Death of Beta-Centric Buy & Hold Long-Only Strat.

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MinimumVariance's picture
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Here's what I predict the academic finance community will suddenly discover -- if you re-run their 'buy and hold' recommendations using data since 1770 (thats when security market prices began  being kept in the UK), you'll find that a 'diversified porfolio of securities allocated among different asset classes produces returns .5% higher than cash".
 
 

newnew's picture
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1770=apples
2009=oranges

B24's picture
B24
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C'Mon New.  What happened in 1792 in England is completely relevant today.
 
Going back just to 1924, I have the holdings page of the first mutual fund - Mass Investors Trust (MFS).  It had 4 categories: Banks & Insurance, Industrials, Railroads & Equipment, and Public Utilities.  Of the 50 something holdings, maybe 10 still exist (now, some may still exist as other names, but I have no idea).  You would recognize: Kodak, GE, GM, Standard Oil, Canadian Pacific, Union Pacific, and AT&T.  Some of the utilities and rails have merged/sold, etc.  Point is, what went on back then is of little consequence today.

buyandhold's picture
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I had a mutual fund wholesaler tell me recently that 'Buy and Hold is dead.' (Not you, he added.) Buying and holding a mutual fund is different, he said, because there the managers are constantly moving around.
To illustrate (and he wasn't an AF guy), if you whip out your ICA guide, there's a page somewhere that shows the ICA has outperformed each individual stock in the Dow 30. If you'd been fortunate enough to hold the best of them for years, you still wouldn't have beaten the fund.
 
I do think you need to go back three or four hundred years if you are studying investment return. It kills me when somebody says 'history tells us,' and then cites something from 20 years ago.
 
 

newnew's picture
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1982-2007=apples with an awesome average equity return
everything else=oranges

anabuhabkuss's picture
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I had someone tell me buy and hold was dead simply because he made 10.5% on his account this past year channel trading AMAT while everything else was down 50%. Listening to his explanation was brutal.

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B24
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Buy and Hold is a strange term.  I mean, like someone said above, if you buy actively managed mutual funds, then you are really buying and holding only the funds your managers want to keep.  So you are not really JUST buying and holding. 
 
Now, some may say that this doesn't work either - only "market timing" works now.  But who the hell can do that accurately?  But if you buy quality and hold it, why would you sell it (except to monetize a large gain that you think cannot be replicated in that stock/bond)?  Point is, investing is the process of buying discounted future cash flows.  In it's simplest form, is that REALLY going to change?  Is this REALLY the New Paradigm? (we know what happened the last time the "old economy" died).
 
So I have heard asset allocation is dead.  I have heard that "buy and hold" is dead. 
 
I'm going to start a Tulip bubble again.

newrepd's picture
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So, if buy and hold is dead, does this mean a return of the retail "commision" broker?

anonymous's picture
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Buy and hold isn't dead.  Buy and ignore is dead.

Squash1's picture
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Hey EDJ has built a large business on that premise...

skeedaddy2's picture
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MinimumVariance wrote: Here's what I predict the academic finance community will suddenly discover -- if you re-run their 'buy and hold' recommendations using data since 1770 (thats when security market prices began  being kept in the UK), you'll find that a 'diversified porfolio of securities allocated among different asset classes produces returns .5% higher than cash".   

Doug Kass crunched these numbers on Warren Buffett:

Wells Fargo: $6.3 billion lost on 290 million shares

American Express: $2.9 billion lost on 151 million shares

Coca-Cola: $2.1 billion lost on 200 million shares

Burlington Northern Santa Fe: $1.8 billion lost on 63 million shares

ConocoPhillips: $1.5 billion lost on 60 million shares

U.S. Bancorp: $1.5 billion on 73 million shares

Kass's bottom line: "All good things, it seems, in markets and life, must come to an end."

Morphius's picture
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Over what time frame? That sounds a lot like someone saying their team is down by a touchdown after the opponent scored on their first possession, so they have obviously lost the game, the playoffs and any chance of the championship.

Perhaps Buffet's looking at an investment horizon that is a tad longer than Mr' Kass' analysis, which presumably covers, what - a year or less?

The investment world is filled with geniuses like Kass who presumed to declare Buffett a bust. There were a ton of them during the tech bubble as well. Only time will tell, but given their respective long term track records of judgment and results, who are you more inclined to back?

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Squash1 wrote:Hey EDJ has built a large business on that premise...
 
I guess my point was that buying actively managed mutual funds is inherintly NOT buy and hold/buy and forget.  That's what the managers are paid for doing.  Now, if you just buy a couple individual stocks/bonds and then just leave them forever, you have a point.  But the point of buying a mutual fund is so that someone else is doing the buying and selling for you.
 
Now, if you are a true asset-allocation, style-box, index sort of advisor, then you might be inclined to shift your allocation strategy on a periodic basis.  But in this day and age, with managed money/mutual funds being so prevalant, it's HARD to be a buy and hold investor.  Even the most stable funds have security turnover every year.

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skeedaddy2 wrote: MinimumVariance wrote: Here's what I predict the academic finance community will suddenly discover -- if you re-run their 'buy and hold' recommendations using data since 1770 (thats when security market prices began  being kept in the UK), you'll find that a 'diversified porfolio of securities allocated among different asset classes produces returns .5% higher than cash".
 
  Doug Kass crunched these numbers on Warren Buffett: Wells Fargo: $6.3 billion lost on 290 million shares American Express: $2.9 billion lost on 151 million shares Coca-Cola: $2.1 billion lost on 200 million shares Burlington Northern Santa Fe: $1.8 billion lost on 63 million shares ConocoPhillips: $1.5 billion lost on 60 million shares U.S. Bancorp: $1.5 billion on 73 million shares Kass's bottom line: "All good things, it seems, in markets and life, must come to an end."
 
It is virtually IMPOSSIBLE for someone like Buffett (buys equity) to NOT lose some equity value in a time like this.  Regardless of what you own, if you are AT ALL diversified in equities, you have lost money. 

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I would advise Warren to diversify a little bit. He is too concentrated in financials and consumer cyclicals and has too much of his money tied up in single positions. Also, a man of his age should have more money in fixed income and I have a bar chart to show him that. Then I would offer him a credit card and ask if he wants to refinance his mortgage.

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buyandhold wrote:
I would advise Warren to diversify a little bit. He is too concentrated in financials and consumer cyclicals and has too much of his money tied up in single positions. Also, a man of his age should have more money in fixed income and I have a bar chart to show him that. Then I would offer him a credit card and ask if he wants to refinance his mortgage.

 
That's a great idea; he's definitely too old to be in the market.
 
I've recently heard about a product he may be interested in. It allows you to enjoy all of the upside of the market with no downside risk. Apparently, someone's figured out how to cheat capitalism. The best part is, there are NO fees! None, zero, zilch... 
 
What's 8% of $30 billion?

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Borker Boy wrote: 
That's a great idea; he's definitely too old to be in the market.
 
I've recently heard about a product he may be interested in. It allows you to enjoy all of the upside of the market with no downside risk. Apparently, someone's figured out how to cheat capitalism. The best part is, there are NO fees! None, zero, zilch... 
 
What's 8% of $30 billion?
 
A couple things.  First, you can't "enjoy all of the upside of the market" above a certain point.  Get your facts straight.
 
Second, it has been written that Warren Buffett has some of his money invested the same way as an index annuity...just with his amount of money, he doesn't need an insurance company to do it for him.
 
Don't be jealous...

skeedaddy2's picture
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MinimumVariance wrote:Here's what I predict the academic finance community will suddenly discover -- if you re-run their 'buy and hold' recommendations using data since 1770 (thats when security market prices began  being kept in the UK), you'll find that a 'diversified porfolio of securities allocated among different asset classes produces returns .5% higher than cash". Money that once stayed put for three to five years can now get moved in three to five days or sooner.

"What's happening is people have learned that if you don't take a
profit it goes away," says Kathy Boyle, president of Chapin Hill
Advisors in New York. "Even somebody who's really biased towards
buy-and-hold is giving up."

More than half the company's in the Standard & Poor's 500 have
beaten earnings expectations, yet the stock index has dropped over 8
percent. Probably the worst January in more than a generation. Its times like these that separate the men from the boys.

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skeedaddy2 wrote: MinimumVariance wrote: Here's what I predict the academic finance community will suddenly discover -- if you re-run their 'buy and hold' recommendations using data since 1770 (thats when security market prices began  being kept in the UK), you'll find that a 'diversified porfolio of securities allocated among different asset classes produces returns .5% higher than cash".
 
  Doug Kass crunched these numbers on Warren Buffett: Wells Fargo: $6.3 billion lost on 290 million shares American Express: $2.9 billion lost on 151 million shares Coca-Cola: $2.1 billion lost on 200 million shares Burlington Northern Santa Fe: $1.8 billion lost on 63 million shares ConocoPhillips: $1.5 billion lost on 60 million shares U.S. Bancorp: $1.5 billion on 73 million shares Kass's bottom line: "All good things, it seems, in markets and life, must come to an end."
 
Isn't this what he owns through Berkshire??
 
I think his personal holdings are a lot fixed income and Berkshire..

MinimumVariance's picture
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GENTLEMEN: My look what I started.
 
The point is to HOLD, after buying, the WHOLE MARKET. Thats Jap real estate, cocoa futures, base metals, antiques, futures, the Zimbabwien S&P12 (theres only 12 companies in Zimbobwiea), FRA's, private equity, etc +stocks and bonds -- in PROPORTION to their respective weights in the sum total of all the worlds assets. As RELATIVE security prices change, the holdings weights are adjusted accordingly, thats passive mgt. buy-&-hold. If you elect to change the weights to your own liking / predictions -- that's active mgt.
 
So whats wrong with this? It doesn't work during periods of systemic collapse -- a la NOW. Watch -- in the next year the whole focus of managing money will be on controlling asymetric tail risk. You heard it here first.

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Well, the smartest people in the world didn't see last years crash coming, I sure couldn't. But this time I'm not listening to the smartest people in the world. I'm making moves on what I see. There is only one way you can hedge a mutual fund, operated by some of the smartest people in the world, against loss ... go to cash. I've been telling myself I would cash out when the Dow closed under 8000, so today I did. I hope I'm wrong. But if I am what's the worst of it? a little missed upside? Buy and hold should be changed to "buy and hedge"

Anonymous's picture
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You cashed out today, Gaddock?   I must say, of all the great things you've done prospecting-wise, and great things you've learned trading options, this is almost certainly a really stupid move, no offense. 
 
You're what?  In your 30's?  My god man!  Maybe you are an ideal candidate for a VA. 

Gaddock's picture
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I cashed out client positions in mutual funds as a hedge. May sound stupid but I see a fifth leg down coming. I'm not letting their accounts get halved, again, buy the smatest people in the world. I have zero faith in "managed money" Again, if Im wrong no big deal.
I'm here for the long run.

Gaddock's picture
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I'm going to short the crap out of the S&P as well when it closes under 800 with a stop at 820, much of it with the cash from the mutual funds. The options positions are working very well. Maybe a bold move, maybe wrong. But I told myself "NEXT TIME" I would act in a decisive manner to what MY eyes see, not what others are telling me.

gvf's picture
gvf
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Are your eyes connected to your gut?  Smart people tell me that there are more nerves in your gut than in your brain.  

HymanRoth's picture
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Gaddock wrote:I cashed out client positions in mutual funds as a hedge. May sound stupid but I see a fifth leg down coming. I'm not letting their accounts get halved, again, buy the smatest people in the world. I have zero faith in "managed money" Again, if Im wrong no big deal.
I'm here for the long run.So are you saying this is a 5 legged bear?  I guess then it must be a male bear....or a mutant.

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Gaddock,If you are serious you made a huge mistake. The Dow is in a trading range, unfortunately you cashed out closer to the bottom than top of that range. 9100 is where you take the money out and put it back in at 7900. That being said, we have been experiencing a bottoming process on the Dow. The time to short the dow has passed at its current level.

Gaddock's picture
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Hope you all are right, I dont think so.

Incredible Hulk's picture
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I concur with 007. And I told myself in November that when we got back to 9000 I was pulling clients (nervous ones anyway) half into cash. But did I???

Squash1's picture
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No one has any idea and that should be the point of all this...
 
Gaddock isn't right or wrong... I have been buying stock on the massive dips riding them up 10-15% and cashing out, because I had been riding them then buying more when they went down, but they would go up and then back down... So like Gaddock, I told myself next time any of my holdings get up 10-15% I cash out and wait for the dip and buy again...And  I did so and road that 4 day rally and then cashed out in mid morning when it was up..There is no other way to play this market right now... 

Gaddock's picture
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Sold the other half of them today. The jobs report Friday may break the rubber band. Cash is an asset class. I can make a lot of money with cash. It is far from sitting there idle. Again, those of you that think I'm wrong ... I hope you are right. Worst thing that can happen is I miss a tiny bit of upside. In the mean time I use the cash to sell options against. My two triggers were 8000 & 9000 + or -. Now we have closed twice under 8000 this week. The next fear is the S&P closing under 800. The more times it does the more those number go from support to resistance.
 
I see deflation with m y own eyes and wallet.

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Gaddock's comments are PERFECT.

Bears have total control and total confidence.

This is a once in a generation buying opportunity.

last 2 weeks are much like early 2003.

we are very near a monster up move (35-50%)

Gaddock's picture
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Today erased any remaining regret for no longer holding equity MF's. There is no valid bailout plan and the range has a bearish tilt.
 
On the flip side there are still huge credits out there for February expirations. 2 and 3% trades allover the place. Not bad for a week and a half. BUT those credits are peoples fear. It appears to be increasing again.
 
I'll be buying at the bottom.

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CDO Squared wrote:Gaddock's comments are PERFECT. Bears have total control and total confidence. This is a once in a generation buying opportunity. last 2 weeks are much like early 2003. we are very near a monster up move (35-50%)
 
Look at some long term graphs on DOW, AA, IP, EK, GE and you will see we are in nothing near a once in a generation buying opp.  These all look like 0 is on the table.  Can add KO, PFE and 100's others with a little bit of looking. 

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fritz wrote:CDO Squared wrote:Gaddock's comments are PERFECT. Bears have total control and total confidence. This is a once in a generation buying opportunity. last 2 weeks are much like early 2003. we are very near a monster up move (35-50%)
 
Look at some long term graphs on DOW, AA, IP, EK, GE and you will see we are in nothing near a once in a generation buying opp.  These all look like 0 is on the table.  Can add KO, PFE and 100's others with a little bit of looking. 
 
Great buying opportunity.  Craziness.  Use every rally to sell clients from the market.  I pulled 1/2 to cash from all traditional equity strategies for clients in 12/2007 - only wish I'd sold it all.
 
If you follow statistical probability of economic recovery, this is entirely different than 2003.  In 03 there were:
 
Rising home values
Easy access to credit
High business confidence
Lower and already moderated unemployment
 
Today we have none of these.  All rallies are fools rallies. 
 
Ideal asset allocation for today's market:
 
1/4 Equities - 60/40 US to International
1/4 Cash
1/4 Market Neutral (long/short - make sure you have a good formula-based model here; no emotions)
1/4 Gold - yeah, I'm crazy, but we just bought about $8 million of the GLD yesterday and statistical probability and Marco Economics tells me it's going to 150 (the etf) in the next 24 months (2,000 oz)
 
Call me crazy if you want - my most aggressive clients only lost about 14% last year and are up ytd.
 
P.S. - buy and hold was never a valid investment srategy.  Take away years 1980 to 2000 and the remaining years of 1897 to current the market has gone up about the same as T-bills with quadruple the volatility.  Mean reversion is taking place - markets are about as efficient when left to "the smartest people on Wall Street" as flipping a coin.
 
Check out crestmontresearch.com for all the facts, not opinions.

Anonymous's picture
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You're an idiot. 

buyandhold's picture
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Seems likely that more debt will be written off in the Great Leveraging. Corporate debt will be exchanged for equity, treasuries paid off for less than face value, municipalities and pensions walking away from commitments. I've always thought the gold bugs were cranks, but it's making more sense to own hard assets of any kind -- gold, timberland, oil reserves, equity in companies that have a tangible product.

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iceco1d wrote:You're an idiot. 
 
Says the genius who's clients are down 45%.
 
...and likely to go down another 25-40%
 
...and lose all his clients
 
Iceco1l - did you borrow too much for your home because of the evil banking system?  Maybe your'e about to be unemployed?  It's okay - JUST HANG IT THERE.  Things always get better, now is not the time to get angry.

Anonymous's picture
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brandnewadvisor wrote:iceco1d wrote:You're an idiot. 
 
Says the genius who's clients are down 45%.
 
Who?
 
...and likely to go down another 25-40%
 
Really?
 
...and lose all his clients
 
Haven't lost any yet.  Getting lots of referrals.
 
Iceco1l - did you borrow too much for your home because of the evil banking system?  ROFL!  Maybe your'e about to be unemployed?  I'm not "employed" right now.  Haven't been for 10 years.  ROFL!   It's okay - JUST HANG IT THERE.  Things always get better, now is not the time to get angry.  I'm sorry, did I appear angry?  ROFL!
 

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brandnewadvisor wrote: 
P.S. - buy and hold was never a valid investment srategy.  Take away years 1980 to 2000 and the remaining years of 1897 to current the market has gone up about the same as T-bills with quadruple the volatility.  Mean reversion is taking place - markets are about as efficient when left to "the smartest people on Wall Street" as flipping a coin.
 
Check out crestmontresearch.com for all the facts, not opinions.
 
W.T.F!?

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brandnewadvisor reminds me of the brokers selling Putnam OTC in 1999/2000 because it worked the year before. Just another sign that we are very near the market bottom. Personally I expect a 25% pop to around 1000 on the s&p by year end.

brandnewadvisor's picture
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Incredible Hulk wrote:brandnewadvisor reminds me of the brokers selling Putnam OTC in 1999/2000 because it worked the year before. Just another sign that we are very near the market bottom. Personally I expect a 25% pop to around 1000 on the s&p by year end.
 
Sorry, been out of the market by 1/2 for over a year.  Before 2008, that is.
 
My clients average returns for aggressive portfolios since 2005 inception of my RIA - 13.87% CAGR.  2008 we lost about 15%.
 
I'm just trying to be helpful.  If everyone wants to keep holding on in this market with no statistical evidence that the bottom is even close; be my guest.
 
Expectations of a 25% "pop" are unfounded and would only represent a great opportunity to sell unless there have been material changes to the overall economy.  There is plenty of evidence here: sloppy monetary policy, consumer spending, business confidence, TED spread, unemployment, etc.
 
At least my suggestions are based on facts.  The guys hawking OTC because of performance only were speculating.  There were no real earnings or prospects of earnings.  Those who followed statistics, like myself, never owned a single dotcom or otc fund.  Just boring stuff that made money.
 
Good luck with your swell investment strategy.

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correction:
My clients average returns for aggressive portfolios since 2005 inception of my RIA : 13.87% CAGR (that is a positive, not negative number).  2008 we lost about 15%.

Gaddock's picture
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Yesterday was the coolest day I've seen in a long time. Two GREAT chances to get in and out in the same day. The longer we sit and breach support the better chance it has of becoming overhead resistance. Being in cash and scalping like a big dog lets me sleep very well. This time we wont be able to say we didn't see it coming. I'm thinking 650 ish will be the bottom. Considering the components of the DOW I think it's going to bottom in the mid 5000. It's going to bear a range bound grind down to it from here. Terrible for investing GREAT for trading.

Gaddock's picture
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More evidence of the same, S&P closed under 800; OUCH!. Still keep wishing I'm wrong but I'm looking like quite the hero to my clients at the moment. They are out of the MF's and actually making money with cash.

Gaddock's picture
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Speaking of statistics; I'm not making a trade unless it's a scalp with an 85% or better probability. Not going out past 60 days, time decay is a great friend. As I said before there are '2% ers' all over the place on stock that we want to own with good solid dividends.
 
Sure wish I could see tomorrow's bar.

stocksandblondes's picture
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gaddock--
 
sent you a pm...

brandnewadvisor's picture
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Was short via SH today and have had SKF four about 3 weeks.  Buy and hold is really smart.  We'll now need all of the "magical" 25% "bounce" that Incredible Hulk is expecting to get back to 1,000.  Might happen, but not soon - so why would anyone be in this market right now?

Gaddock's picture
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Well here we are at the end of the rubber band. Will it snap??
 
The MF's are down 6% from where I sold them on average.
 
Sad .... I still hope I'm wrong.

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Incredible Hulk wrote: brandnewadvisor reminds me of the brokers selling Putnam OTC in 1999/2000 because it worked the year before. Just another sign that we are very near the market bottom. Personally I expect a 25% pop to around 1000 on the s&p by year end.

What's your reason for your expectation, Hulk? Do you think that earnings will be up by that much? If so, why?

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A couple reasons. I'll start with my gut, based on what feels like capitulation from personal client interactions. Despair in the media, on wall street, in DC, and on main street all point to a "low point" for me. I went out to eat at a nice restaurant and it was completely full. I wait in line on Thursday (not a weekend) at Best Buy that is 20 deep. I spent $40 on some computer cord. The world is not ending. People are still spending. Every time (as if I've seen more than the (2000-2002 mrkt) there is 0 hope to be found and the bears are smiling as if they can't be wrong, then we are at/near the bottom. Investments cycle. The longs think we can't be wrong, then we are wrong for awhile. The shorts begin to think they can't be wrong, then they are wrong for awhile. My gut (whiich has been wrong) tells me we are there.
From a fundamental standpoint. I think companies throw everything and the kitchen sink in for writedowns on the first quarter and pushes s&p earnings to $50-$55 an annualized basis giving us a current pe near 13. I think by 3rd or 4th quarter, the writedowns are no longer there and with even a slight uptick from all this money their throwing into the system we see quarterly earnings closer to $65 annualized. Based on future expectations, what will be then current valuations and having the worst behind us, I think 15 is a resonable PE for the market we finally see the cash flow in from the sidelines pushing us to 1000 on the s&p.

I tell my clients I'm an eternal optimist. Unfortunately, I've been wrong the last decade, but I think the next decade looks very promising (see the optimism).

Feel free to shoot holes through my reasoning. I spend my days selling against the media, I might as well sell against other brokers too.

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