Broad-market picking? - U.S. bull market is getting long-in-the-tooth

[farangster]

I think we need a paradigm shift (love that phrase) when it comes to investment risk in this country.  Of course, no one knows where markets are going and stock picking is a loser's game but what about recognizing cheap markets from expensive ones....broad-market picking?   When Buffett says to be greedy (buy) when others are scared and scared when others are greedy...........doesn't it seem that this would apply even more so to big deviations between large, diversified markets (u.s., int'l developed & emerging)?

Look at the p/e ratio of the infamous Vanguard small market etf, VB..........nearly 40!!!  and this etf has some of the strongest diversification- over 1400 small cap stocks.  Even the s&p etf's are hovering in the mid 18's.  Doesn't the U.S. market seem pricey, near the tail end of a great bull market more than 5 years old?  International developed markets have followed sink with the expensive U.S market.  In stark contrast the "higher risk" emerging markets have stunk for many years now and everyone is pulling money out of them in droves but look at the valuations now!  The emerging market etf, IEMG, has a p/e around 10 and holds over 1700 stocks diversified across more than 20 emerging countries (that do not all follow the same path, thus providing more diversification than the one mammoth u.s. market alone).  Schwab's new fundamental, value-based, diversified em etf , FNDE, with almost 900 stocks (also over 20 countries) has a p/e just over 6!!! - that's crazy low.  In my opinion this indicates that the broad based u.s./int'l developed markets are getting expensive and emerging markets are pretty damn cheap.  Yes, in the long-term, when the u.s. markets correct downward, the beaten-down emerging markets will drop too, but which market do you think will bounce back faster, longer and higher- the economically fast-growing market that was already cheap before the drop or our expensive, economically slow-growing u.s. and int'l developed markets?

When we spend a lot time and energy to find the best prices for those things we buy on a regular basis to improve our lifestyles, doesn't it make even more sense to apply this philosophy to the broad-based index funds we depend on heavily to fuel that lifestyle into the future?  How hard is it to cut down on one fund and buy more of another compared to changing a leaking radiator in your car? 

i don't know what's going to happen, but it sure looks like em markets are cheap right now and u.s. markets are expensive.  so i'm throwing my new money at emerging markets right now until the other markets start looking cheaper because when it comes to risk that u.s. market looks much scarier to me, and it's a good time to start rebalancing too- to cash in on some of these nice profits we have had lately before they disappear for another five years.  I also, really like the fact that emerging countries do not always have a strong correlation with each other- adding to diversification. 

i have never liked the way the financial industry promotes diversification across markets based on 20+ years of historical data that will definitely not forecast what happens in the next 20+ years.  There is no magic percentages of diversification between markets to maximize returns because the markets are constantly changing in unpredictable ways and effected by a myriad of unpredictable events around the world.  Understanding that fact, I believe the best we can do is look at the broad markets as they are now and put more weight on the crumbling, cheap markets that everyone hates and less on the high flying markets that everyone is married to and buying heavily because that party has to come to an end sometime.  In this way we are buying index's at a good price without the risk of individual stocks, countries or active funds with high fees and small baskets of stocks. 

A bmp investor's (yeah i just made that up) need to take a little bit more time when it comes to investing but hey- we can spare a little more time for something so important i'm guessing.


(fyi i got these p/e numbers from etf.com-  a great resource for commission-free, etf investors)

[ender]

You might find this website really interesting - http://www.multpl.com/

[innerscorecard]

I see where you are coming from, but either you believe you can time markets (in which case you can get very rich) or you don't believe you can. I think emerging markets have a good place in one's indexed investment portfolio, and you will naturally buy more as they get cheaper, if you stick to your asset allocation. But I think it is dangerous to go all in on a market you think will be hot and not buy others.

[Mr Mark]

Calling a market is, err, market timing. If you have an emerging market AA, ands its rebalance time, yeah, buy more em.

But remember the market can stay irrational longer than you can stay solvent.

[innerscorecard]

One rule of investing and financial behavior is that the hot money suffers.

Something that has happened in this market is that investors have been forced to go up the risk curve to get the same returns, since safer assets have a yield that is unsatisfactory. But that doesn't mean that the riskier assets have suddenly become less risky.

Would you be happy permanently having a large portion of your portfolio in emerging markets? They are cheaper...but they are cheaper for a reason. If you look at emerging markets funds, some of their biggest holdings are companies like Gazprom, Lukoil, Petrochina, and the like. They are certainly very cheap. But they should be cheap (probably not this cheap) There is a lot wrong with them.

[innerscorecard]

Definitely not hot for those in the mainstream...but chatter about increasing allocation to emerging markets has increased recently in the financial media (broadly defined). Jason Zweig had a column about them in the WSJ in the past few weeks, Rob Arnott (one of the principal guys doing fundamental indexes) said they were a good pick in a Morningstar interview late last year, and I seem to remember reading about it in Barron's as well recently.

I don't think having a larger-than-usual allocation to emerging markets is a bad idea (in fact I do myself) I just want to emphasize that it's not a free lunch, that is to say, an emerging markets investment yielding X% dividends or earnings is not an identical investment to a large-cap/broad-market U.S. investment with that same yield that you could have gotten in 2009. It's riskier.

I believe in reversion to the mean generally too, but as you yourself said, there are no guarantees for when or to what magnitude this will happen. I see that you're looking into fundamental indexes. I think there's been some evidence that non-market-cap weighted ways of index deliver better returns the more inefficient the market is, so supposedly they are best for emerging markets small caps. I'm still figuring this stuff out myself too. I believe most strongly in the cost matters hypothesis, and the cost for fundamental indexes is much higher than market-cap-weighted indexes (though still reasonable and much lower than active management).

Will definitely be interesting to see what happens in emerging markets over the next few years and decades. I'm definitely with you in that I think they're a good opportunity right now and I feel good about investing in them because they are so cheap. It's just that it's like thinking Cinderella's sisters look good because she's taken right now. They may still be ugly. :)

[warfreak2]

The real question you seem to be asking is, "it's been so long since we had a bear market, isn't it very likely we'll have one soon?". Now, this logic would apply to random events which have a good reason to be regular, like haircuts, buses and weekends. But other random events (e.g. phone calls) happen independently of each other, and while there is an average frequency (e.g. one call per hour), you can't say "a customer called me an hour ago, so another customer is just about to call me very soon". In fact, if the average time you have to wait for these random phone calls is half an hour, then even if the last phone call was five hours ago, you still expect to wait another half an hour. That's because these time gaps follow an exponential distribution, the most important property of which is memorylessness. When we say "past performance is not indicative of future returns", or "you can't time the market", what we mean is that you can't predict the future of the market by looking at its recent history (or its history at all), because market events follow this memoryless distribution pretty closely.

[arebelspy]

All of what the above said, plus:
You are saying one market that has been "hot" is overvalued, and another has been doing poorly (emerging markets).  That makes you want to invest in the latter?

Look at why they have been performing that way.  Could it be that U.S. companies have been more profitable over the last 5 years and more worth owning?

It sounds like you're wanting to invest that way on some gut feeling and trying to be a contrarian for its own sake.

The stock market is not some big gamble.  It's based on ownership of the underlying companies.  Do you have some reason to believe emerging markets will start outperforming relative to the U.S.?  Because it seems most investors would rather own those U.S. companies spitting out gobs of money than the companies in the emerging markets, and maybe you should think about why that is.

[arebelspy]

i find this article more informative regarding Mr. Schiller's cape ratio as of now:

http://www.gurufocus.com/shiller-PE.php

Why?  What makes that chart better than the one posted?  Because it confirms a preexisting notion you had?  Or is there some reason to prefer it?

I need some context to what you're saying, I'm not hearing any reasoning behind your statements.

[foobar]

Well they buy US stocks because when they sort by 5 year returns, those are at the top of the list.  So they overpay to buy them until the collapse and another sector hits the top of the 5 year list and the cycle repeats.:)

I expect EM to outperform the US because that is what they have done for the last 70 or so years. However I will not guess if that outperformance is starting tomorrow or in 20 years. I definitely don't follow it closely enough to decide it is undervalued (i.e. tons of book value that is not getting recognized because of flight to safety for example ) or underperforming (i.e. companies growth have stalled and are unlikely to restart). I would say the same thing about small caps and value in todays market. Long term I love them. Not so sure about short term though.

For the really in the face example of this the problem of market timing even when your right long term, look at gold.  You 1970 to 2010 gold return looks decent.  However the number of people that could wait out a 20 year bear market is very small.

The one question people is how do they expect this bull market to end? Everyone is fearing the 30%+ decline we had in 2000-2002 or 2008. That is definitely a possibility. We might also only get a 15% correction for 3 months before going up another 100% over 4 years before a 30% bear market.  Or maybe we go from a 15% correction over 3 months to a 20%(suckers rally) rise over 3 months to a 50% bear market. I wouldn't want to guess.

My gut says we get another 2-3 years out of this market and then whoever is the next president gets to enjoy a nasty bear market but I wouldn't only be willing to bet your money on that outcome:)

The stock market is not some big gamble.  It's based on ownership of the underlying companies.  Do you have some reason to believe emerging markets will start outperforming relative to the U.S.?  Because it seems most investors would rather own those U.S. companies spitting out gobs of money than the companies in the emerging markets, and maybe you should think about why that is.

[kyleaaa]

Broad market picking is just as much a loser's game as stock picking. Could it really be any other way?

[waltworks]

It always surprises me how many market timing/active day trader/stock picker/etc threads show up here, given that the whole point of MMM isn't really get-rich-quick beat-the-market crapola, it's don't spend so much *ucking money and invest in the low hanging index fruit that doesn't have any associated headaches. Then go play with your kids and your friends and forget about it.

I mean, there are tons of sites all over that are all about trading this and that and geeking out over various investing systems and formulas - why not post this kind of stuff there?

-W

[aclarridge]

It always surprises me how many market timing/active day trader/stock picker/etc threads show up here, given that the whole point of MMM isn't really get-rich-quick beat-the-market crapola, it's don't spend so much *ucking money and invest in the low hanging index fruit that doesn't have any associated headaches. Then go play with your kids and your friends and forget about it.

I mean, there are tons of sites all over that are all about trading this and that and geeking out over various investing systems and formulas - why not post this kind of stuff there?

-W

Amen. I think OP should just set asset allocation and stick to it, then go enjoy life.

[data.Damnation]

Be greedy where others are fearful and fearful where others are greedy. But don't go overboard. I sold some of my small cap index fund and put it into an emerging market index fund a few weeks ago. US small caps are overvalued and emerging markets are undervalued. So far it's worked out pretty well. I don't see anything wrong with adjusting your allocation a few percentage points here or there. Just don't do anything stupid like putting 50+% of your money into a single asset class.

[wtjbatman]

It always surprises me how many market timing/active day trader/stock picker/etc threads show up here, given that the whole point of MMM isn't really get-rich-quick beat-the-market crapola, it's don't spend so much *ucking money and invest in the low hanging index fruit that doesn't have any associated headaches. Then go play with your kids and your friends and forget about it.

I mean, there are tons of sites all over that are all about trading this and that and geeking out over various investing systems and formulas - why not post this kind of stuff there?

-W

In a quick and non-scientific examination of this subforum, on the first page I found 21 threads that focus on index funds and 7 threads that focus on active trading. I didn't count any thread that wasn't specifically talking about either index funds or stock "trading".

There are still three times as many index threads here. If you want to go somewhere where any talk of either stock trading, or really anything outside of "index funds". is frowned upon, check out the bogleheads forum.

Otherwise those of us who want to talk about active trading, or dividend growth investing, or the buying and selling of muskrat furs, shouldn't be made to feel like we're not welcome. IMO there's nothing wrong with debate. This place thrives on it.

[waltworks]

That is exactly my point. I mean, I don't care what people post, but if I were looking for good insights on whether the current bull market is about to crash... this is not where I'd be posting. Hence my bafflement at the existence here of such threads, given that the vast majority of the forum regulars have little or no interest in that sort of question.

I also love to crush my enemies and hear the lamentations of their women by stifling debate on the internet.

https://www.youtube.com/watch?v=6PQ6335puOc

Sorry if that wasn't clear.

-W

[wtjbatman]

These forums are pretty active, and people are going to post whatever they want to talk about. I'm not going to sweat whether their post truly fits in with MMM's investing style or not, ain't nobody got time for that.

Honestly I shouldn't have brought up fur trading (even if muskrats are freaking pests here), because that's likely a whole nother debate with a pretty vocal minority here...

[waltworks]

Everyone knows that the 1% rule only works for muskrats in some provinces.

:)

-W

These forums are pretty active, and people are going to post whatever they want to talk about. I'm not going to sweat whether their post truly fits in with MMM's investing style or not, ain't nobody got time for that.

Honestly I shouldn't have brought up fur trading (even if muskrats are freaking pests here), because that's likely a whole nother debate with a pretty vocal minority here...