Invest now and weather the storm or wait for sunny days?

I'm fairly new to value investing and while I understand that it is very difficult to time the market, I was hoping for some advice for the right time to jump in. I have a good chunk of cash saved up that I hoped to invest in an index ETF per recommendations by Buffet and other value investors, but is now the right time? On one hand, through research and listening to financial news, the market is highly inflated and many of the ETFs indices (ex: tracking the S&P 500) are over-valued and hitting all-time highs every other day. History shows that we are due for a correction and the market is primed. However, on the other hand, as I already mentioned, you can't time the market. Tony Robbins gives an example in his most recent book Unshakeable about 5 hypothetical portfolios in which an investor has $2000 to invest every year for 20 years. From 1992 to 2012, the investor who correctly times the best day every year for 20 years would end with $87,000 and the investor who picks the worst day every year for 20 years would end with $70,000. The investor who invests that money immediately would have $80,000 and one with dollar cost averaging would have $75,000. And in the end, the investor who kept it all as cash would have $57,000. Scenarios like these make me believe that maybe now is the right time to invest some cash while saving some for the future (80%, 20% split).

Before I ramble on more, I'm interested to hear everyone's thoughts on my question. Is now the right time or should I wait to make my first investment? And secondly, am I correct that an ETF index is the right place to start or do you see better opportunities elsewhere?

Thanks

Answers

  • Hi,

    You don't have to go all in to begin with, if you don't feel completely sure. You could take a portion of your savings (less than the 80% you mention) and begin simple with an ETF to 'get your feet wet' or to test your judgement.

    Yes, a broad ETF is a decent starting point. As you say, the market is high now, but... there's no guarantee that it'll come down anytime soon. It might be worth waiting for a fall in the market, but what if that takes several more years? Will you be happy to sit on your hands during that time? Even a low-yield bond is better than nothing, as at least you're making something to offset inflation.

    Regards,

    Aidan
  • Hey!

    Timing the market or knowing when its going to crash is basically impossible, so dont bother taking that into accounting. If you wanna value invest, you shouldnt be afraid of locking in your cash anyhow, and the markets will always return to a higher point.
    Think of it like this.
    Look at a daily chart - Try to see if you can get in at the daily low point! Its basically impossible to find. So maybe dont try to guess where the lowest or highest point is! Just because you didnt get in at the lowest point of the day, or got out at the highest, dosnt mean you cant make money.

    Try to go in smaller like Aidan said! Get a feeling of the market, and if its uncomfortable for you to know that the bubble might burst, maybe waiting is better for you?

    Hope this helped

    Regards

    Aske




  • I can tell you just what I did:
    After having invested quite heavily over the last few years, I recently panicked some months ago - and
    sold everything.
    I expect a market crash in the order of at least 50% in the next upcoming years.
    So my advice is: Wait.

    Thanks

    Christoph
  • I say wait and save move money in the mean time.
  • @christoph is this your view on all markets or just US and Europe based companies? Mohnish Pabrai and Guy Spier did an interview last weekend while at the Berkshire annual meeting and said they are finding opportunities in India and other foreign markets. Just curious of your take on it. Here is the link to the interview:


    Also, your website and blog look great! Looking forward to reading more as you post.
  • @christoph . It does not make sense for me why u sold all your stocks. The market might be overvalued, but you are holding individual stocks and not index fund? Induviduall stocks are still undervalued in this market conditions, even though the market as a whole is overvalued. I am suprised you panicked and tries on market-timing.
  • I don't see this as necessarily black and white. If you're starting out, develop a simple framework for how you want to be allocated (stocks/bonds/cash equivalents). Consider that a "long only" portfolio and make sure you have other savings for shorter term needs.

    Weight yourself more on cash equivalents if you're worried about the macro - but my recommendation is to be in the market. No one knows the macro. We do know that at some point you will likely lose 50% (or more) of your market value. Charlie Munger suggests that if you can not handle that with some equanimity, than maybe this is not the game for you to be playing.



  • I too am a newbie investor (first post on the forum). Started investing in April. I currently don't have a job. I have about $14,000 in my saving account for short term needs.
    I put about $20,000 in IT ETFs and FB/APPL stock. Then I'm holding about $13,300 in cash for future investments just incase the market crashes. My current positions are long term. I know I'm not well diversified.
    Curious what others think and what their positions are.
  • If you are comfortable with your portfolio businesses and their absolute (not relative)
    valuations, there is no reason to exit or not add to such positions irrespective of what market
    valuations are.
  • edited May 20
    Hi guys,

    The market is <b class="Bold">not</b> expensive. The US is expensive, yes, but the overall world is fairly priced. The CAPE average of MSCI world countries since 1989 is 21.0 and the current CAPE is 21.8. The PB average since 1989 is 2.0, equal to the current PB.

    http://www.starcapital.de/files/publikationen/Research_2016-01_Predicting_Stock_Market_Returns_Shiller_CAPE_Keimling.pdf

    http://www.starcapital.de/research/stockmarketvaluation

    Some ETFs to look into:
    - https://www.ishares.com/us/products/239628/ EFV: iShares MSCI EAFE Value</a>
    - http://www.cambriafunds.com/gval.aspx GVAL: Cambria Global Value</a>
    - https://www.schwabfunds.com/public/csim/home/products/exchange_traded_funds/summary.html?symbol=SCHE SCHE: Schwab Emerging Markets Equity
    - https://www.ishares.com/us/products/264617/ishares-core-msci-europe-etf IEUR: iShares Core MSCI Europe, alternatively the minimum volatility version EUMV: https://www.ishares.com/us/products/264611/

    I have all my investable assets in stocks. I don't know yet how I would tolerate a 50% loss - I haven't been through that yet (and hopefully I won't need to go through that since I'm a trend follower, but no guarantee).
  • Here are the reasons,why I sold everything:
    1) I consider stocks in the US and europe extremely overvalued. and here i really mean the complete markets,not only the averages. I do not know of any decent picks here. Of course there might always be some obscure net-nets,that somehow fell off the radar and are still cheap.
    But I do not know of any. And every single "normal" stock i look at is absurdly expensive. If you know any undervalued stock,I would be very interested to know.
    2) Regarding emerging markets:I mostly do not invest in these too much-they are very hard to value(for example:Russian accounting is totally different to GAAP-accounting.).Then you have all those state-controlled companies in emerging markets,chinese zombie banks,etc.
    Regarding India:I think the ratio of nonperforming loans on the indian banks balance sheets is 16%! No,thank you.

    I keep my view:Stocks and bonds are in extreme bubbles. There is absolutely nothing worth to invest right now.
  • so according to this logic our stock NOV got expensive because the overall market got Expensive? And the stock should be sold because of this. Strange strategy and logic Imo. I vould have understood it if your stocks had reached intrinsic value though. This sounds like market timing for me. your strategy might be superior to mine, but this goes against everything I have read about value investing in individual stocks.
  • Hi christoph,

    Europe in total has a CAPE of 17.6 and P/B 1.8, which is below historical average for the overall market. It shouldn't be hard to pick something cheap here... And if it's hard to pick, buy an index or quant fund like I do :smile:
  • Hi liberty,
    Dont know why-but i never could find any decent picks in europe. Not even 5 years ago. I had owned Munich Re and still hold a tiny portion of Goodwin plc. That is it. In the whole of europe.
    And the CAPE..I would argue that an index full of overleveraged bank stocks is no sound investment-even if the CAPE looks ok.
    And:the CAPE becomes more meaningful when it is margin-adjusted(since profit margins also mean-revert). Since we currently see historically very high margins,this margin-adjusted CAPE would no longer look so cheap.
    If you know any interesting stocks in europe I would be very interested. Never could find anything. Mostly bad balance sheets,no moat,capital intensive.
    Much easier to find good companies in the US.

    Thanks
    Christoph
  • I share Christoph's concerns regarding the current market conditions, I am becoming increasingly fearful as I see more and more people becoming greedy, by greedy I mean the staggering levels of private debt we currently see around the world and the absurd valuations we are seeing in the markets. The public debt situation is also completely out of control. There has been no meaningful economic recovery with stagnation in wage growth and anaemic economic growth in the major economies. I am concerned that inflation may begin to pick up, it is already doing so here in the UK. If the central planners panic and raise rates to try and stifle inflation this will put huge pressure on both individuals and companies being able to service interest payments on debt. As Buffett says, it's only when the tide goes out that you see who has been swimming naked! We obviously cannot accurately predict or time the market but we can certainly heed the signs we are seeing. When there is little value on offer it seems sensible to wait patiently and accumulate dry powder. The current picture in the markets and the wider economy is concerning to me.

    Regards,

    Anaximander
  • edited May 31
    Hi Anaximander,

    How do your views on the macroeconomic environment guide your investment decisions with regard to your net net portfolio in particular?

    Kind regards,
    G
  • The fact that many value investors are concerned about this market conditions make me think there is still plenty of upside still. Its when even value investors are not concerned that there might be time to be sceptic. Because at that time there will be no more buyers in the market.
  • Hi @Ecofreedom

    not sure, I can follow your latest argument.
    Personally, I will remain concerned as long as we see these elevated levels in the market.
    If the market continues to rise, I will surely not stop being concerned (just the opposite, in fact).
    So if many value investors remain concerned as well, the market should rise indefintiely, if your argumentation was correct. And this is not true.

    Besides: If a person stops being concerned BECAUSE the market rises, I do not consider this person a value investor - but a speculator instead.

    Thanks

    Christoph
  • edited June 1
    You are right. My logic does not make sense.
    Anyway here are some questions:

    How many investors can be classified as value investors? 10%? Can we define a value investor?
    where the value investing community scared in 2007/2008 right before the financial crisis?
    Where many value investors entusiastically buying in march 2009?

    My general impression is that its still sceptisism to this market among many investors, and I think the crash will usually come when there seem to be no problem in the economy and sky is clear and rosy.
    My RSS feed is full av doom and gloom blog post about this market. Was it like that in 2007/2008?, but then maybe these people are hardcore value investors that is being fearful when others are greedy? Still I see market crash predictions in the mainstream media also. So the general public are fearful out there it seems like. Therefore I still think the market has more upside in the short term. Just my speculative opinion.
  • Hi Christoph,

    If you found individual companies you considered undervalued would you invest in them today despite the overall market being overvalued?

    Kind regards,
    G
  • But anyway I dont even attempt market prediction so I stay invested in my stocks regardless of the overall market as long as my stocks are below my estimated I.V. I am still suprised that you sold all your stocks because of the general market conditions. Only when they are above I.V in my opinion.
  • edited June 1
    Hi Eco,

    I agree with your sentiment - one should only be out of the market when value can't be found - not when the overall market is overvalued, as it can remain so for decades. It is hard to find reliable data but I'd say there are about 50,000 stocks listed in developed markets and unless you're an institutional investor virtually all those stocks can be invested in. I have found the greatest mispricing in stocks with market caps < USD 100m. The empirical evidence is clear - the cheaper the stock and the smaller it is the greater the historical return.

    I can't understand why anyone would want to compete with institutional managers and assume they have an edge over the long term. It is a zero sum game - to me it just makes sense to educate yourself and become a "middleweight" and then go compete in the "super fly weight" category since there is no restriction on doing just that.
  • hi @christoph ,

    [quote]Besides: If a person stops being concerned BECAUSE the market rises, I do not consider this person a value investor - but a speculator instead.[/quote]

    Then Buffett is not a value investor:

  • Hi G, I would consider net-net investing to be classified as a type of 'special situations' investing and as such the catalyst is, generally speaking, an internal rather than external factor. As such macroeconomic factors would have little to no bearing upon investment decisions. Having said that the same applies to most value investments as one shouldn't invest in a company based upon macroeconomic factors but rather based upon the fundamentals of the company. The macroeconomic factors merely provide an opportunity to enter or exit an investment at a favourable price.

    Considering the fact that value opportunities are currently few and far between(In the western economies at least) and we have major distortions within multiple markets it seems prudent to wait for opportunities to arise or look elsewhere if one has global coverage. As I stated earlier, I am becoming increasingly concerned with the macro-economic situation I am seeing.

    Regards,

    Anaximander
  • Hi Anaximander,

    Thanks a lot for the post.

    I know you have read "What Has Worked in Investing - Tweedy, Browne" - you recommended it to me! (Thank you!) It showed that being fully invested was the best course of action. In addition, beyond simple trend following rules e.g. 12 or 10 month moving average and time series momentum rules I don't believe there are any robust indicators that can be reliably used to time the exit and entry into the equity market. Such trend following rules, I believe, keep one out of the market about 30% of the time which in turn means an increase in trading costs and tax events (possibly).

    What macroeconomic indicators are you using to move out of the market and what evidence exists to suggest they are robust? What indicators would you use to get back into the market?

    Kind regards,
    G
  • I think its best for most investors to stay close to fully invested at all times, as long as their individual picks are undervalued. Yes fair enough to not to invest if you cant find value, but still I think there is value out there among the 40.000 or so stocks. If its so smart to sell all the stocks now because of market conditions why arent smart people like warren buffett, monish pabra, guy spier and other great investors selling all their stocks? Even Guy spier says that he prefer to stay fully invested in these conditions because of the lack of other alternatives in fixed income.
  • Hi G,

    With regards to macroeconomic indicators and entry/exit of the markets. First let me say that I am not attempting to time the markets nor do I think it is worth trying to do so. I have begun to withdraw from the markets because I see very little in the way of opportunities for value investments(Obviously some still exist but they are becoming increasingly scarce). I see the larger investment community chasing for yield wherever they can find it and I also see worryingly high valuations in various markets, i.e. bonds, real estate, fine art, equities. You are indeed correct with regards to the Tweedy Browne and it's historical data supporting the idea of remaining fully invested. Recently I have begun to realize more and more that we are in uncharted territory. Never, since the time of Babylon have rates been and remained so low and never in history have we see such enormous levels of both public and private debt, this is making me very uncomfortable. As Munger has said and I'm somewhat paraphrasing, if you are not perturbed by what is before us you need your head checked. This has prompted me to question whether one can reasonably rely on past empirical studies given where we currently find ourselves. Now one can argue that yield is being sacrificed by not being in the markets but the flip side of this is the opportunity cost of not having sufficient capital to put to work should a major correction/crash occur.
    With regards to specific macroeconomic indicators, I pay close attention to what Prof Steve Keen and Richard Vague are saying regarding private debt levels and this has been a very good indicator of alerting the risk of economic/market downturns. If fact I would say that Growth of private debt relative to GDP and the rate of change in that growth appears, at least to my mind, to be the single best indicator to monitor. In short, I am withdrawing from the markets because I am perturbed by the levels of debt, market valuations and the fact that I see little in the way of value. Time will tell whether this is a prudent position to take

    Regards,

    Anaximander
  • Hi Anaximander,

    "Recently I have begun to realize more and more that we are in uncharted territory"

    Is this a sophisticated way of saying "this time is different"? ;-)

    I watched the lecture by Professor Keen and read his paper which you recommended and I think I heard an interview of his on Adventures in Finance - what he says makes sense. My only issue is that the collapse doesn't occur for another few years.

    The last secular bull ran from the early 80's to '99.

    Are you maintaining your net net portfolio through all this or has that been scaled down too?

    Thanks for your insights as always.

    Kind regards,
    G
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