Stock Market Crash - End of the Bull!

[CLOONEY]

For all you guys who know the stock market in depth (whether that be the ASX, Wall Street etc), or have studied economics, what do you think of all this talk about an end to the bull market? I have been researching this myself for the past week, as I am holding back on investments into the market, in fear of a correction to the currently overpriced market. We had a mild one here in Australia very recently, but since, the market has recovered to nearly 6000 points again.

We all know, that world markets are dictated to a large extent by Wall Street, so what are your opinions? Do you think the markets can sustain their huge rises over the past few years, or do you think a correction is imminent in the near future? The current bull market, is looking suspiciously like the bull market of the mid 80s, and I personally, would LOVE to see a crash as big as was seen in 87.

One thing I am worried about however, is the current sound fundamentals of the western economies, the Chinese growth (leading to an increase in the industrial/mining sector), of which seems to be seeing no end anytime soon. The major thing I am worried about, is the baby boomers generation, investing more and more to increase their wealth as much as possible before their retirements over the next 1-2 decades. This will greatly disepate investments, probably gradually over that time period, and there are not enough X's, not to mention, with University Fees as high as they are, X's dont have the funds to invest, leaving a big strain on the market in the future. However for now, this doesnt seem to be causing a worry to the market whatsoever, infact the opposite.

Thoughts? I am ready to enter the market again, as I feel most companies are a fair value, or overvalued, and need a maket crash or at least large correction in order to search for some sound, undervalued companies. The longer the wait, the more compounded returns I miss out on however, so I hope the market is due for a crash very soon, as is expected on trends alone, but some of the points I stated earlier, lead me to beleive that this bull market may continue for as long as another couple of years. Though might flatten out somewhat (but that does not help me at all). Investments opportunities are looking scary at the moment, not a good sign! Too bad I wasnt born 20 years earlier!

 

[Bible_Belt]

You sound more like an investor than a trader. I'm no investor, but I can tell you that traders don't ask why, they just react to what they see. "Why?' is a dangerous question, because financial markets often don't make sense. It's herd behavior, the ebb and flow of fear and greed. The best traders I met never asked why, and the worst ones all went bust by holding losing positions despite being convinced that they were right.

Playing for reversals is risky business. It can be done, but the easier money is in riding the foolish trends, and getting out before they reverse. If you do bet against a trend, use strict stop losses and don't hold a big losing position, that is the cardinal sin of trading.

 

[CLOONEY]

You sound more like an investor than a trader. I'm no investor, but I can tell you that traders don't ask why, they just react to what they see. "Why?' is a dangerous question, because financial markets often don't make sense. It's herd behavior, the ebb and flow of fear and greed. The best traders I met never asked why, and the worst ones all went bust by holding losing positions despite being convinced that they were right.

Playing for reversals is risky business. It can be done, but the easier money is in riding the foolish trends, and getting out before they reverse. If you do bet against a trend, use strict stop losses and don't hold a big losing position, that is the cardinal sin of trading.

I am definately an investor, not a trader. I traded for many years when I was younger, but no longer. I do convince myself I am right, and hold shares even during a crash, as most good investors do. Crashes are usually very short term (most markets recover from even their largest crashes 87 for example, within 2 years). I dont bet against trends, I invest when companies are undervalued, so I make money off the short-sightedness of traders.

This is the problem though, nothing is undervalued at the moment!!! P/E ratios are through the 20s on some of the companies I want to invest. Need a correction soon, as the bond rate is only making me 3.5% above CPI. Barely any compounding returns there in the long-run!

Sound like Buffettology? It is, I am a keen student of his investment principles. I am a financial analyst by profession, and an economist. So I am definately into understanding the whys, and looking for safe investments, of which I can still make 20%+ per annum. Should have just invested in Berkshire Hathaway!

 

[Celadus]

I'm interested in economics and the theory behind it but I have a hard time holding onto something if I think I can get it for a better price.

Buffet has a good approach but he has an extreme edge. He started in the 50s when information was asymmetrical. Nowadays, you can research any company in a few hours and make a decision. Back then, you had to acquire financial statements. I read that he went through 30 a day. He made his money by buying companies that were worth more than he paid and he then used the extra cash to buy another company. It would be impossible to do that now.

Now, he's so rich and has a reputation so companies make it easy for him to take over their company. Immediately adds a Buffet premium to the stock price. His biggest edge is he gets to run the company and guide it how he and his manager wants. Thats the true Buffet style. An investor has no input in operation. You're at the mercy of management and the agency problem kicks in.

Bible Belt and I hijacked your thread. Sorry. I don't really have a response for your original question because I don't know. Check out "Data Driven Investing" it suggests low Price to Book ratios over Price/Earnings. You can still find a few good companies like that.

Price to Earnings is relative to the market environment. I trade throughout the day but I only trade fundamentally strong companies against weak ones. I stay in the middle of the caffeine junky momemtum trader and the wait and see investors.

I hope my account is large enough to short Berkshire when Buffet dies..

 

[madgame]

So I am definately into understanding the whys, and looking for safe investments, of which I can still make 20%+ per annum. Should have just invested in Berkshire Hathaway!

Have you been getting a performance of 20% p.a. over the last few years or is this your future goal?

I have the experience, that many folks seem to be fooling themselves into thinking their strategies work (not referring to any of you guys)...without ever tracking them. John Caples preached that with his 'testing advertising methods' and it's true in all walks of life:

Whether it's weight lifting (most ppl I know work out for a few weeks and then stop it for a few weeks again..or months...and have no idea if theyre progressing or not; I know many people who think theyre making money on betting on sports..with a new 'system' every month (only favorites! next month: only underdogs!) or their sound understanding of sports...and they have no idea how much money they made or lost after a certain period).

If somebody doesn't track their results, how will they ever know they're on the right track?

So, what have your guys' performances been over say the last 12 months (or better last couple of years, if youve been in the game long enough)? Has anyone been outperforming the S&P or DJ over an extended period of time(how long?)?

P.S.: I'm not trying to be cynical, if thats what it reads like. Im just curious, if anybody has been successfully outperforming the market (over a not short-term period).

 

[CLOONEY]

Make this quick, as time is short.

Good to see some of you guys provided analysis and your expectations on the end of the bull

Celadus, I agree, Buffett did have a HUGE advantage investing back when he did. And I also agree, he has a big advantage investing now. Though he has made some very smart and simple moves during that time that anyone could have made (buying the jewellry company in his home town anyone)? I am looking at buying into a business that makes 40% RIO per annum ATM. Only way I can get it, is my brother started the franchise, but its a HUGE investment, and one with very low risk. I look at numerous ratios before trading, not simply P/E, I have about 11 I look at simultaneously.

Madgame, if you invested anywhere in the all ordinaries (ASX), you would have made 20% pa over the last 4 years. Well not anywhere, but just about, and particularly in buffettology equivelant companies, such as JB Hi-Fi, Woolworthes and a few more I am currently looking at. I have been making around 20pa over the last few years, and I intend to keep making it for at least 30 years to come, weather that be investing in the market, or buying up my own businesses (first one is in the pipelines, as I stated earlier). I also have money invested in not sure the name off the top of my head (OMP500) or something like that. Its similar to a mutual fund, but invested worlwide, and invested by a Chicago firm I beleive, in collaboration with another great investment fund. It has outperformed any index for the past 20 years, and so far has made me 27% pa over the last 2 years (though I think it is dropping). As far as outperformed the DJ, the ASX would have done that, with China booming, our Commodity Sector (a HUGE part of the ASX), has taken flight! This is driving the all ords boom at the moment, and this is a HUGE factor that will keep it continueing. Though, like the tech crash, a fall in the Chinese GDP growth rate will initiate a HUGE CRASH, and this is what I am scared of ATM, hence my reason to try and predict the end of the bull. WIth a crash, it is easy to find undervalued companies (and this is the most foolproof way to ensure they are going to rise again), unlike an individual company calamity!

 

[spider_007]

all i know is; there is no shortage of oppinion, and there are too many factors to predict. My wyldest guess??? Yea there probably will be one, maybe 10-15 years from now, and i'll be world wide depression. My best guess, is that the polititions will do thair best to delay it so that it doesn't happen on thair watch.....

I don't know, i leave these things for the smarter people.

All i know is that there has been a uranium trend for the last couple of years, and it will probably go the way of oil, and i'm taking a full advantage of it.

 

[CLOONEY]

all i know is; there is no shortage of oppinion, and there are too many factors to predict. My wyldest guess??? Yea there probably will be one, maybe 10-15 years from now, and i'll be world wide depression. My best guess, is that the polititions will do thair best to delay it so that it doesn't happen on thair watch.....

I don't know, i leave these things for the smarter people.

All i know is that there has been a uranium trend for the last couple of years, and it will probably go the way of oil, and i'm taking a full advantage of it.

Many factors to predict, but monetary and fiscal policy still predict trends, and are very effective. 10-15 years? More like within 2 I beleive. Stock market crashes do not bring about depression, vice-versa. Politicians are barely concerned with the stock market. It doesnt affect their term.

On another note, a slowdown in the US economy is expected from last I heard. Recession is even talked about.

 

[Bible_Belt]

Stock market crashes do not bring about depression, vice-versa.

Not that I ever even took economics, but don't schools teach that the market is a leading indicator?

 

[Celadus]

A recession is a decline in GDP for two or more quarters. A depression is a really bad recession with extremely high unemployment and deflation.

Stock market tanking can be a leading indicator but I think its mainly people just losing confidence in the market. Lots of "what ifs" and "depends" in economics.

We probably won't see a bear market as bad as we did in the 90s and early 2000s for awhile. Wall Street makes money selling safe investments. Doesn't matter if it goes up or down. I think everyone is a little edgy still. Volatility has been at an all time low for awhile. It just recently picked up in the last few weeks after the one day crash. It was the first time since 9/11 the market dropped 2% in one day but I think the S&P futures are back above where they were.

 

[madgame]

Sounds impressive Clooney. Nice to see somebody who seems to know what he's doing.

 

[CLOONEY]

No schools do not teach the market is a leading indicator. Never heard that in my life. Markets as you said yourself, are driven by fear and greed. The "good news phenomenon" and the "bad news phenomenon". Though they are influenced by economic climate, a drop in the stock market due to far overvalued prices (perhaps, and argued a reason for the 87 crash), will not lead to much of an affect on the economy.

The great depression lead to a HUGE stock market crash. The 87 crash, never lead to a depression.

Indicators primarily include unemployment and rate of growth in GDP. Further indicators are inflation (ties in with the two above), and trade balances. IR and fiscal policy (though this is not used much as a macroeconomic tool as it is a blunt instrument in a country with a floating exchange rate due to the crowding out effect, such as the United States or Australia) are the two tools used to curb these indicators to maintain stable levels of growth, inflation etc.

 

[Oxide]

I think we are about 100 points away from a month ago... it seems to me we got back here a little too fast

I would also take a bearish position on the sub prime market lenders (well, actually it is too late now, smart money was about 2-3 weeks ago) and then continue down the chain - who else is going to get hurt from people defaulting? construction? bigger banks like chase and merryl?


To be honest, I have no idea what to invest in. I wish i knew how to find good deals (besides the P/E) ratio... anyone wants to help figure out how to find a deal?

 

[Celadus]

The 1929 crash was the beginning of the Great Depression. There was a recession after the 1987 crash.

 

[CLOONEY]

I think we are about 100 points away from a month ago... it seems to me we got back here a little too fast

I would also take a bearish position on the sub prime market lenders (well, actually it is too late now, smart money was about 2-3 weeks ago) and then continue down the chain - who else is going to get hurt from people defaulting? construction? bigger banks like chase and merryl?


To be honest, I have no idea what to invest in. I wish i knew how to find good deals (besides the P/E) ratio... anyone wants to help figure out how to find a deal?

I dont follow the DJ or the US economy too closely, so not much idea about that index or its companies.

To be honest with you, if your taking tips on what to invest in, or basing your investing simply on a P/E ratio, your going to get chewed up! "Buffettology: The Workbook", is probably the best book you could read to learn the basics of long-term investing and finding undervalued companies, and which undervalued companies have economic positions to keep them going in the long-term. It keeps it simple, and its far less risky than trading. Also, I would advise to take some economic courses if your at Uni, gives you the basic fundamentals of what will impact the market and how long these impacts will be sustained. Though, you will probably need an economics degee, rather than just a couple of courses too really analyse the economy, as you will forget most of what you have learnt after the first couple of months.

 

[CLOONEY]

The 1929 crash was the beginning of the Great Depression. There was a recession after the 1987 crash.

The 87 crash rebounded like 50% of its fall within 2 days, no?

Do you honestly think the crash caused a recession, and what were the GDP figures following? How long after the crash was there a recession, I guess your talking about only the United States economy also yeh?

The Great Depression, or any depression, is going to seriously affect the stock market index in that country, and will have subsequent effects elsewhere on other global indicies. There are many crashes and large corrections in global stock markets every few years, with minimal affect on their economies (perhaps only to consumer confidence, which will ripple through the economy (unemployment etc), but not to the extent of causing a depression). Sometimes markets simply overheat, and need to be corrected.

 

[Bible_Belt]

No schools do not teach the market is a leading indicator. Never heard that in my life.

It's all academic gobbledygook anyway, but I remember this from the Series 7 review books.

http://economics.about.com/cs/businesscycles/a/economic_ind.htm

"Leading economic indicators are indicators which change before the economy changes. Stock market returns are a leading indicator, as the stock market usually begins to decline before the economy declines and they improve before the economy begins to pull out of a recession."

 

[CLOONEY]

No schools do not teach the market is a leading indicator. Never heard that in my life.

It's all academic gobbledygook anyway, but I remember this from the Series 7 review books.

http://economics.about.com/cs/businesscycles/a/economic_ind.htm

"Leading economic indicators are indicators which change before the economy changes. Stock market returns are a leading indicator, as the stock market usually begins to decline before the economy declines and they improve before the economy begins to pull out of a recession."

Sure, any economic downfall, will cause a fall in the market. I am talking about crashes or corrections, which are not due to do with stock market returns, more due to an overvaluation. At least that is from my experience and view of it.

Though, in all my studies of economics (I studied it for 4 years in total), I never heard of stock markets as a leading indicator. Maybe that was just my Uni though......