Are You an Active Investor in the Stock Market?

[EnumaElish]

Who's to say how retirement funds should be "played with?" Should I defer all the decisions to some professional money manager who has his hands tied in bear markets, simply because it's a retirement account?

That does not address the fundamental issue of time horizon. For all I care, you are welcome to cash out all of your retirement money and put it in a CD account. Over the medium to long term cash cannot beat the stock market, so you'll return to stocks eventually. But, will the income taxes you paid when you cashed out be worth it? (Not to mention commissions & fees.)

 

[EnumaElish]

would the dropping dollar value factor in?

How is this an argument for cash?

 

[Greg Bernhardt]

How is this an argument for cash?

It wasn't

 

[chroot]

That does not address the fundamental issue of time horizon. For all I care, you are welcome to cash out all of your retirement money and put it in a CD account. Over the medium to long term cash cannot beat the stock market, so you'll return to stocks eventually. But, will the income taxes you paid when you cashed out be worth it? (Not to mention commissions & fees.)

When did I ever say I was "cashing out?" You misunderstood me. I called T. Rowe Price and told them to reallocate my 401(k) monies into cash, rather than being exposed to the stock market. Money managers are handicapped in bear markets. I didn't withdraw anything, and thus I paid nothing -- no taxes, no commissions, or anything else. I simply reallocated it, since I don't think the next few quarters will be particularly pretty.

- Warren

 

[russ_watters]

Who's to say how retirement funds should be "played with?" Should I defer all the decisions to some professional money manager who has his hands tied in bear markets, simply because it's a retirement account? Don't be silly.

I'm not even suggesting you use a managed mutual fund. 30 years in an S&P index fund is virtually no risk and will set you up for retirement. The money shouldn't be "played with" at all. That is what the conventional wisdom says.

Almost every sign you could possibly want has already been delivered.

And yet a bear market hasn't happened yet. Why?

The sub-prime fiasco has another year or 18 months of teeth.

18 months of getting worse or 18 months before it recovers? 18 months of continually getting worse would put us into a new Great Depression.

I realize not all the worst after-effects have been seen (some bad housing sales data came out today, in fact), but with interest rates dropping, I don't see why it wouldn't start back up soon. But with all those unsold houses on the market, yeah, I can see it taking 18 months for prices to start back up as the glut is cleared.

We've only hit the first wave (out of four) of ARM resets...

Two things about that:
- one, with interest rates going back down, that won't be as much of a hit and
- two, the forclosures are more of an effect of the slowing market than of banks giving money to people they shouldn't have. With homes on the market longer and people overconfidently buying and closing before their last home sells, they are forced to try to handle two mortgages at once. So I don't see a 1 point increase in peoples' interest rates having a big effect.

You're only looking at share price, not market capitalization. The entire stock market was worth $11 trillion at the beginning of the bull market in 2004; it's worth $17 trillion today. For those who are counting, that's a 55% increase in total value over a little under four years.

You're measuring from the bottom of the bear, I'm measuring from the top of the previous bull. From the bottom of the bear market, share prices are up 90%. I picked an earlier date because measuring inside a single cycle doesn't tell you anything about long term trends. Over its lifespan, the market has averaged something like 12% a year before inflation. The market in 2001 may have still been overvalued, but if the next peak (and resulting bear) comes from the same trend, we're not even close - the market could be double what it is today. That's the point: the long bear and slow recovery has meant that the market has a long way to go before being overvalued and in need of a correction.

[edit] Actually, I was measuring from mid-2001 because that's as far back as Google's graph goes and people sometimes see there being two separate bears there. For the S&P, though, we just now equalling the previous high from the 2000 internet boom (it was a lot worse than for the Dow). Seven years with a net gain of ZERO in the S&P, before inflation. That's a very weak market with a long way to rise to get back on track with long term trends.

 

[Greg Bernhardt]

I'm not even suggesting you use a managed mutual fund. 30 years in an S&P index fund is virtually no risk and will set you up for retirement

Personally, I don't see myself making to retirement. I figure I got a good 20 years left!

 

[russ_watters]

Personally, I don't see myself making to retirement. I figure I got a good 20 years left!

You don't look so good with that grey beard and all those missing teeth! (not to mention the crazy eyes and the gun...) You don't age well...

 

[russ_watters]

Separate post for this one because I'm not sure I follow:

Except that cutting rates devalued the dollar (as it will again later this month), and the devalued dollar is what's really eating away at the market as a whole. The fed is getting very close to forcing a bear market in their stop-gap measures in attempt of halting it.

Why is the devauled dollar eating away at the market? Because it hurts our exports? Our companies are strong and our economy expandinig and that's the bottom line that is the basis for the value of the stock market. Maybe the economy isn't as good as it would be if the dollar was stronger, but it is still quite good - the dollar has been declining for years and yet the economy is still expanding faster than most of our major competition.

Or maybe I'm missing something about your logic...

 

[russ_watters]

From today's paper:

"In the months ahead, however, resurgent prices for gas and home heating are likely to be accompanied by continued declines in home prices and result in additional declines in confidence," the survey said. "Each downward step raises the probability of recession, which is still below 50% but not comfortably so."

http://www.usatoday.com/money/economy/2007-10-26-sentiment_N.htm

 

[EnumaElish]

Who's to say how retirement funds should be "played with?" Should I defer all the decisions to some professional money manager who has his hands tied in bear markets, simply because it's a retirement account? Don't be silly.

If you are so confident, maybe you should invest in futures.

 

[Greg Bernhardt]

Lets get some stock picks. I'll throw out KMGB and SDTH for long term.

 

[Zantra]

When did I ever say I was "cashing out?" You misunderstood me. I called T. Rowe Price and told them to reallocate my 401(k) monies into cash, rather than being exposed to the stock market. Money managers are handicapped in bear markets. I didn't withdraw anything, and thus I paid nothing -- no taxes, no commissions, or anything else. I simply reallocated it, since I don't think the next few quarters will be particularly pretty.

- Warren

AFAIK, most company sponsored 401Ks don't offer the option of liquidation unless you pay the penalty. And anyhow, long term gains will wipe out any short term losses.

 

[jim mcnamara]

Warren -
Keeping cash is what people when the relative value of a currency is going up.
The US dollar is going down. Plus, in this circumstance, keeping cash is at best a keep-even strategy, assuming interest % matches inflation rate plus effects of US currency devaluation on real purchasing power - the US imports a lot of goods, e.g., cars and electronics.

 

[Greg Bernhardt]

Lets get some stock picks. I'll throw out KMGB and SDTH for long term.

I told you ppl last night. SDTH up 11% today

 

[aXiom_dt]

Is an actuarial science degree the degree most beneficial to an investor? Or is that completely wrong?

 

[Greg Bernhardt]

Is an actuarial science degree the degree most beneficial to an investor? Or is that completely wrong?

I would absolutely think it would be helpful, that and/or a general economics degree.

btw, what a terrible day, ouch! everyone was hoping for a .50 cut on the discount

 

[chroot]

Terrible day, unless you were hedged or mostly short (as I was). One of my shorts, DRYS, made me 8.5% today. Overall, my day ended pretty much flat, but if there's a dead cat bounce tomorrow I'll be in great shape.

- Warren

 

[Greg Bernhardt]

another disgusting market day, blaaaaah

 

[chroot]

Yup, today was a pretty wretched day. I was mostly long this time (having inexplicably closed my short position on DRYS a bit too early... blah), and lost some money. On the other hand, I picked up some SSO and some AAPL cheap, so hopefully tomorrow will be a brighter day. Buy into weakness, sell into strength.

- Warren

 

[Greg Bernhardt]

How is everyone doing now? After my main pick SDTH dropped 30%, it had good earnings in in three days bounced back 15%.

 

[Astronuc]

Don't you just wish that you had bought Rohm and Haas yesterday.

It jumped ~$29/share after Dow offered to buy it for $15 billion.

Dow Chemical to buy Rohm & Haas for $15 billion


Some other news

Paulson: Rules governing financial markets are 'outdated'

Bernanke asks for new law to help close troubled brokerages, and says that Treasury dept. should lead in closing troubled brokerages.

Bernanke: Investment firms need stronger federal oversight

Fannie Mae, Freddie Mac shares continue to plunge

The stocks have been under pressure this week over fears the companies will need to raise capital due to a new accounting rule, even though analysts say that need may not materialize. Fears were further stoked after a St. Louis Fed president said Congress should recognize that the government-sponsored mortgage companies are insolvent after losses.

But a regulator said earlier this week the companies have adequate levels of capital, and the Treasury secretary reiterated that Thursday.

Shares of Fannie Mae skidded more than 13% on Wednesday while Freddie Mac shares plunged more than 23%. Over the past 12 months, shares of Fannie Mae are down about 80%. Shares of Freddie Mac have fallen close to 90% over the past year.

Analysts say the government wouldn't let the companies go under due to their central role in the mortgage market. Between them they own or guarantee about $5 trillion of mortgages, nearly half of all U.S. home-mortgage debt outstanding.

 

[Astronuc]

If you like to gamble - consider Lehman Brothers, Fannie Mae and Freddie Mac. If they don't go insolvent or get bought at a discount, their shares should rebound.

Lehman, bank shares caught in mortgage storm
Worries over health of government-sponsored mortgage giants swamp sector

Lehman was down 20% this morning, and they have recovered about 5%.

Fannie Mae is off about 22% from yesterday, and Freddie Mac abou 10%. If they survive, perhaps they'll rebound next week, or the week after, or . . . .

Apparently some options expert calls Fannie, Freddie shares 'worthless'

Do you fell lucky?



The DOW 30 industrials his a 2-yr low

"Freddie and Fannie are going under the waves and GE got us ready for what we're going to be listening to: in-line number, lackluster guidance. Other than with financials next week, where we get no guidance and have no idea where we're going," said Art Hogan, chief market strategist at Jefferies & Co.

AIG dropped about 7% in the morning and has rebounded a bit down only 4%.

The market still has time to recover today. If not, there may be some bargain hunters jumping in on Monday.

 

[sketchtrack]

My broker has me invested in Duke Energy, they are down real low, but expected to make a comeback.

 

[BWV]

Given that stockpicking is a zero sum game relative to index returns (before transaction costs - after costs it is negative sum), is it simply the cognitive bias of overconfidence the reason why you all buy individual stocks? Or is it for the entertainment value

Probably a mixture of both for me

 

[Astronuc]

If one had bought Fannie Mae or Freddie Mac on Tuesday at their bottom, one would have realized a 50% gain in the last two days. Both gained about 30% yesterday and are up about 20% this morning.

Shares of Fannie Mae (FNM:Fannie Mae - Last: 11.90+2.65+28.65%, 9:52am 07/17/2008) finished at $9.20, up 30%, while Freddie's (FRE:Freddie Mac - Last: 8.33+1.50+21.96%, 9:52am 07/17/2008) shares gained 31% to close at $6.90.

An investment of $70,000 in FNM by the close of Tuesday would have netted one about $45,000 this morning. Nice little return.

 

[BWV]

If one had bought Fannie Mae or Freddie Mac on Tuesday at their bottom, one would have realized a 50% gain in the last two days. Both gained about 30% yesterday and are up about 20% this morning.

Shares of Fannie Mae (FNM:Fannie Mae - Last: 11.90+2.65+28.65%, 9:52am 07/17/2008) finished at $9.20, up 30%, while Freddie's (FRE:Freddie Mac - Last: 8.33+1.50+21.96%, 9:52am 07/17/2008) shares gained 31% to close at $6.90.

An investment of $70,000 in FNM by the close of Tuesday would have netted one about $45,000 this morning. Nice little return.

But what was (and still is) the risk of the equity of either stock being wiped out or significantly diluted in a recapitalization? Both companies are insolvent, with leverage ratios of 80-1 or more

 

[Astronuc]

But what was (and still is) the risk of the equity of either stock being wiped out or significantly diluted in a recapitalization? Both companies are insolvent, with leverage ratios of 80-1 or more

In 2 days - essentially none. This is an example of get in and get out. Such opportunities do not happen very often.

 

[BWV]

It was only an opportunity in hindsight, much like yesterday's lottery draw

One could not have predicted the rally in the stock, nor can you still be certain that the equity is safe from a recapitalization

 

[Astronuc]

It was only an opportunity in hindsight, much like yesterday's lottery draw

One could not have predicted the rally in the stock, nor can you still be certain that the equity is safe from a recapitalization

I had a wait and see view. I expected flat or drifting a little lower, but I'm not surprised by the increase. Short-term bargain hunters who take advantage of the Fed/Treasury moves.

 

[Astronuc]

MidAmerican Energy inks deal to buy Constellation for $4.7B in cash-and-stock agreement
http://biz.yahoo.com/ap/080918/constellation_energy_buyout.html

DES MOINES, Iowa (AP) -- Natural gas and electric company MidAmerican Energy Holdings Co. said Thursday it will buy Constellation Energy Group Inc. for $4.7 billion in a cash-and-stock deal.

Des Moines, Iowa-based MidAmerican will pay $26.50 per share for the Baltimore-based utility. The two companies plan to sign a definitive merger agreement by the end of business Friday.

After the deal is signed, Constellation will issue $1 billion in preferred equity to MidAmerican, the companies said.

CEG's stock was down 60% this week over concerns with liquidity. I imagine stock will recover somewhat. It will be interesting to see what MidAmerica does with the nuclear plants that CEG owns/operates.

 

[mheslep]

If one had bought Fannie Mae or Freddie Mac on Tuesday at their bottom, one would have realized a 50% gain in the last two days. Both gained about 30% yesterday and are up about 20% this morning.

Shares of Fannie Mae (FNM:Fannie Mae - Last: 11.90+2.65+28.65%, 9:52am 07/17/2008) finished at $9.20, up 30%, while Freddie's (FRE:Freddie Mac - Last: 8.33+1.50+21.96%, 9:52am 07/17/2008) shares gained 31% to close at $6.90.

An investment of $70,000 in FNM by the close of Tuesday would have netted one about $45,000 this morning. Nice little return.

But what was (and still is) the risk of the equity of either stock being wiped out or significantly diluted in a recapitalization? Both companies are insolvent, with leverage ratios of 80-1 or more

Impressively prescient and wise post BWV. FNM selling today at $0.54.

 

[CPL.Luke]

keep in mind that the average investor gets a 4.5% return yeaeer over year, the S&P500 gts 11% averaged over the past 30 years.

when it comes to the dot com bubble people who bought in in the midst of it lost big time, the people who bought 2 years before that did well.

I generally assume that averaged out the entire stock market should perform similarly to GDP and when it isn'tcorrelated that their might be a problem.

 

[BWV]

keep in mind that the average investor gets a 4.5% return yeaeer over year, the S&P500 gts 11% averaged over the past 30 years.

when it comes to the dot com bubble people who bought in in the midst of it lost big time, the people who bought 2 years before that did well.

I generally assume that averaged out the entire stock market should perform similarly to GDP and when it isn'tcorrelated that their might be a problem.

the data from the 20th century, using other markets beside just the US, is 4-6% real.

 

[mheslep]

keep in mind that the average investor gets a 4.5% return yeaeer over year, the S&P500 gts 11% averaged over the past 30 years.

when it comes to the dot com bubble people who bought in in the midst of it lost big time, the people who bought 2 years before that did well.

I generally assume that averaged out the entire stock market should perform similarly to GDP and when it isn'tcorrelated that their might be a problem.

the data from the 20th century, using other markets beside just the US, is 4-6% real.

That's what I see reported, but I can't lay hands quickly on a running average calculation. Does someone have a source?

 

[russ_watters]

keep in mind that the average investor gets a 4.5% return yeaeer over year, the S&P500 gts 11% averaged over the past 30 years.

when it comes to the dot com bubble people who bought in in the midst of it lost big time, the people who bought 2 years before that did well.

I generally assume that averaged out the entire stock market should perform similarly to GDP and when it isn'tcorrelated that their might be a problem.

Keep in mind that in order to be listed in the NYSE, much less be in an index such as the S&P 500, a company has to be of a certain size and stability. There is an awful lot of failure in small businesses and those failures are never seen in the stock market - only the successful ones ever survive long enough and grow big enough to be listed. So you should expect that the stock market will perform significantly better than the GDP.