

    Bond Yields from http://www.multpl.com/10-year-treasury-rate/table/by-year
    Shiller P/E from http://www.multpl.com/shiller-pe/table

    As you can see stocks had an expected yield of the same or less than bonds during these bubbles before they popped. But today we still have at least a 1% difference. Could we then be looking for value with relative safety at a P/E of say 20-25 since it would still be less than the market as a whole? Is this an over simplistic view of value in the market? I would really love to get some feedback on this subject. Also I know that this doesn’t address some of the other major issues with our current environment i.e. private debt so high, where we are in the business cycle etc. Looking forward to hearing your thoughts, and sorry for the lengthy post.
  • @Preston Do more podcasts like TIP143: MASTERMIND DISCUSSION 2ND QUARTER 2017 - Was really good :smile:

    Also if you ever need an app let me know, would love to be involved.
  • It's safe to begin when you see a dollar being sold for fifty cents by Mr Market. The risk is lowered if you see a dollar on sale for forty cents. Do not look top down. Look bottom up.
  • @ExtremeAthlete so that’s why you love indexing so much? All the bottom up analysis)))
  • Thomas,

    I try to play nice with everyone :D
  • @Gambit stocks and bonds are both overvalued.... I don’t think you can’t value one by saying the other has even less of a return...

    The market has business cycles where misallocated capital is wiped out...

    We are nearer the top of this cycle than the bottom...

    When you buy nearer the bottom the returns are better..
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