Posts tagged ‘Great Depression’

Sleeping and Napping Through Bubbles

We have lived through many investment bubbles in our history, and unfortunately, most investors sleep through the early wealth-creating inflation stages. Typically, the average investor wakes up later to a hot idea once every man, woman, and child have identified the clear trend…right as the bubble is about burst. Sadly, the masses do a great job of identifying financial bubbles at the end of a cycle, but have a tougher time realizing the catastrophic consequences of exiting a tired winner. Or as strategist Jim Stack states, “Bubbles, for the most part, are invisible to those trapped inside the bubble.” The challenge of recognizing bubbles explains why they are more easily classified as bubbles after a colossal collapse occurs. For those speculators chasing a precise exit point on a bubblicious investment, they may be better served by waiting for the prick of the bubble, then take a decade long nap before revisiting the fallen angel investment idea.

Even for the minority of pundits and investors who are able to accurately identify these financial bubbles in advance, a much smaller number of these professionals are actually able to pinpoint when the bubble will burst. Take for example Alan Greenspan, the ex-Federal Reserve Chairman from 1987 to 2006. He managed to correctly identify the technology bubble in late-1996 when he delivered his infamous “irrational exuberance” speech, which questioned the high valuation of the frothy, tech-driven stock market. The only problem with Greenspan’s speech was his timing was massively off. Stated differently, Greenspan was three years premature in calling out the pricking of the bubble, as the NASDAQ index subsequently proceeded to more than triple from early 1997 to early 2000 (the index exploded from about 1,300 to over 5,000).

One of the reasons bubbles are so difficult to time during their later stages is because the deflation period occurs so quickly. As renowned value investor Howard Marks fittingly notes, “The air always goes out a lot faster than it went in.”

Bubbles, Bubbles, Everywhere

Financial bubbles do not occur every day, but thanks to the psychological forces of investor greed and fear, bubbles do occur more often than one might think. As a matter of fact, famed investor Jeremy Grantham claims to have identified 28 bubbles in various global markets since 1920. Definitions vary, but Webster’s Dictionary defines a financial bubble as the following:

A state of booming economic activity (as in a stock market) that often ends in a sudden collapse.

 

Although there is no numerical definition of what defines a bubble or collapse, the financial crisis of 2008 – 2009, which was fueled by a housing and real estate bubble, is the freshest example in most people minds.  However, bubbles go back much further in time – here are a few memorable ones:

Dutch Tulip-Mania: Fear and greed have been ubiquitous since the dawn of mankind, and those emotions even translate over to the buying and selling of tulips. Believe it or not, some 400 years ago in the 1630s, individual Dutch tulip bulbs were selling for the same prices as homes ($61,700 on an inflation-adjusted basis). This bubble ended like all bubbles, as you can see from the chart below.

Source: The Stock Market Crash.net

British Railroad Mania: In the mid-1840s, hundreds of companies applied to build railways in Britain. Like all bubbles, speculators entered the arena, and the majority of companies went under or got gobbled up by larger railway companies.

Roaring 20s: Here in the U.S., the Roaring 1920s eventually led to the great Wall Street Crash of 1929, which finally led to a nearly -90% plunge in the Dow Jones Industrial stock index over a relatively short timeframe. Leverage and speculation were contributors to this bust, which resulted in the Great Depression.

Nifty Fifty: The so-called Nifty Fifty stocks were a concentrated set of glamor stocks or “Blue Chips” that investors and traders piled into. The group of stocks included household names like Avon (AVP), McDonald’s (MCD), Polaroid, Xerox (XRX), IBM and Disney (DIS). At the time, the Nifty Fifty were considered “one-decision” stocks that investors could buy and hold forever. Regrettably, numerous of these hefty priced stocks (many above a 50 P/E) came crashing down about 90% during the 1973-74 period.

Japan’s Nikkei: The Japanese Nikkei 225 index traded at an eye popping Price-Earnings (P/E) ratio of about 60x right before the eventual collapse. The value of the Nikkei index increased over 450% in the eight years leading up to the peak in 1989 (from 6,850 in October 1982 to a peak of 38,957 in December 1989).

Source: Thechartstore.com

The Tech Bubble: We all know how the technology bubble of the late 1990s ended, and it wasn’t pretty. PE ratios above 100 for tech stocks was the norm (see table below), as compared to an overall PE of the S&P 500 index today of about 14x.

Source: Wall Street Journal – March 14, 2000

The Next Bubble

What is/are the next investment bubble(s)? Nobody knows for sure, but readers of Investing Caffeine know that long-term bonds are one fertile area. Given the generational low in yields and rates, and the 35-year bull run in bond prices, it can be difficult to justify heavy allocations of inflation losing bonds for long time-horizon investors. Commercial real estate and Silicon Valley unicorns could be other potential over-heated areas. However, as we discussed earlier, identifying and timing bubble bursts is extremely challenging. Nevertheless, the great thing about long-term investing is that probabilities and valuations ultimately do matter, and therefore a diversified portfolio skewed away from extreme valuations and speculative sectors will pay handsome dividends over the long-run.

Many traders continue to daydream as they chase performance through speculative investment bubbles, looking to squeeze the last ounce of an easily identifiable trend.  As the lead investment manager at Sidoxia Capital Management, I spend less time sucking the last puff out of a cigarette, and spend more time opportunistically devoting resources to valuation-sensitive growth trends.  As demonstrated with historical examples, following the popular trend du jour eventually leads to financial ruin and nightmares. Avoiding bubbles and pursuing fairly priced growth prospects is the way to achieve investment prosperity…and provide sweet dreams.

investment-questions-border

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), MCD, DIS and are short TLT, but at the time of publishing SCM had no direct positions in AVP, XRX, IBM,or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

November 26, 2016 at 9:09 am 3 comments

Sleeping Through Bubbles and Decade Long Naps

We have lived through many investment bubbles in our history, and unfortunately most investors sleep through the early wealth-creating inflation stages. Typically, the average investor wakes up later to a hot idea once every man, woman, and child has identified the clear trend…right as the bubble is about burst. Sadly, the masses do a great job of identifying financial bubbles at the end of a cycle, but have a tougher time realizing the catastrophic consequences of exiting a tired winner. Or as strategist Jim Stack states, “Bubbles, for the most part, are invisible to those trapped inside the bubble.” The challenge of recognizing bubbles explains why they are more easily classified as bubbles after a colossal collapse occurs. For those speculators chasing a precise exit point on a bubblicious investment, they may be better served by waiting for the prick of the bubble, then take a decade long nap before revisiting the fallen angel investment idea.

Even for the minority of pundits and investors who are able to accurately identify these financial bubbles in advance, a much smaller number of these professionals are actually able to pinpoint when the bubble will burst. Take for example Alan Greenspan, the ex-Federal Reserve Chairman from 1987 to 2006. He managed to correctly identify the technology bubble in late-1996 when he delivered his infamous “irrational exuberance” speech, which questioned the high valuation of the frothy, tech-driven stock market. The only problem with Greenspan’s speech was his timing was massively off. Stated differently, Greenspan was three years premature in calling out the pricking of the bubble, as the NASDAQ index subsequently proceeded to more than triple from early 1997 to early 2000 (the index exploded from about 1,300 to over 5,000).

One of the reasons bubbles are so difficult to time during their later stages is because the deflation period occurs so quickly. As renowned value investor Howard Marks fittingly notes, “The air always goes out a lot faster than it went in.”

Bubbles, Bubbles, Everywhere

Financial bubbles do not occur every day, but thanks to the psychological forces of investor greed and fear, bubbles do occur more often than one might think. As a matter of fact, famed investor Jeremy Grantham claims to have identified 28 bubbles in various global markets since 1920. Definitions vary, but Webster’s Dictionary defines a financial bubble as the following:

A state of booming economic activity (as in a stock market) that often ends in a sudden collapse.

 

Although there is no numerical definition of what defines a bubble or collapse, the financial crisis of 2008 – 2009, which was fueled by a housing and real estate bubble, is the freshest example in most people minds.  However, bubbles go back much further in time – here are a few memorable ones:

Dutch Tulip-Mania: Fear and greed have been ubiquitous since the dawn of mankind, and those emotions even translate over to the buying and selling of tulips. Believe it or not, some 400 years ago in the 1630s, individual Dutch tulip bulbs were selling for the same prices as homes ($61,700 on an inflation adjusted basis). This bubble ended like all bubbles, as you can see from the chart below.

Source: The Stock Market Crash.net

British Railroad Mania: In the mid-1840s, hundreds of companies applied to build railways in Britain. Like all bubbles, speculators entered the arena, and the majority of companies went under or got gobbled up by larger railway companies.

Roaring 20s: Here in the U.S., the Roaring 1920s eventually led to the great Wall Street Crash of 1929, which finally led to a nearly -90% plunge in the Dow Jones Industrial stock index over a relatively short timeframe. Leverage and speculation were contributors to this bust, which resulted in the Great Depression.

Nifty Fifty: The so-called Nifty Fifty stocks were a concentrated set of glamour stocks or “Blue Chips” that investors and traders piled into. The group of stocks included household names like Avon (AVP), McDonald’s (MCD), Polaroid, Xerox (XRX), IBM and Disney (DIS). At the time, the Nifty Fifty were considered “one-decision” stocks that investors could buy and hold forever. Regrettably, numerous of these hefty priced stocks (many above a 50 P/E) came crashing down about 90% during the1973-74 period.

Japan’s Nikkei: The Japanese Nikkei 225 index traded at an eye popping Price-Earnings (P/E) ratio of about 60x right before the eventual collapse. The value of the Nikkei index increased over 450% in the eight years leading up to the peak in 1989 (from 6,850 in October 1982 to a peak of 38,957 in December 1989).

Source: Thechartstore.com

The Tech Bubble: We all know how the technology bubble of the late 1990s ended, and it wasn’t pretty. PE ratios above 100 for tech stocks was the norm (see table below), as compared to an overall PE of the S&P 500 index today of about 14x.

Source: Wall Street Journal – March 14, 2000

The Next Bubble

What is/are the next investment bubble(s)? Nobody knows for sure, but readers of Investing Caffeine know that long-term bonds are one fertile area. Given the generational low in yields and rates, and the near doubling of long-term Treasury prices over the last twelve years, it can be difficult to justify heavy allocations of inflation losing bonds for long time-horizon investors. Gold, another asset class that has increased massively in price (over 6-fold rise since about 2000) and attracted swaths of speculators, is another target area. However, as we discussed earlier, timing bubble bursts is extremely challenging. Nevertheless, the great thing about long-term investing is that probabilities and valuations ultimately do matter, and therefore a diversified portfolio skewed away from extreme valuations and speculative sectors will pay handsome dividends over the long-run.

Many traders continue to daydream as they chase performance through speculative investment bubbles, looking to squeeze the last ounce of an easily identifiable trend.  As the lead investment manager at Sidoxia Capital Management, I spend less time sucking the last puff out of a cigarette, and spend more time opportunistically devoting resources to less popular growth trends.  As demonstrated with historical examples, following the trend du jour eventually leads to financial ruin and nightmares. Avoiding bubbles and pursuing fairly priced growth prospects is the way to achieve investment prosperity…and provide sweet dreams.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) and are short TLT, but at the time of publishing SCM had no direct positions in AVP, MCD, XRX, IBM, DIS, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

October 15, 2012 at 4:38 pm 1 comment

Back to the Future: Mag Covers (Part III)

Diploma

Congratulations to those who have graduated through my first two articles (Part I and Part II) regarding the use of media magazine covers as contrarian investment indicator tools. We’ve reviewed magazine’s horrendous ability of predicting market shifts during the 1970s and Tech Bubble of 2000, and now we will take a peek at the “Great Recession” of 2008 and 2009. If you have the stamina to complete this final article, your diploma and selfless glory will be waiting for you at the end.

This magazine cover series was not designed to be utilized as an exploitable investment strategy, but rather to increase awareness and raise skepticism surrounding investment content. Just because something is written or said by journalist or blogger does not mean it is a fact (although I fancy facts). In the field of investing, along with other behavioral disciplines, there are significant gray areas left open to interpretation. A more educated, critical eye exercised by the general public will perhaps release us from the repetitive boom-bust cycles we’ve become accustomed to. Perhaps my goal is naïve and idealistic, nonetheless I dare to dream.

The wounds from a year ago are still fresh, and we have not fully escaped from the problems that originally got us into this mess, but it is amazing what a 60%+ market move since March can do to the number of “Great Depression” references. Let’s walk down calamity memory lane over the last year:

Great Depression Redux?

Great Depression 2008

Months ago we were in the midst of a severe recession, and the media was not shy about jumping on the “pessimism porn” bandwagon for the sake of ratings. Like a Friday the 13th sequel (nice tie in!), CNBC just weeks ago was plugging the crisis anniversary of the Lehman Brothers failure. Time magazine’s portrayal of the financial crisis as the next Great Depression, including the soup kitchen lines, mass unemployment, and collapse of thousands of banks, was used like chum to feed the frenzy of shocked investing onlookers. Unemployment rates are still creeping up, albeit at a slower rate, but we are nowhere near the 25% levels seen in the Great Depression.

American Disintegration

U.S. Evaporation

One of my favorite articles (read here) of the global crisis was written by The Wall Street Journal late last year about a Russian Professor, Igor Panarin (also a former KGB analyst). I find it absurdly amusing that the WSJ would even give credence to this story, but perhaps now I can look forward to an Op-Ed in their newspaper from Iranian President Mahmoud Ahmadinejad or North Korean Leader Kim Jong Ill. Not only did Professor Panarin pronounce the complete evaporation of the United States, but he also provided a specific timeframe. In late June or early July 2010, he expects the U.S. to fall into civil war and subsequently get carved up into six pieces by particular foreign regions, including China, Mexico, E.U., Japan, Canada, and Russia (which will control Alaska of course). I guess Sarah Palin will not be a happy camper?

Other Crisis Souvenirs

Soros Headline

Hey Georgy, let me know when you turn bullish…so I can sell!

Market Mayhem

New Yorker Cover 10-08
Who’s that on the cover? Nancy Pelosi?!

 

Lessons Learned

Contrarianism for the sake of contrarianism is not necessarily a good thing. Trend can be your friend too. Bubbles take much longer to inflate than they burst, so it may be in your best interest to ride the wave of ecstasy for longer than the early alarm ringers. Take for example Alan Greenspan’s infamous irrational exuberance speech in 1996, when the NASDAQ index was trading around 1300. As we all know, the NASDAQ went on to pierce the 5000 mark, four years later. Sorry Al…right idea, but a tad early. Although he may have been correct directionally, his timing and degree were way off.  Pundits like Nouriel Roubini and Peter Schiff are other examples of prognosticators who identified the financial crisis many years before the catastrophe actually hit. As I noted previously, trading based on magazine covers was not conceived as a legitimate investable strategy, but as I’ve shown they can be indicators of sentiment. And these sentiment indicators can be used as a valuable apparatus in your toolbox to prevent harmful decisions at the worst possible times.

 Thanks for coming Back to the Future on this historical tour of cover stories. Now that you have graduated with honors, next time you are in line at the grocery store, feel free to flash your diploma to receive a discount on a magazine purchase.

Class dismissed.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.  

DISCLOSURE: No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

November 13, 2009 at 2:39 am 3 comments


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