Missing Monevator alert: For some sinister reason, Monevator email subscribers didn’t get my article [1] on this week’s Budget. It was a spirited old ramble followed by some good comments from readers, so go check it out [1] if you missed it!
People have been fretting about the stock market being too frothy all year (and for long before that…) But it’s worth remembering the majority of pundits are American.
I’d agree, for what it’s worth [2], that the US market is looking dear, especially the small to mid-sized companies.
But personally I think that the UK and Europe still look fair-to-good value. And some emerging countries like China and Russia are now in a bear market.
Supporting my feeling about the UK market is this interesting graph from John Kingham, posted on his UK Value Investor [3] blog:
[4]The black line shows where we are now.
The graph suggests the FTSE 100 is still in the green ‘safety’ zone, when comparing its longer-run earnings to valuation.
John writes:
While a slightly cheap market isn’t particularly exciting, it does imply slightly better future returns than normal.
If we have 2% inflation and 2% real growth from the underlying companies, plus 3.5% or so from the dividend and a little bit more if the market mean reverts upwards towards fair value, then over the next 7 years we may get something like a 10% annualised return over that time.
At the end of that period in 2021, the FTSE 100 would be at 10,700.
Note the sensible use of the word “imply”. There’s nothing in this sort of valuation work that guarantees anything, and indeed the market could halve this year – or double.
But as an antidote to doom brought on by a few good years of decent returns, I think it is reassuring.
Keep on keeping on
Of course, passive investors know better than to try to time markets. Keeping your allocations, rebalancing, and ideally adding new money every month or year is how that strategy wins.
Barron’s has a short and interesting post [5] on how those who save steadily over time can afford to ignore valuation:
For three decades, two investors put an annual $1,000 into Vanguard 500 Index starting in 1983.
One of them is Disciplined Dave. Dave invests his money on the last trading day of each year. He doesn’t try to time the market.
The second investor is Hapless Harry. Harry wants to time his annual contribution, but he has “the worst timing in modern Wall Street history.” He invests his $1,000 at the market peak every single year.
The result from 1983 to 2013?
- Dave’s $31,000 grew to $177,176. That’s 9.9% a year.
- The same money from Harry hit $169,153, for 9.5% a year.
There wasn’t too much difference between picking the worst days to invest and picking a regular day – just $8,000 or so.
It was time in the market that counted.
Of course you could argue that Harry would have done better to sit out the bear markets, if he’d somehow been able to see them coming in advance.
But The Brooklyn Investor warned this week [6] that even the great value investors owe very little of their success – if any – to trying to time the market:
All of this is not to say that valuations don’t matter. They matter a lot. We are “value” investors, so of course “valuations” matter.
When we say don’t worry about warnings about overvalued stocks, bears will call us perma-bulls; that we bulls think markets always go up.
Well, they don’t. They will go up and down as they always have.
My argument is that it’s going to be hard to predict the market based on it. Higher valuations will mean lower prospective returns but higher valuations don’t necessarily lead to an imminent bear market or correction.
A bear market or correction will always be inevitable, but it’s hard to say when it will happen. And if you don’t know when it’s going to happen, it’s going to be very hard to capitalize on it
A lot of stupid comments that people leave on websites annoy me – I’m sensitive soul, in truth.
But the most annoying of all are glib comments about the market being obviously expensive and certain to crash, and so me or anyone else being muppets to write about shares.
The worse thing isn’t that these people are misleading everyone who reads their comments by giving some specious illusion of prescience – though that’s annoying and potentially costly enough.
But it’s that some tiny percentage of them will be right, by luck, every few years when the market does crash, as all long-term investors know it will now and then.
By all means follow valuation and have a sense of whether you think it’s time to add more of your funds to cash, bonds, or shares.
But run screaming from anyone who claims to know what’s going to happen.
They don’t. Nobody knows.
That’s why it’s a market, not a savings account.
From the blogs
Making good use of the things that we find…
Passive investing
- Don’t be as dumb as a pension fund – Canadian Couch Potato [7]
- Portfolio managers, not traders – Abnormal Returns [8]
Active investing
- How to come up with investing ideas – Wexboy [9]
- On diversification – Oddball Stocks [10]
- The power of dividends – Zone of Competence [11]
- Investing, housing, and speculating – Investing Caffeine [12]
Other articles
- Get it together before you make it big – Mr Money Mustache [13]
- Why do people leave it so late to fill their ISAs? – Simple Living in Suffolk [14]
- Everything is now a sport – Kottke [15]
Product of the week: Getting 5% on cash in an ISA is coming closer, with the Budget announcing that peer-to-peer lenders like Zopa [16] will soon be eligible for ISAs. The exact details and timeline are to be confirmed. Remember peer-to-peer accounts are not the same – nor as safe – as cash deposits. But Zopa’s safeguard guarantee [17] and similar backstops from rivals have probably made ministers more comfortable.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1 [18]
Passive investing
- The default portfolio – Morningstar [19]
- Debating Smart Beta index funds – WSJ [20]
- US index funds are now 43% -above pre-crash highs – Ferri/CBS News [21]
- US investors can run an ETF portfolio for 0.09% a year – ETF.com [22]
Active investing
- Are good fund managers just lucky? – Fortune [23]
- US small caps look expensive compared to large caps – Barrons [24]
- Be careful you’re not reading paid-for promotions of a stock – Fortune [25]
Other stuff worth reading
- Official: Pension pots can be used to buy Lamborghinis – Guardian [26]
- A deep explanation of how the new pension system will work – Telegraph [27]
- Budget is an uncommon outbreak of common sense [Search result] – FT [28]
- How to earn 6.8% in your cash ISA this year – Yahoo [29]
- Sainsbury’s and the fragile economy – Peston/BBC [30]
Book of the week: John Lee could have become an ISA millionaire double quick with the new higher £15,000 allowance. Find out how he did it anyway in his book: How to Make a Million Slowly [31].
Like these links? Subscribe [32] to get them every week!
- Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.” [↩ [36]]