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Summary: Most investors have learned to make certain assumptions. In
this article, I will present a chronology of events over the last few years
which seem to demonstrate that it often pays to question such assumptions by
looking at things from a different perspective. A few of the things to be learned
from the events of the last several years are:
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the consensus, as expressed by the current overall direction of the stock
and bond markets and within the media, is quite often wrong.
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one should not generalize very much at all from monthly economic data
releases that can, at best, only reflect short-term trends; while such
data may be important to traders, being swayed by it is likely to be counter-productive
for long-term investors. Conversely, by gathering enough data to form a
long-term picture, you have a considerably better chance of doing well.
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do not assume that by just investing in "plain vanilla" or "conventional" stock
funds, or with a portfolio consisting of 100% stocks, you will necessarily
come out OK. Conversely, investing some of your portfolio in bonds, cash,
as well as some specialized stock positions, is a far safer way for most
investors to help achieve a reasonable degree of success.
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in order to help ensure doing well in your investing, you should have
at least enough time to occasionally monitor your investments, and the
willingness to change course when sufficient data justify making such moves;
otherwise, given the risks of investing, you may want to keep your money
only in risk-free investments such as CDs.
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finally, do not assume that there is little anyone can do to improve their
results, nor that it will always turn out OK to put your investments "on
hold" indefinitely; if you do not think you yourself can navigate the above
channels, look for a source of help that has a good long-term track record,
regardless of how "non-mainstream" that source might appear.
Year after year, going all the way back to 1999 when I started my free Mutual
Fund Research Newsletter, I have attempted to give readers convincing
arguments as to why they should "think outside the box." However, trying
to change the way people think about investing has never been an easy task.
One of the best ways to illustrate thinking differently is to review a small
sample of what has transpired over the last few years as presented in my prior
Newsletters. This enables us to see directly how looking at things differently
from consensus opinions would have assisted readers through what proved to
be a series of "unforeseen" events. Some of these happenings were not nearly
so unforeseen to those who, rather than accepting what most people believed,
viewed events using "a different set of eyes".
Looking Back Chronologically
As recently as July 8, 2008, we were still officially in a long-running bull
market. It was only until the S&P 500 Index finally reached a 20% drop
the following day that we knew for sure of its end. Unfortunately, for many
people whose thinking might have closely paralleled the consensus, the transformation
from bull to bear, and subsequently, from good times to deep recession, seemed
to catch them seriously off guard. As a result, their investments suffered
far more than they would have had these investors been more able to part ways
with the consensus, and by so doing, more accurately see what were detectable
warning signs.
In fact, my Newsletters had already fully made the case for danger during
the period beginning as early as July 2006. In order to have done that, it
was important to have been able to free ourselves from some of the firmly held,
but essentially wrong, views that are frequently held by investors. In what
follows, we will use quotes from selected issues of this Newsletter to illustrate
some of the events that transpired, what the consensus view was, and then update
what subsequently unfolded. We will also add other updates for helping investors
decide where we think things will likely go from here.
Note: Almost all forecasts we make in our Newsletters (unless we specifically
state differently) refer to our opinion as to what might happen over the
following several years. Given that some time has passed since
we wrote the direct quotes shown below, each preceded by ***, the quotes
allow you judge for yourself as to the usefulness of what we consider our "outside
the mainstream" approach. You can click on the dates to review the entirety
of each specific Newsletter.
July 2006
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*** "Clearly, during the last yr. and a half, US domestic stocks have
been disappointing. ... Does recent stock weakness...mean you should continue
to be cautious about US stocks? My sense is yes. And should you continue
to load up on cash? Yes ..."
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(Note: Our July '06 recommended allocations to non-stock investments
for moderate risk investors were EQUAL to that for our stock investments,
specifically Bonds 27.5%, Cash 22.5%.)
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*** " ... if you think you can make better returns by just being 100%
in stocks, you may be right. But you should at least be aware of the
risks you are taking, esp. if you are investing to achieve a specific goal
such as an assured minimum level of retirement funds." (emphasis added)
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*** " ... many investors are being far too speculative and optimistic
about the favorable prospects for stocks in the year or two ahead."
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*** "Invest in a 'long-short' fund [such as Hussman Strategic Growth -
see our current recommendations below] if the market indeed turns bearish
(or you believe it will)."
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(Update: While the S&P 500 Index has lost more than 8% per
year over the last 3 years, our recommended long-short fund has a
slightly positive return over the same period.)
Oct. 2006
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*** " ...we feel that neither stocks nor bonds will do as well as normal
over the next few years. Why? Because there are too many risks out there,
such as above average valuations, [and] a likely end to the current cycle
of moderate or better economic expansion..."
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(Update: While stocks did continue to do well for another year,
the following Oct. (2007) marked the end of the line for rising stock prices.
Bond prices had their ups and downs over the 2 years after we wrote this,
although they have improved a good deal since Oct. 2008.)
Apr. 2007
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*** " ...there appears to be too much confidence, most likely bred by
4 straight years of almost continually rising stock prices. ...[Not a place]
where long-term investors should be buying. Yet, the latest reported data
shows that apparently ordinary investors are pouring money into both stock
and bond funds, especially international stocks."
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*** "We have continued to highly recommend the international stock category
raising our stake over the last few years. But we think a little caution
is now in order. That's why we're reducing our recommended allocation here
a little from last quarter. We have not specifically included emerging
market funds in our model portfolios since the 4th qtr. of '04 although
we have occasionally referred to them as a good place for a rather small
percentage of your portfolio."
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(Update: Emerging market funds and most international funds also
topped out in Oct. 2007 and are currently down ranging from about 20% to
33% cumulatively from when we first wrote this.)
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*** "If and when the Fed actually starts to lower rates, we will likely
become much bigger bond enthusiasts since they will likely only do so,
with inflation now still a threat, if they start to sense that the economy
could be trouble. That would be an environment that is bad for stocks but
very good for most bonds."
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*** "And what form might that [above] trouble take? For approximately
the last 2 years, ... [Steve Shefler, who seriously studies the housing
market and who now writes columns for us as well as SafeHaven] has been
telling me that the housing market will indeed cause significant trouble
to the overall economy - far beyond what most people realize. Two years
ago, it seems, not many people were even aware of a potential ticking
time bomb. While a few now are, most are still not ready to acknowledge a
serious, looming blow not only to the US economy, but possibly, to most
of the international markets, due to the tendency for all markets
to follow the presumptive leader in determining global economic health,
that is, the US." (emphasis added)
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Update: The Fed made its first cut of the current cycle in late
Sept. 2007 and the stock market's demise followed less than a month later.
Since then bonds have been a pretty good place to be, especially as compared
to the stock market. As we now know, and warned you about well before the
bear market began, the housing crisis did turn out to be the "ticking
time bomb" that precipitated the crash of stock markets all around
the world.
July 2007
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*** "...what goes up like a rocket can (and usually) does come down like
a rocket. And so, while my recommendations may not appeal to some aggressive
investors, we feel we have a better chance of coming out ahead in the long
run by helping people steer past the kind of investments that have the
potential for serious corrections which can easily wipe out years worth
of prior gains."
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*** "[Investors should] continue taking some profits out of funds that
have been going up at an annualized 20 or 25% rate over the last 4 to 5
years. These include, for example, emerging markets and European stocks.
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(Note: This, essentially, was a repeat of the warning given (above)
in Apr. 2007, but also would have included other fund categories such as
Energy.)
On our Alerts page,
we stated:
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*** "As of July 2007, ... we [now believe] that "high yield" (also called
junk) bonds [are] entering into an extended period where returns will be
minimal, or worse, even leading to outright losses. Investors who want
to avoid possible poor returns ahead might want to sell or reduce any current
holdings."
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Update: Since that time, these bonds have indeed shown negative
returns and proven to be the poorest performing bond category to be invested
in. Although these funds have bounced so far this year, we are currently
advising waiting at least several months longer before possibly recommending
them again.
Oct. 2007
Background: This was the month during which the market topped out,
although the actual top occurred about a week after we published the Oct. newsletter.
The Newsletter was headed "Change Is Upon Us" and focused on our outside the
box view that "future fund category performance [eg. Large Growth, Small Value,
etc.] is more predictable than the overall market." This led us to state:
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*** "[The Large Growth category] (LG) is now likely to do significantly
better than [Small Value] (SV) (and small cap in general) in the years
ahead ... regardless of the market's overall direction..."
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(Note: To get some idea of how this prediction has played out thus
far, you can click here.
The chart displayed shows that, in spite of bear market losses for both
funds, Vanguard's Large Growth Index (VIGRX) is ahead of the Vanguard Small
Cap Value Index (VISVX) cumulatively by about 14% over the last 2 yrs.
Interestingly, while the Value fund did actually do better year over year
between Oct. 2007 and Oct. 2008 during the worst of the bear market, since
then, the Growth fund is now the one doing significantly better. We continue
to favor the Large Growth category (as shown in our Model Portfolio below)
and will likely favor it over the Small Value category and small stocks
in general for at least more several years.)
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*** "... you would likely do best of all if you can reduce your stock
allocation upon correctly recognizing what turns out to be the start of
a prolonged bear market, putting the transferred funds into either cash
or bond funds, whichever appear to have better prospects. Right now it
appears that bonds, esp. short-term high quality ones, would have better
prospects if repeated Fed action takes place to reduce interest rates due
to the housing crisis, financial market instability, and the possibility
of recession."
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*** "We are considerably more positive about bonds than we have been for
quite a while because it appears fairly certain that the US economy will
slow down which is good for most categories of bonds."
Update: At the time all these quotes from the Oct. '07 Newsletter were
written, as mentioned above, the stock market was still in the 2002 - 2007
bull market and our current recession had not even been born. The US recession
was only officially declared and announced to the world on Dec. 1, 2008, a
full year after it was now acknowledged to have begun. (So much for counting
on the reported news alone to help one decide about the appropriateness of
one's investments!) By "thinking outside the box," well ahead of the crowd,
we were better prepared than the consensus for the new investing environment
that lay ahead.
Jan
2008
Background: Right near the top of this Newsletter under "Topics Covered",
we wrote "2007 Returns Show Potential Warning Signs of a Bear Market." The
gist of the article: "...the falling off in consistently positive performance
in 2007 from 2006 may indicate that the best days of the 2003-2007 bull market
are now history." Some further quotes:
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*** "We think that this reversal of fortunes, if sustained, could carry
over to international stocks as well."
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*** " ... a bear market ahead seems to be a real possibility."
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*** " ... if you don't think you will be able to comfortably accept
the possibility of losses ... over a one or more year period, then perhaps
it would be wise to begin making some adjustments to your portfolio." (emphasis
added)
-
On our Alerts
page dated Jan. 18, 2008, we stated:
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***" ... we believe that that virtually all 9 major categories of US stocks
funds, with the possible exception of Large Growth, are unattractive based
on the valuation data we monitor."
-
(Update: By 2008 year's end, as you are probably well aware, ALL
categories of stock funds were pummeled by the bear market with an average
loss of approximately 40%. However, since the start of 2009, Large Growth
stocks have rebounded well and have been nearly at the top of the above
9 categories, second only to Mid Cap Growth, and significantly ahead of
the S&P 500 Index.)
March
2008
Background: After dropping consistently since mid-2003, unemployment
began edging up again in mid-2007 and has been rising ever since. As stated
above, stocks had started falling in early Oct. 2007. This led us to uncover
and make the following non-mainstream observations:
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*** "EVERY recession since 1948 or earlier has occurred not long after
unemployment began rising, and additionally, ended shortly before unemployment
started to fall back again (emphasis added). All of this appears pretty
ominous to me since ... it does not appear that we are near the end of
that rise."
-
*** "... it seems likely that the unemployment rate will continue to rise
over the next few years ... Bottom line: higher unemployment will lead
to reduced consumer spending, both likely contributing to a longer than
average (average being 6-9 mos.) period of recession." (emphasis not
added)
-
*** "Some of the most highly regarded experts we follow suggest that the
current downturn could last easily into 2009 or even longer.
-
*** " ... investors should not be ready to snatch up so-called (stock) "bargains" until
the one year trend reverts from negative to positive and stays positive
for many months, if not considerably longer."
-
(Note: We were correct in worrying the onset of a recession, and
a long one at that - it too did start less than 6 months after the pickup
in unemployment, although at the time we wrote this Newsletter, it was
still
-
too early to be picked up by mainstream economists; see the "Update" above
under Oct. 2007.)
Update: Since unemployment has continued to rise with no end currently
in sight, unless a fall in the unemployment appears close, the implication
is that the recession is not likely to end as soon as some now anticipate.
Stocks, however, after hitting their lows on Mar. 9, 2009, appear have priced
in that the recession will end within the next 2-3 mos. since stocks typically
begin to recover as much as 6 months or so before a recessionary downturn ends.
If the recession doesn't end by Sept., it would follow that stocks could fall
back to their March '09 levels.
Apr
2008
Background: In March '08, the market seemed to be stablizing from its
near 5 month drop, leading many to believe that the skies were clearing. We
said:
-
*** "In spite of the emerging consensus that stocks may be set to climb
from here on out, we are still in a negative period with many stock categories
perched near a bear market, if not already in one."
-
*** "... the stock market appears likely to continue its downward trend."
-
Update: While things continued to appear brighter thru May '08,
the several month improvement fizzled out, culminating in reaching a full
bear market market in July, as already noted.
Are we still in a secular, long-term bear market? I don't know. Only time
will tell, but IF the S&P 500 drops back down to where is was in mid-March
(that is, around 764; it is currently at about 919, as of 6-30), we would again
have dropped 20% into, at a minimum another temporary bear market, which would
confirm that, very likely, we are still in a long-term bear market.
June
2008
Background: As stock prices had improved over the prior few months,
prices for high quality bonds had begun slipping in spite of several further
cuts in interest rates by the Fed. Many investors began to assume the "mini" bond
bull that had started more than 9 months earlier was now history. But, based
on our long stated view that once started, investment trends tend to last considerably
longer than the majority expect, we wrote:
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*** " ... we think it somewhat more likely that the nascent positive bond
trend reversal that started in 2007 will continue to survive, perhaps for
another year or more."
(Update: Over the last 13 months, many high quality bond funds
have shown returns for the period in the vicinity of 9% cumulatively.)
July
2008
Background: A year ago, we discussed on-going research to identify
criteria for making successful BUY, SELL, or HOLD decisions regarding the major
mutual fund categories. Although our research followed the start of the Oct.
'07 bear market, we applied what we learned to judge what one might have done
had they been able to use our current findings in deciding what to do at the
beginning of Oct. 2007, a time when stock prices were touching new highs. Here's
what we said:
- ***"Last Oct (2007), our new approach would have identified all the major
categories as SELLs, except Large Growth and Large Core which would have
be classified as HOLDs. No categories would have been recommended as BUYs." (Note: Our
recommended allocations to non-stock investments for moderate risk investors
in the July '08 newsletter EXCEEDED those to our stock investments, specifically
Bonds 35%, Cash 20%.)
Update: Obviously, stocks have been down considerably over the last
year, many bonds up nicely, and cash only minimally positive. (See our comments
about Large Growth performance above under the Jan. '08 Newsletter.)
Using our newly designed research tool, all the major categories of funds
are, as of the end of June 2009, classified as HOLDs, except Energy, and most
International stock funds, esp. Emerging Markets, which are currently viewed
as SELLs.
Please visit our website to see our current specific recommendations in more
detail.
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