Efficient Markets, RIP

[smedleyb]

SPX sitting comfortably above 1330-1340 support as we speak.  I mentioned last week 1390-1400 as the top of the measured move on the H&S bottom, and we seem to be inching our way toward that level.  Yet yesterday, ISM came in at 49.5 suggesting manufacturing is now contracting.  On other fundamental fronts:

(1) pre-announcements by P&G and Fedex suggest widespread corporate earnings deterioration is upon us;

(2) sales and EPS estimates are contracting as most analysts are just now taking down their growth rates;

(3) margins are being  pressured as imput costs rise (since sales growth estimates are outstripping EPS growth);

(4) much of this deterioration is fueled by a collapsing Europe and anemic Asian growth economies; with S&P 500 companies deriving 50% of their profits overseas, it's difficult to see how the market can sustain it's current levels/valuation.

I can't help but feel the window of calm we are in will be shut rather quickly as the realization sets in that corporate earnings are about to be pummeled over the next 12 months.  I'm positioning my accounts for what I perceive to be the nascent stages of a bear move that will knock the averages down at least 25-30% over the next 12 months. 

That, and my pet monkey just threw a dart which landed on "Short Stocks Soon."

[grantmeaname]

There's no way you could convince me that it has similar risk characteristics to the rest of the market. It went from $78 to $18 in 2008, losing 76% when the S&P 500 lost only 55%. From the same page, Morningstart classifies it as high-risk and low-return, giving it a 1-star rating. I'm not impressed. If it's taking on outsize risks and plummeting harder than the market on downturns, of course it's also growing faster when the market moves in the other direction. You could dismiss that by saying that only the new guy took on those risks, but Yahoo's older historical data reveals that the fund lost 53% in the dotcom bust.

[tooqk4u22]

Because the question is realy about passive (index) or active (individual stocks) investing I feel that investment management fees should be left out of the equation with regards to identifying mutual fund managers, hedge funds, or pension funds that consistently beat the market.  The reason is if these investors quit and did it for their own account there wouldn't be the fees and also if a person believes that they can get a better return investing in individual stocks then they would not incur the management fees because they would not be investing in actively managed funds and because there are so many options for low cost or even free trades that it is a non-factor. 

The main stream press basically says that 80% of active managers don't beat the market in any given year especially after factoring in fees, which is fine and may be correct for a single year. But what about over time - some of those managers may not beat the market in a given year but may trounce it in a given year as well.  So another part of the analysis has to be looking at it over various timeframes - what if an active investor didn't beat the market one year but in the prior five years beat it significantly. 

Of course I think it is impossible to identify good managers so you are just adding to the uncertainty, for this I feel it makes no sense investing in active funds.  Either I have the time, inteligence, and discipline to invest on my own or I invest in indexes - inbetween doesn't work.

Also as I said previously, some good managers are impacted by the fund's size and Buffett falls into this category - if you look at the holdings in most large funds they consist of large companies so they may as well be S&P 500 and that is probably one of the biggest reasons why active funds underperform.  One exception to investing in active funds could be if the fund size is small and the manager is highly experienced in a specific sector (i.e. not broad based) - small means nimble.  Private equity exists because small companies fall below the radar of large fund managers because they don't move the dial.

[grantmeaname]

Because the question is realy about passive (index) or active (individual stocks) investing I feel that investment management fees should be left out of the equation with regards to identifying mutual fund managers, hedge funds, or pension funds that consistently beat the market.  The reason is if these investors quit and did it for their own account there wouldn't be the fees and also if a person believes that they can get a better return investing in individual stocks then they would not incur the management fees because they would not be investing in actively managed funds and because there are so many options for low cost or even free trades that it is a non-factor.

The fees are the actual cost of doing business. The actively managed mutual fund is a service, and providing that service brings associated costs, which are borne by the investors. The fact that you personally could be a hobbyist doing things on a computer you already own at such a volume to avoid high transaction fees doesn't change the fact that actively managed mutual funds can't overcome the costs associated with providing their supposed advantages.

The main stream press basically says that 80% of active managers don't beat the market in any given year especially after factoring in fees, which is fine and may be correct for a single year. But what about over time - some of those managers may not beat the market in a given year but may trounce it in a given year as well.  So another part of the analysis has to be looking at it over various timeframes - what if an active investor didn't beat the market one year but in the prior five years beat it significantly.

Again, let me reiterate that the mutual fund doesn't just have to return better than the market, but better than an index fund with a comparable risk ratio. Yes, LMVTX outperformed the S&P 500 when the market was growing, but it also underperformed it during busts.
The annual returns just get multiplied to get you the aggregate return of a longer period, so an active fund would have to outperform a comparable index fund during the fifth year more dramatically than the underperformance of all the other four years combined (multiplied) in order to outperform for the whole period.

Of course I think it is impossible to identify good managers so you are just adding to the uncertainty

Surely if it's possible to identify good stocks it's possible to identify good managers, right? How are these two any different?

[arebelspy]

SPX sitting comfortably above 1330-1340 support as we speak.  I mentioned last week 1390-1400 as the top of the measured move on the H&S bottom, and we seem to be inching our way toward that level.  Yet yesterday, ISM came in at 49.5 suggesting manufacturing is now contracting.  On other fundamental fronts:

(1) pre-announcements by P&G and Fedex suggest widespread corporate earnings deterioration is upon us;

(2) sales and EPS estimates are contracting as most analysts are just now taking down their growth rates;

(3) margins are being  pressured as imput costs rise (since sales growth estimates are outstripping EPS growth);

(4) much of this deterioration is fueled by a collapsing Europe and anemic Asian growth economies; with S&P 500 companies deriving 50% of their profits overseas, it's difficult to see how the market can sustain it's current levels/valuation.

I can't help but feel the window of calm we are in will be shut rather quickly as the realization sets in that corporate earnings are about to be pummeled over the next 12 months.  I'm positioning my accounts for what I perceive to be the nascent stages of a bear move that will knock the averages down at least 25-30% over the next 12 months. 

Okay, so here's my question.  What are you going to do about it?  You say you're "positioning your accounts" - what exactly does that mean?  Moving to cash, I'm assuming.  Then what?  Are you planning on shorting something specifically?  Are you just gonna sit tight til we hit a perceived bottom, the buy a bunch of stocks?   What specifically?

I mentioned making a thread where you document your trades.  Now would be the perfect time.

Cause I agree with you, at some point the market will go down.  It always does (and it always comes back up).  So I'll be really annoyed if in six months it drops and you come back and bump this thread and say "see? I was right" ... or if it doesn't happen for a year, and you bump it at that point, or in 18 months.

If you make a vague prediction about it going down, then yes, of course you will be right at some point.  That doesn't mean anything.

Start a thread saying I bought X, or I sold Y, and post trades as you do them (not after).  And if it goes down reasonably, and you can call the bottom and such, that will be a different story than vague predictions.

That, and my pet monkey just threw a dart which landed on "Short Stocks Soon."

Hah! Snarky humor like this is so much more fun than angry ranting.  Kudos.

[tooqk4u22]

The fees are the actual cost of doing business. The actively managed mutual fund is a service, and providing that service brings associated costs, which are borne by the investors. The fact that you personally could be a hobbyist doing things on a computer you already own at such a volume to avoid high transaction fees doesn't change the fact that actively managed mutual funds can't overcome the costs associated with providing their supposed advantages.

Your missing the point...much of the back and forth, including several comments from you, are that individuals can't beat the market (which is usually defined by an index). Fund managers are by definition individuals so ignore the fact about the fees because I am not making the argument to invest with those guys just simply that there are individuals who can do it and extending it further by saying it is easier if you are smaller.  I DON'T BELIEVE IN INVESTING IN ACTIVELY MANAGED FUNDS, but I do allocate a portion of my investments to individual stocks.

Again, let me reiterate that the mutual fund doesn't just have to return better than the market, but better than an index fund with a comparable risk ratio. Yes, LMVTX outperformed the S&P 500 when the market was growing, but it also underperformed it during busts.
The annual returns just get multiplied to get you the aggregate return of a longer period, so an active fund would have to outperform a comparable index fund during the fifth year more dramatically than the underperformance of all the other four years combined (multiplied) in order to outperform for the whole period.

I wasn't the one making a case for that fund so not sure you meant the comment for me, but you are right if a fund out performs in years 1-4 but not in 5 it could negate it and in 6 it could out/under perform again - the point is you need to factor in performance trends by the manager because over time certain ones can win (but again as they get bigger this gets less likely so by the time a trend is estabished it may be too late).  By the way, look at holdings in that fund it proves my point that getting to big is the biggest issue for actively managed funds because small investments don't move the dial and that then leaves only large ones and then it starts to move like an index with more risk and high expenses.

Surely if it's possible to identify good stocks it's possible to identify good managers, right? How are these two any different?

They are different. There can be an abundance of information about individual companies, industries, and sectors, but very little information is available about fund managers, which can change styles or as they get bigger move further away from the raw data relying more on people under them. 

[tooqk4u22]

If you make a vague prediction about it going down, then yes, of course you will be right at some point.  That doesn't mean anything.

Of course you realize this is the precise qualification to be a PHD trained economist:)

Start a thread saying I bought X, or I sold Y, and post trades as you do them (not after).  And if it goes down reasonably, and you can call the bottom and such, that will be a different story than vague predictions.

This really is the only way to settle the issue although time needed to prove it out would not be great.  Certainly he has made trades, good and bad, over the last 5-10 years that could be documented...although my guess is if he showed more good ones than bad ones posters would accuse him of not showing the full picture and wouldn't believe him anyway.  So that really only leaves forward predictions  - he is on record with one already (not that I understand it - I thought head and shoulders was a shampoo). 

[smedleyb]

Arebelspy, I'm using this thread right here and now to articulate my forecasts and I will happily walk you through my trades as I execute them.

[arebelspy]

Arebelspy, I'm using this thread right here and now to articulate my forecasts and I will happily walk you through my trades as I execute them.

Cheers.

So in that spirit, what are your current holdings as of 7/3/12?

[grantmeaname]

Your missing the point...much of the back and forth, including several comments from you, are that individuals can't beat the market

The weak efficient market hypothesis excludes inefficiencies that are too small to exploit without being nullified by their transaction costs. I think that running an actively managed mutual fund's costs are transaction costs just as much as trading costs are. If a mutual fund was exceptionally managed and exploited the market's inefficiencies to the tune of 1.5% a year over market returns with a comparable risk profile but had a 1.51% expense ratio, it would violate the strong EMH but not the weak EMH. Does that make sense?

I wasn't the one making a case for that fund so not sure you meant the comment for me, but you are right if a fund out performs in years 1-4 but not in 5 it could negate it and in 6 it could out/under perform again - the point is you need to factor in performance trends by the manager because over time certain ones can win

I totally agree. In the absence of that data or even half a bright idea about where to find it, I was just trying to use the aforementioned fund as an example. I know you weren't the one who brought it up, and I guess I didn't write out enough of my admittedly jumpy thought process to make that clear.

(but again as they get bigger this gets less likely so by the time a trend is estabished it may be too late).  By the way, look at holdings in that fund it proves my point that getting to big is the biggest issue for actively managed funds because small investments don't move the dial and that then leaves only large ones and then it starts to move like an index with more risk and high expenses.

I found a totally fascinating journal article yesterday about mutual fund performance by net asset value, fund family, asset type, and expense ratio. It had something interesting to say about this. Unfortunately, it hasn't turned up in 30 minutes of history digging.

They are different. There can be an abundance of information about individual companies, industries, and sectors, but very little information is available about fund managers, which can change styles or as they get bigger move further away from the raw data relying more on people under them.

Fair enough.

[smedleyb]

Arebelspy, I'm using this thread right here and now to articulate my forecasts and I will happily walk you through my trades as I execute them.

Cheers.

So in that spirit, what are your current holdings as of 7/3/12?

Come on man, it's the holidays! 

100% cash.

Although I will say this, and tooqk4u22 already touched on it: if I'm right, the disbelievers will chalk it up to luck or selective data reporting; if I'm wrong, the masses will pile on and chase me off these boards like some two-bit snake oil salesman. 

But if even a few mustachians walk away some some deeper insight into the workings of the market, or have a better understanding of the differing viewpoints which inform peoples perceptions of stocks and of the forces that move them -- as if the debate between the random walkers and those who see a deep, inner logic to the market machine just spawned on some message board -- well then I think all of this is a worthwhile pursuit.

peace.

[unitsinc]

I'm definitely interested in this. I hope we have the next Buffet in our midst.

[smedleyb]

I'm definitely interested in this. I hope we have the next Buffet in our midst.

Why?  Looking for some cheap insurance on your home, auto, or boat?

[smedleyb]

What if the age of the long decline of index funds is upon us -- a situation created by (a) a heavily indebted youth with scant job prospects and thus no income to invest, and (b) an aged and retired baby boomer generation looking to cash out their IRA money?

Characterizing youth as heavily indebted is inaccurate, as I've demonstrated all of a dozen times now. Job prospects are really not bad among college graduates, who I would say are more heavily into investing than high-school graduates, college dropouts, and high school dropouts. If they were, I'm sure you would have provided data to support your assertion. For example, in Ohio, all people aged 20-to-24 had an 11.9 percent unemployment rate according to Ohio Department of Job and Family Services. Even among college graduates the average debt was about $15k, and I've already demonstrated elsewhere that that value is totally manageable. Meanwhile, the average boomer has only $78k between all their 401ks and IRAs, according to a Center for Retirement Research study; likely, much of that money is in bonds and boomers heed the traditional advice of becoming more conservative as they approach retirement. Somehow, I don't see $40k of retirement-earmarked equities per boomer and $15k of student loans per college grad as a problem so colossal it'll sink the equities markets. More to the point, though, you've got these gloomy arguments that bear no relation to the actual economic facts of the nation.

You're right, college grads are in great financial shape:

http://www.theatlantic.com/business/archive/2011/08/chart-of-the-day-student-loans-have-grown-511-since-1999/243821/

500% increase in debt load, in a dozen years?

But not to worry, employment prospects are excellent in Ohio, but maybe not every where else:

http://www.theatlantic.com/business/archive/2012/04/53-of-recent-college-grads-are-jobless-or-underemployed-how/256237/

No jobs, no payments, mucho defaults:

http://studentloanjustice.org/press%20release7-20-10.htm

Hopefully the debt gets paid by the time social security kicks in:

http://www.wptv.com/dpp/news/national/college-student-loans-follow-some-to-old-age-according-to-federal-reserve-bank-survey

And perhaps even Ohio is not immune to the student debt crisis:

Here at Ohio Northern, recent graduates with bachelor’s degrees are among the most indebted of any college in the country, and statewide, graduates of Ohio’s more than 200 colleges and universities carry some of the highest average debt in the country, according to data reported by the colleges and compiled by an educational advocacy group.

http://www.nytimes.com/2012/05/13/business/student-loans-weighing-down-a-generation-with-heavy-debt.html?_r=1&pagewanted=all

Nothing to see here folks, everything is under control.

[smedleyb]

In weak-form efficiency, future prices cannot be predicted by analyzing prices from the past. Excess returns cannot be earned in the long run by using investment strategies based on historical share prices or other historical data. Technical analysis techniques will not be able to consistently produce excess returns, though some forms of fundamental analysis may still provide excess returns. Share prices exhibit no serial dependencies, meaning that there are no "patterns" to asset prices.

http://en.wikipedia.org/wiki/Efficient-market_hypothesis

The past is no predictor of the future; TA and fundamental analysis are useless in determining the movement of prices; there are, literally, no patterns or trends to asset prices.  No bears, no bulls, just random movements.

Hmm:

In the last decade, the efficient market hypothesis, which had been near dogma since the early 1970s, has taken some serious body blows. First came the rise of the behavioral economists, like Richard H. Thaler at the University of Chicago and Robert J. Shiller at Yale, who convincingly showed that mass psychology, herd behavior and the like can have an enormous effect on stock prices — meaning that perhaps the market isn’t quite so efficient after all. Then came a bit more tangible proof: the dot-com bubble, quickly followed by the housing bubble. Quod erat demonstrandum.

"The incredibly inaccurate efficient market theory was believed in totality by many of our financial leaders, and believed in part by almost all. It left our economic and government establishment sitting by confidently, even as a lethally dangerous combination of asset bubbles, lax controls, pernicious incentives and wickedly complicated instruments led to our current plight."

http://www.nytimes.com/2009/06/06/business/06nocera.html?pagewanted=all

The failure of EMH to account for or diffuse the bubbles of the past decade has caused many large investors to abandon EMH in all its forms in favor of an approach that uses a multiplicity of techniques to locate and exploit investment opportunities.  The debate between EMH and its detractors still rages, and it's unlikely to be settled here.  But the point is for all investors (including yours truly) to recognize both sides rather than blindly cling to one side of the issue and disparage the other.   The idea that markets are long term efficient and rational will not protect your nest-egg against the deleterious effects of bursting asset bubbles; the idea that one can unequivocally determine the outcome of investments (using psychology, technical or fundamental analysis) ignores the unpredictability of the future and is a recipe for financial disaster.

[tannybrown]

smedleyb, do you worry about opportunity costs for being 100% cash?

[smedleyb]

smedleyb, do you worry about opportunity costs for being 100% cash?

Absolutely.

But I worry much more about sitting fully invested through the next 30-50% decline and watching my "fuck you" money get whacked. 

[arebelspy]

smedleyb, do you worry about opportunity costs for being 100% cash?

I think it's because of opportunity that he wants to be 100% cash.

[tannybrown]

Right -- I think the argument could be made to have some real cash around to take advantage of such a dip.  I just hadn't heard of such an approch before, where the market conditions dictate pulling out of any investment besides cash.  It seems like an argument against asset allocation.

[arebelspy]

Right -- I think the argument could be made to have some real cash around to take advantage of such a dip.  I just hadn't heard of such an approch before, where the market conditions dictate pulling out of any investment besides cash.  It seems like an argument against asset allocation.

Well people who believe in market timing generally don't care about asset allocation.

It's real common among market timers.  Or anyone who thinks there will be opportunities in the future.

I'm heavily in cash right now myself, waiting for some short sales to go through.

[Mr Mark]

I think the original breakthrough paper on asset allocation used 25%  each of stock, bonds, cash and gold.

Holding some cash is fine, IMHO.  But for my money, intermediate term bonds are close enough wrt stash allocation, vs pocket change.

And smed your play may well prove a winner. But by definition, I chose to invest >95% of my stash in low fee balanced AA, because then I think I can reasonably plan for long term real growth aligned with world GDP  growth.

I am just not willing to speculate with FI stash.

And, to be fair, you've sometimes sort-of agreed with that cap.

Playing with active trading, technical analysis, timing, individual stocks, complex 3rd party instruments... it is for basically everyone a losers game.

And, much more insidiously, the lure is of the fast buck. The quick and easy way to FI. Screw this whole savings rate vs 5% stuff. I'm a trading god, and I'm capable of risking everything on my trades and instincts.

Sorry. That's what I call a rookie error.

[smedleyb]

Mr. Mark, i agree with most of what you say and find your approach to AA to be spot on.  If mustachians came up to me and asked which investment approach is best for the long term, I would unhesitatingly direct them to your posts and say "mimic that guy."

That said, I think that over next several years equities will be choppy with little upward progress (10%?).  I've explained ad nauseum why I think the economy and ultimately the markets are in for some rough sledding until the excesses of debt get wrung out and the conditions for an authentic, organic expansion take root.  If this was 2009, SPX 800 and I was screaming to people "sell, sell, sell," then I would be a fool.  But we're at SPX 1400, it's 3 years into a cyclical bull, and I'm beginning to see the early signs of an economic and earnings peak -- which may or may not play out.  But advantage of being small is I can get 100% long very quickly if my forecasts prove to be bunk.

But lets not forget what spawned this thread: being critiqued for attempting to ascertain if certain stocks are a buy or not ("you can't pick stocks; it's just gambling"), and also by recommending to some mustachians that cash is an asset too and that you don't need all your FI money invested 100% in stocks, bonds, gold, and RE all the time.   Being mocked for saying Spanish stocks are a buy at IBEX 6,500 [and to the poster who attacked my comments on another thread, TEF is only down 4% from where I said buy, EWP is up 2%, and Banco Santander is up 10%] after the index had collapsed from 16,000 seems to me silly.  Buy 'em when they hate 'em, always. 

[grantmeaname]

You're right, college grads are in great financial shape:

I never argued that things were peachy and splendid, I argued that it wasn't a specific problem affecting the stock market, since even of that college-going fraction of the 9% of Americans that are 20-24, the average debt is only $15k.

500% increase in debt load, in a dozen years?

In that time there's been a concomitant increase in enrollment on the order of 40% as well as a significant increase in time to degree. Even discounting those reasons why the statistic is misleading, I have to ask why that's a bad thing? Going to college still improves your earning potential much faster than it costs you money (unless you're a total moron like Kelsey Griffith and you borrow $120k, then are frustrated you can't pay it back waiting tables only 18 hours a week). Some of the rise can be attributed to for-profit universities, which I consider pretty much the scum of the earth, and I would agree that that's bad. And yes, graduation rates and the increasing time to completion do give me some worry. But the loans haven't even approached the point that they're counterproductive, when you consider their gigantic effect on earning potential over the entire working career.

But not to worry, employment prospects are excellent in Ohio, but maybe not every where else

53% of recent graduates are unemployed or underemployed? That's not horrifying. Journalism majors know going in that they're not going to end up with a job after four years. So do my peers in anthropology. You could say that it's a problem that people are allowed to study things that you don't think are economically worthy, but I don't think anyone would take that argument seriously. On top of those people, there are stay-at-home parents, all of the people waiting to break into a field who are making connections in their field with internships and volunteering, graduate students... I think you're using the underemployment statistic to represent a narrower stripe of people than it does, and even those people are there by choice.

No jobs, no payments, mucho defaults

That's a sensationalistic piece of shit website that perpetuates this myth of consumers being fleeced by big bad wall street because they either 1) aren't smart enough to understand what a loan is, or 2) aren't treated as real adults in our narrative of them. The NY Times article used this same language, and I wasn't a fan of it then, but this site is just filled to the seems with it. Look, if you believe that other people are people responsible for making their own decisions, you can't go around linking garbage like this. Besides, if their true default rate is "between 25 and 33 percent (perhaps even greater)", you know they're not a reputable source. Seriously, did you just search around for whichever website had the highest number?

Hopefully the debt gets paid by the time social security kicks in

The plural of 'anecdote' is not 'data'. The fact that they interviewed two different old people with loans does not make it a problem affecting the demographic as a whole.

And perhaps even Ohio is not immune to the student debt crisis

The reporter for the article was working in Ohio! Of course the students he interviewed were Ohioans, and of course the worst borrowers of those were the ones that went to small private liberal arts colleges! That's the same article I link to every week when we discuss student loans; of course I've read it. If you follow the link in the snippet you quoted, you'll see that 68% of Ohio students borrow an average of $27.7k, meaning the average graduate has $18.8k in debt, a whopping 20% more than the national average. And even with that hardly crushing debt load, as I posted a bit further up in the thread, things are just peachy here in Ohio! Look at the unemployment statistics I linked. There's a 11.9% unemployment rate among everyone in the demographic, and unemployment is lower among those with higher educational attainment, so I'm not surprised that less than 10% of graduates in that age group are unemployed.

Nothing to see here folks, everything is under control.

I think I've thoroughly demonstrated that everything is under control. If not, wouldn't the factual data counter what I'm saying in some meaningful way instead of repeatedly contradicting your predictions of our doom at the hands of Stafford loans?

Edit: Typos.

[smedleyb]

I think I've thoroughly demonstrated that everything is under control. If not, wouldn't the factual data counter what I'm saying in some meaningful way instead of repeatedly contradicting your predictions of our doom at the hands of Stafford loans?

The factual data show much greater debt levels for college graduates, coupled with deteriorating job prospects.  How exactly have you refuted that claim? 

And how is this piece of factual data incompatible with the claim that young workers will be in less of a position to contribute to 401Ks going forward?

I think the student loan crisis is in its incipient stages; we'll know better over the next 5 years how under control the situation actually is.

[arebelspy]

I think what grant is showing is that the student loan "crisis" is overblown and nothing to wring your hands and worry about.

Is college debt up? Sure.  Is unemployment up? Yup.

Is that debt crushing? Not at all.  Can they still get jobs (which make the degree pay for itself)? Yes.

[grantmeaname]

I think what grant is showing is that the student loan "crisis" is overblown and nothing to wring your hands and worry about.

Is college debt up? Sure.  Is unemployment up? Yup.

Is that debt crushing? Not at all.  Can they still get jobs (which make the degree pay for itself)? Yes.

Exactly. The average loan balance is not so significant that it precludes 401k contributions. I've repeatedly demonstrated how insignificant it is, and I would be willing to run the numbers yet again if what we're arguing over is whether student loans are really expensive in absolute terms. Like I said, that increase is startling in relative terms, and I don't like some of the things that have contributed to that increase, but I don't think it's that significant in absolute terms.

[smedleyb]

I think what grant is showing is that the student loan "crisis" is overblown and nothing to wring your hands and worry about.

Is college debt up? Sure.  Is unemployment up? Yup.

Is that debt crushing? Not at all.  Can they still get jobs (which make the degree pay for itself)? Yes.

I get that he thinks the crisis is "overblown."  And I get that now you think the same.

They assured us in 2007 that sub-prime was contained too, before the wheels fell off the wagon. 

Time will tell.

[grantmeaname]

I just argued that based on the evidence that the "crisis" is anything but. The actual numbers that describe the behavior of the 30 million people my age in this country support my assertion that while the changes are startling on a relative scale, they are not currently significant or crippling on an absolute scale.

If all you have to say back is that you're scared it'll be really bad because someone else made an argument about the subprime crisis that sounded the same to you, we're done here.

[smedleyb]

I just argued that based on the evidence that the "crisis" is anything but. The actual numbers that describe the behavior of the 30 million people my age in this country support my assertion that while the changes are startling on a relative scale, they are not currently significant or crippling on an absolute scale.

If all you have to say back is that you're scared it'll be really bad because someone else made an argument about the subprime crisis that sounded the same to you, we're done here.

But I thought we were just getting started?:

The Huff post is concerned:

Slightly more than 80 percent of bankruptcy attorneys say the number of their potential clients with student loan debt have increased "significantly" or "somewhat" in the past three to four years,

http://www.huffingtonpost.com/2012/02/08/student-loan-debt-bankruptcy_n_1263348.html

Here's another, how do you say it?, sensationalist piece of shit:

"Student-loan debt has ballooned and may turn into a bubble," S&P said. "There are more defaults and downgrades for some student loan asset-backed securities."

http://articles.latimes.com/2012/feb/09/business/la-fi-student-debt-bubble-20120209

Let's allow the bankruptcy attorney's to chime in again:

SURVEY:  4 OUT 5 U.S. BANKRUPTCY ATTORNEYS REPORT MAJOR JUMP IN STUDENT LOAN
DEBTORS SEEKING HELP, FEARS GROW OF NEXT MORTGAGE-STYLE DEBT THREAT TO U.S.   

http://www.nacba.org/Portals/0/Documents/Student%20Loan%20Debt/020712%20NACBA%20student%20loan%20news%20release.pdf

Oh wait, mortgage style debt threat!  Let's repeat for emphasis:

If all you have to say back is that you're scared it'll be really bad because someone else made an argument about the subprime crisis that sounded the same to you, we're done here.

I guess I'm not the only one who sees the analogy to subprime.

Now we're done.

[tannybrown]

It's odd that bankruptcy attorneys would weigh in on student loan debt, which isn't forgiven in bankruptcy.

[Jamesqf]

Is college debt up? Sure.  Is unemployment up? Yup.

Is that debt crushing? Not at all.  Can they still get jobs (which make the degree pay for itself)? Yes.

It'd be interesting to have data that's a little better than just a simple average loan debt.  I mean, if you have Barry Obama borrowing say $150K to go to Harvard Law School, and me borrowing $10K to get a MS in Computer Engineering at the local state university... Well, that's an average $80K loan debt, but only one of us had problems paying.  (Took me roughly two years :-))

The point is that while you can find a bunch of sob stories about people who borrowed lots of money to go to an Ivy League school to study English Lit or Comparative Basketweaving and now - surprise! - can't find a job that doesn't involve asking "Do you want fries with that?", you don't hear much about people who borrowed maybe $10-20K to get their BS in Engineering, then went to work the day after graduation at $50K+. 

So we've got a student loan "crisis" that affects a small fraction of college students & recent graduates, which themselves are a small fraction of the population.  Is that relatively small tail enough to wag the economic dog?

[JohnGalt]

I just argued that based on the evidence that the "crisis" is anything but. The actual numbers that describe the behavior of the 30 million people my age in this country support my assertion that while the changes are startling on a relative scale, they are not currently significant or crippling on an absolute scale.

If all you have to say back is that you're scared it'll be really bad because someone else made an argument about the subprime crisis that sounded the same to you, we're done here.

But I thought we were just getting started?:

The Huff post is concerned:

Slightly more than 80 percent of bankruptcy attorneys say the number of their potential clients with student loan debt have increased "significantly" or "somewhat" in the past three to four years,

http://www.huffingtonpost.com/2012/02/08/student-loan-debt-bankruptcy_n_1263348.html

Here's another, how do you say it?, sensationalist piece of shit:

"Student-loan debt has ballooned and may turn into a bubble," S&P said. "There are more defaults and downgrades for some student loan asset-backed securities."

http://articles.latimes.com/2012/feb/09/business/la-fi-student-debt-bubble-20120209

Let's allow the bankruptcy attorney's to chime in again:

SURVEY:  4 OUT 5 U.S. BANKRUPTCY ATTORNEYS REPORT MAJOR JUMP IN STUDENT LOAN
DEBTORS SEEKING HELP, FEARS GROW OF NEXT MORTGAGE-STYLE DEBT THREAT TO U.S.   

http://www.nacba.org/Portals/0/Documents/Student%20Loan%20Debt/020712%20NACBA%20student%20loan%20news%20release.pdf

Oh wait, mortgage style debt threat!  Let's repeat for emphasis:

If all you have to say back is that you're scared it'll be really bad because someone else made an argument about the subprime crisis that sounded the same to you, we're done here.

I guess I'm not the only one who sees the analogy to subprime.

Now we're done.

I think we're getting into the weeds over a statement that doesn't seem to be the fundamental issue at hand?

My own personal goal is simply to get rich by buying market sell-offs (declines of 20% or greater) over then next 5 years and begin accumulating for the next great bull market that will commence when we pay off our debts, save a little, and invest for the future.  This country hasn't deleveraged by any means, unless one considers transferring private debt onto our public institutions a credible payment plan.  Until then, I'm more than comfortable attempting to be more tactical with my money (i.e., trade more) while maintaining high levels of cash.

I believe that this is the appropriate strategy to employ in a secular bear market, which my technical and historical analysis of the market says we are in. 

The key thing smedleyb appears to be arguing is that the US as a nation has not stopped spending beyond it's means and, until that happens, we'll continue seeing long-term flat growth at best to significant declines at worst.  This is why he is arguing against the conventional efficient market theory advice of dollar cost averaging buy and hold. 

If I have that right, I think arguing over one specific type of debt won't get us anywhere, even if there was a chance that you two would come to an agreement.  It seems it would be more productive to talk about the real heart of the argument rather than a tangent like this. 

[arebelspy]

The Huff post is concerned:

Slightly more than 80 percent of bankruptcy attorneys say the number of their potential clients with student loan debt have increased "significantly" or "somewhat" in the past three to four years,

...

All this post did was confirm the first part of what I said:

Is college debt up? Sure.  Is unemployment up? Yup.

Is that debt crushing? Not at all.  Can they still get jobs (which make the degree pay for itself)? Yes.

It doesn't refute the second part.

If I have that right, I think arguing over one specific type of debt won't get us anywhere, even if there was a chance that you two would come to an agreement.  It seems it would be more productive to talk about the real heart of the argument rather than a tangent like this. 

The point of this thread seems to be to argue about any sort of disagreements anyone has with smedley over the state of the U.S., the markets, trading theories, buying individual stocks vs. index funds, etc. etc.

Based on some hints in other posts I'm sure at some point there will be an attack on Buffet and discussion about that.

It'll wander.  I don't think it'll stick to what you think of as "the heart of the argument."  Sorry.  :)

[smedleyb]

The key thing smedleyb appears to be arguing is that the US as a nation has not stopped spending beyond it's means and, until that happens, we'll continue seeing long-term flat growth and best to significant declines.  This is why he is arguing against the conventional efficient market theory advice of dollar cost averaging buy and hold. 

If I have that right, I think arguing over one specific type of debt won't get us anywhere, even if there was a chance that you two would come to an agreement.  It seems it would be more productive to talk about the real heart of the argument rather than a tangent like this.

The biggest knock against EMH -- weak or strong -- is the belief that market inefficiencies get resolved quickly and are thus not exploitable by the average public.

Yet the tech bubble took years to unfold (Greenspan warned against "irrational exuberance" in 1996) as did the housing bubble.  The cumulative imbalances did not appear and disappear overnight.  They were a long time in the making.   So much for efficiency and rationality. 

And yes, I think buy and hold is the wrong strategy to employ in the current bear market.  I advise higher levels of cash.  I didn't know I was being so controversial until I encountered some postesr around here.  I've tried to be more diplomatic since.     

And I agree what you're saying about the "student debt crisis," or lack thereof -- hey, we're just exchanging ideas.  If areblespy wants to spin that discussion into a separate thread, then fine.  But you're right, it's just a tangent.

I won't lie:  I think the biggest flaw in MMM's approach to FI is his failure to account for the tremendous volatility and risk inherent in equity investment.  History is littered with markets that top out and never come back:  Dutch Tulips and the Nikkei comes to mind.  Do I think the same fate awaits us  here in America?  Fuck no.  But I'm not ready to sound the "all clear" signal when so much of my brain, heart, and gut tells me we're not through this thing just yet.  15 trillion thrown at this economy and just 1.9% GDP growth?  Europe at the brink?  Absolute debt levels higher than ever?

Let's not invest with our heads buried in the sand.  Attack me for being wrong.  But don't attack me for trying to tell the truth as I see it.

[smedleyb]

The point of this thread seems to be to argue about any sort of disagreements anyone has with smedley over the state of the U.S., the markets, trading theories, buying individual stocks vs. index funds, etc. etc.

Based on some hints in other posts I'm sure at some point there will be an attack on Buffet and discussion about that.

It'll wander.  I don't think it'll stick to what you think of as "the heart of the argument."  Sorry.  :)

I think the point of this thread is to have a healthy discussion about the stock market.  To be honest most of the dialogue is pretty honest, balanced, and respectful.  And that's they way I intend to keep it.

[JohnGalt]

The key thing smedleyb appears to be arguing is that the US as a nation has not stopped spending beyond it's means and, until that happens, we'll continue seeing long-term flat growth and best to significant declines.  This is why he is arguing against the conventional efficient market theory advice of dollar cost averaging buy and hold. 

If I have that right, I think arguing over one specific type of debt won't get us anywhere, even if there was a chance that you two would come to an agreement.  It seems it would be more productive to talk about the real heart of the argument rather than a tangent like this.

The biggest knock against EMH -- weak or strong -- is the belief that market inefficiencies get resolved quickly and are thus not exploitable by the average public.

Yet the tech bubble took years to unfold (Greenspan warned against "irrational exuberance" in 1996) as did the housing bubble.  The cumulative imbalances did not appear and disappear overnight.  They were a long time in the making.   So much for efficiency and rationality. 

And yes, I think buy and hold is the wrong strategy to employ in the current bear market.  I advise higher levels of cash.  I didn't know I was being so controversial until I encountered some postesr around here.  I've tried to be more diplomatic since.     

And I agree what you're saying about the "student debt crisis," or lack thereof -- hey, we're just exchanging ideas.  If areblespy wants to spin that discussion into a separate thread, then fine.  But you're right, it's just a tangent.

I won't lie:  I think the biggest flaw in MMM's approach to FI is his failure to account for the tremendous volatility and risk inherent in equity investment.  History is littered with markets that top out and never come back:  Dutch Tulips and the Nikkei comes to mind.  Do I think the same fate awaits us  here in America?  Fuck no.  But I'm not ready to sound the "all clear" signal when so much of my brain, heart, and gut tells me we're not through this thing just yet.  15 trillion thrown at this economy and just 1.9% GDP growth?  Europe at the brink?  Absolute debt levels higher than ever?

Let's not invest with our heads buried in the sand.  Attack me for being wrong.  But don't attack me for trying to tell the truth as I see it.

This is the part of the discussion I'm really interested in.  Mainly because I really want buy and hold to be the right strategy (mainly because short term market/individual stock timing is not something I'm interested in) but share many of the same doubts you do about the mid-term growth prospects for the economy. 

I guess my real question then is - what is your advice for someone who does not want to regularly think about the market.  Is it to just stay out right now?  If that's the case, how does someone not interested in following the market know when to get back in?  I don't want to stick my head in the sand entirely - but I don't really want to look out more than a few times a year...

[JohnGalt]

The point of this thread seems to be to argue about any sort of disagreements anyone has with smedley over the state of the U.S., the markets, trading theories, buying individual stocks vs. index funds, etc. etc.

Based on some hints in other posts I'm sure at some point there will be an attack on Buffet and discussion about that.

It'll wander.  I don't think it'll stick to what you think of as "the heart of the argument."  Sorry.  :)

I think the point of this thread is to have a healthy discussion about the stock market.  To be honest most of the dialogue is pretty honest, balanced, and respectful.  And that's they way I intend to keep it.

You're right - and I should probably stop trying to refocus it as it's not my post... but it does get old reading long posts with lots of quotes and links between two intelligent people who seem destined to disagree on nearly anything they discuss in regards to the market.  At some point I just feel like it's better to agree to disagree on that particular conclusion and move on...

[grantmeaname]

If you concede that most people can't do better than the market, and you think the market is going to be stagnant or near enough, what could you recommend as a solution for the masses? Unless there's some flaw in my logic, that's a case of things not adding up such that there could be any solution (besides "keep working").

[arebelspy]

Yet the tech bubble took years to unfold (Greenspan warned against "irrational exuberance" in 1996)

And how would one have done shorting the market in 1996, 1997, 1998, 999?

As it has been said, the market can stay irrational longer than I can stay solvent.

And I agree what you're saying about the "student debt crisis," or lack thereof -- hey, we're just exchanging ideas.  If areblespy wants to spin that discussion into a separate thread, then fine.  But you're right, it's just a tangent.

I completely agree with just exchanging ideas, but I think due to the fact that "the market" is tied into so many things (student loan debt, boomers retiring, national and global economies, etc.) I think we'll run across many tangents in the exchanging ideas part.  I think that's a good thing, rather than trying to strictly stay "on topic" (and decide what exactly that entails).

I won't lie:  I think the biggest flaw in MMM's approach to FI is his failure to account for the tremendous volatility and risk inherent in equity investment.

And I disagree.  I think there is MUCH more risk in trying to time markets and buying and selling individual stocks.  In MMM's philosophy he is investing for the long term, which historically has worked.  In alternate types of trading, many, many people have lost money.  That to me is a much bigger flaw in an FI plan built on timing the markets and technical trading.

Attack me for being wrong.  But don't attack me for trying to tell the truth as I see it.

I think that's what we're doing.  ;)

[arebelspy]

but it does get old reading long posts with lots of quotes and links between two intelligent people who seem destined to disagree on nearly anything they discuss in regards to the market. 

Ah, see I disagree.  I enjoy the long posts with links and quotes, as it makes me think and consider two very different viewpoints.

And many of the things smedely has said has made me stop and think.

But we can agree to disagree on that, instead of debating it and linking and quoting.  ;)

[smedleyb]

I think that's what we're doing.  ;)

Touche!

[smedleyb]

If you concede that most people can't do better than the market, and you think the market is going to be stagnant or near enough, what could you recommend as a solution for the masses? Unless there's some flaw in my logic, that's a case of things not adding up such that there could be any solution (besides "keep working").

My ideal portfolio for most Mustachians today:

Index and dividend funds (less volatile), some bonds (which you should be ready to ditch at a moment's notice), at least 25% cash, a little gold, and a whole lot of patience.

When the economic backdrop imoroves:  growth and emerging market funds, no bonds (I think a bond collapse will be the impetus for the next bull market rally), 5-10% cash, no gold, about 5-10% in a basket of best managed growth companies.


edit:  and I do concede the difficulty in stock picking and market timing for most investors. 

[arebelspy]

Decent suggestions, if a bit conservative.

Keep in mind that studies have shown cash strategies to be inferior in returns - in essence the cost of keeping that money in cash to buy on dips outweighs getting the stocks cheaper and you actually make less money than just investing it.  YMMV, and obviously a crash may change that, if you could predict exactly when such a thing could happen (and not be so early the market ignores you for years and you lose a lot).

[JohnGalt]

If you concede that most people can't do better than the market, and you think the market is going to be stagnant or near enough, what could you recommend as a solution for the masses? Unless there's some flaw in my logic, that's a case of things not adding up such that there could be any solution (besides "keep working").

My ideal portfolio for most Mustachians today:

Index and dividend funds (less volatile), some bonds (which you should be ready to ditch at a moment's notice), at least 25% cash, a little gold, and a whole lot of patience.

When the economic backdrop imoroves:  growth and emerging market funds, no bonds (I think a bond collapse will be the impetus for the next bull market rally), 5-10% cash, no gold, about 5-10% in a basket of best managed growth companies.

Are there any fairly simple signs to look for to tell that the economic backdrop has improved?

You say to be ready to ditch bonds at a moment's notice - what would be the trigger? 

In essence, how would the average Mustachian know when the time is right?  I have a degree in economics and have no problem admitting that I have little confidence in my ability to predict the timing on these types of shift well enough to capitalize on them. 

[sol]

Attack me for being wrong.  But don't attack me for trying to tell the truth as I see it.

Not only do I welcome the vociferous bears, I encourage them to preach their gospel from the hilltops.  The market needs that constant negativity to keep it in balance, even in cases when it contradicts the historical record.

Whether or not now is one of those times isn't really relevant. 

[smedleyb]

Are there any fairly simple signs to look for to tell that the economic backdrop has improved?

You say to be ready to ditch bonds at a moment's notice - what would be the trigger? 

In essence, how would the average Mustachian know when the time is right?  I have a degree in economics and have no problem admitting that I have little confidence in my ability to predict the timing on these types of shift well enough to capitalize on them.

John, I think the single biggest "tell" that the economic backdrop has improved hinges on the ability of our political and business leaders to bite the bullet and begin to seriously deal with their addiction to debt:

http://www.huffingtonpost.com/2012/07/10/scranton-city-workers-minimum-wage_n_1661488.html

Rather than float a bond to deal with budgetary gaps, the mayor of Scranton cut wages in lieu of a tax increase.  While this sort of behavior is devastating short term to many workers, it's also quite positive long term as it signals a willingness to deal with budgetary issues rather than shove them into the background by borrowing our way out of a hole -- which is, of course, impossible to do.   You can't borrow your way to prosperity.

Transferring private debts onto the public balance sheet is not a viable payment plan.  But this is exactly the strategy employed by our leaders -- you know, the same ones who never saw the financial crisis coming, but whom we entrust to lead us out of this morass (cue Einstein's definition of insanity).   I believe the "bond collapse" will commence as investors begin to question the solvency of our government and start clamoring for greater levels of compensation to hold US debt.  I think the arrival of that moment can be measured in months, not years.

Market note:  a couple weeks ago I said that the SPX breaking over 1340 was bullish and my technical work showed that the market has some room to run to SPX 1390.  Well, while the SPX did touch 1375 last week, but has since sold off and is currently bouncing around this important 1340 level as we speak.  1340 now represents support for the market, and it's critical that it hold here if the bulls stand a chance.

But I'll say this: the news flow (especially earnings) has been outright negative, which is not surprising since 50% of S&P profits are derived overseas and Europe is an economic mess.  My sense is that these levels don't hold.  The strategy before was to unleash shorts at or near 1390, but maybe that level doesn't come into play.  Plan B  is to see how the market acts around 1330-1340, and if it breaks (drops below 1320), the strategy will be to short the first bounce back to 1340 (markets almost always seem to retest broken support levels after they break, and these retests represent the best trading set-ups IMO). 

So for all the mustachians waiting with baited breath for my next move, there it is! lol. 

[arebelspy]

I think the single biggest "tell" that the economic backdrop has improved hinges on the ability of our political and business leaders to bite the bullet and begin to seriously deal with their addiction to debt

I agree, and think we're nowhere close (a few small town anecdotes aside).  On a national level, the politicians continue to kick the can down the road with no serious fiscal reform.

[tooqk4u22]

Borrower and spend - it is the American way at all levels. Consumers have paused a bit because no lender will give them more money.  If only that were the case for the governement.

The longer it goes on the harder it will be to take the medicine but most developed countries are in the same boat.  We are the best looking horse in the glue factory.

[smedleyb]

Borrower and spend - it is the American way at all levels. Consumers have paused a bit because no lender will give them more money.  If only that were the case for the governement.

The longer it goes on the harder it will be to take the medicine but most developed countries are in the same boat.  We are the best looking horse in the glue factory.

Perfect analogy! lol.

Hence the strong US dollar (DXY) and  the 10 year US bond yield cracking below 1.5%.   The US (and Germany) represent safe zones in a tumultuous global economy.  Are sub 1% 10 year yields on the horizon?  Amazing, and insane, given the debt loads being generated especially by our government to spark life into a sagging economy.  Something's gotta give.  I suspect bonds are entering a "blow-off" phase.  Time will tell.     

[grantmeaname]

Smedley, I like that you've taken the fight to your signature. However:

EMH been thoroughly discredited.

Support your argument. You know, like in this gigantic thread that YOU CREATED about the topic. Look, you're already here. Just go ahead, start posting evidence or responding to any of my dozen specific invitations above.

Also, needs moar verb.

It is still taught in colleges and business schools, which is why I find most MBAs not worth hiring. Frequently, they can be worse than clueless — they are steeped in the bad ideas of long dead economists, and in my profession, that is not a formula for making money.

EMH emerged in academia in the 1960s. Of the three players mentioned, one died three years ago, one died thirty years ago, and one is alive and younger than all of my grandparents. "Long dead" may not be the best word choice.