Invite ye felawes and frendes desirous in gold to enter the gates of Shrewd'm, for they will thanke ye later.
- Manlobbi
Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A)
No. of Recommendations: 4
May I ask the Pro´s with decade long experience: How does a secular bear market unfolds in your experience?
I ask because I think it finally happens what has to happen at some point. That after many years of markets getting more and more expensive a return to the mean comes, probably with the pendulum swinging too much in the other direction, markets exaggerating again.
The signs/indicators I wrote about here or on the MI board: S&P/Nasdaq did cross 125&200 SMA downwards. Looking at a 1 year or longer chart you see the "rounded top" Jim talked about.
Very especially the most hyped and expensive stocks are affected, all Mag 7, e.g. Meta in "freefall".
Additionally contrary to since 1 year now it seems even Berkshire is seen less as safe haven. For 1 year on days the Indizes were down Berkshire quite reliably was up. This connection seems to become weaker (remains to be seen; this is just an observation based on the last days).
I want to know what history has to say about the future developments in the different areas of the market in case I am correct. When it´s too late to increase already existing short exposure (since a few weeks I am short all Mag 7 apart from Apple, but am hesitant to increase that as I´d have to pay now much more to buy more of those puts)? What areas will go down fastest and furthest (The most hyped ones probably)?
Etc. etc. All I know is what Jim said about recovery afterwards, that the worst stocks recovers first (What are the worst then? The Mag 7, as they then would have performed worst?).
I could ask this question on the MI board, but would probably get answers which focus more on the short term: "Market is oversold -> reaction upwards", "Extreme fear -> points to reaction upwards".
I am interested in the secular cycle instead, in what will happen if those longterm waves or still intact and we are over the top of one. And that is rather a question for the veterans here with 40, 50 or more years of experience.
P.S: I try carefully to sign a new thread as "OT" when not about Berkshire. I am not sure here as my question is very general but affects Berkshire too.
No. of Recommendations: 0
I´d like to add something to clarify: I am 50% cash of net assets. It is very very tempting for me to now heavily buy stocks of really good companies that have fallen a lot (Lululemon and SAP). And to write many more BRK puts than I´be done yesterday to eventually buy Berkshire stock at effectively around $450.
But by doing so I´d reduce my cash mountain to a hill --- and I still hope for the unthinkable, see the chances for it increasing: To buy Berkshire at $400 or let´s rather say 1.1-1.2 x BV --- and similar for other favourites of mine. At such a point I would go "all in".
It might never come, but luckily that wouldn´t be a catastrophe for me if by "waiting forever" I would miss out on a market that continues to rise. Apart from my 1 year ago reduced but still huge Berkshire stock exposure I am practically out of the market since 2 years or so. So I missed out on a big market upward move (compensated for by successful BRK options trading, with not too much money exposed) --- but I feel good and safe this way.
No. of Recommendations: 2
I want to know what history has to say about the future developments in the different areas of the market in case I am correct. When it´s too late to increase already existing short exposure (since a few weeks I am short all Mag 7 apart from Apple, but am hesitant to increase that as I´d have to pay now much more to buy more of those puts)? What areas will go down fastest and furthest (The most hyped ones probably)?
Etc. etc. All I know is what Jim said about recovery afterwards, that the worst stocks recovers first (What are the worst then? The Mag 7, as they then would have performed worst?).
For the first part of your question, I have no idea. I think the answer is that every case is different, but if you are looking for how major corrections start, and trying find some pattern, I personally believe this is the wrong way of thinking about it. What we should be doing, IMO, is to examine moments when conditions looked like right now, and determine what it was best to do, in retrospect. For instance, at moments when the markets were trading at high multiples (say over 25x earnings), but had dipped 10% 1-2 months after their most recent peak (almost there now with the S&P 500 down from 7002 to 6374), in how many cases did markets go on to dip significantly further, 2 months later, versus bottoming out and recovering?
As for the second question, the worst stocks that seem to recover most dramatically are the risky ones that looked like they might go out of business, and these stocks obviously drop the most, but as the economy/stock market recovers, they also recover most strongly. I would say these are NOT the kind of Mag7 stocks that all look like great companies but are just trading at kind of high multiples of very high (perhaps temporarily high) earnings.
Regards, DTB
No. of Recommendations: 7
I´d like to add something to clarify: I am 50% cash of net assets. It is very very tempting for me to now heavily buy stocks of really good companies that have fallen a lot (Lululemon and SAP). And to write many more BRK puts than I´be done yesterday to eventually buy Berkshire stock at effectively around $450.
If you think we are entering a secular bear market, there will be plenty of time to buy - no need to rush. The market is not even in correction territory yet. To me a secular bear market would be one where the SP500 trades down under 5000, and then stays in the 5000-6000 range for 3 or so years, and we probably wouldn't see a new ATH in the market until say 2033 or so.
If we assume some earning growth in that period (probably muted) we might expect in say 2030 for TTM EPS in the SP500 of $300 in aggregate, meaning at 5000 it would be at a PE of around 16, which is probably low enough to start the next bull market. In such a market it wouldn't be uncommon for the SP500 to even trade closer to 4000 for a period of time.
So lots of opportunity to deploy cash...
tecmo
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No. of Recommendations: 35
I know pretty much nothing about how to spot a secular market top. The main prerequisite is that the rear view mirror look like a secular bull market (check) and that valuations look high (check). But those two things are true probably half the time.
However I can put a number on how bad things can be at a secular bear market bottom. (or how good, if you're a stock buyer)
Let's optimistically assume that S&P 500 earnings in recent years are not unduly elevated - i.e., helpful US tax rates and deregulation and market concentration and corporate interest rates and demographic tailwinds and geoeconomics will not go materially into reverse. In those circumstances the long run smoothed level of real earnings is a very useful yardstick as future earnings (actual stock values) a pretty similar to extrapolations of the past.
One can say with some confidence that, merely on the assumption that reported earnings mean roughly what they used to, if the S&P 500 were valued today on trend earnings as it was at the 1982 lows, adjusted for inflation the index level would be 1087 right now. Now *that's* a secular bear. The typical stock would get you a cyclically adjusted 16-17% earnings yield on your purchase price, with a 6.6% dividend yield.
Along the same reasoning, if the market were merely valued today at its average level since 1990 (i.e., its average earnings yield using smoothed real earnings), the S&P 500 would be 4362 right now, 32% lower.
So if a bear market or secular bear market were to begin, there is potentially a lot of air under us. It is sometimes said that "hope" is not a strategy. But in this case, we don't have much else.
Jim
