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Timing the Market vs. Buy and Hold

After the recent strong stock market gains, I have been asked a few times lately: “What should we do to protect against a possible market downturn? Should we become defensive?”

If you could move in and out of the market at the right time, you would obviously increase your returns and avoid some losses. On the other hand, many of the best investors, such as Warren Buffett, tend to stay invested all the time. What is the most effective strategy?

Let’s look at timing the market and how we could do it.  The most important part of timing the market is to get the general direction right. There are all kinds of predictions, but to keep it simple, let’s categorize your prediction for the next year into one of the four in the chart.

Table 1: S&P500 since 1950. Source: Standard & Poor’s (click here if you cannot see the table)

What’s your prediction for the next year?

If you are predicting an “up a lot” or “up a little” year, you would want to be fully invested. That means you need to be fully invested at least 3 years out of 4. The biggest risk of market timing is missing the 76% of years that are gains.

Most years, you would probably predict a “normal” year – right? Note that “normal” returns are abnormal! On January 1 each year, the media publishes predictions by many financial experts. Most predictions are in the normal range. Since the stock markets average a bit over 10% long term, you would expect most years to be somewhere between 0% and 20%. However, more than 60% of years are abnormal.

If you are predicting a “down a little” year, it is probably not worth changing your investments. The issue is that what if you are wrong? The human gut is almost always wrong when it comes to investing. And remember there are three times as many gains.

How much would you gain anyway if you are right? Remember, you would have to be right both in the timing of selling and buying, and you may incur some costs and tax consequences to make changes. The “up a little” and “down a little” years could also easily have turned out differently in a couple months at year-end.  Unless you are very sure of a down year and you know you have your human gut in check, it is rarely worth it to try to avoid a “down a little” year.

Predicting bear markets

Where market timing could make a big difference is if you could avoid the “down a lot” years, or the bear markets. If you could be fully invested all the time, except just avoid the bear markets, you would outperform significantly.

How do you see a bear market coming?

The first thing to remember: “Bad news doesn’t hit you between the eyes. It hits you in the back of the head.”2 Most predictions of bear markets happen when there is well-publicized bad news expected. For example, recently we had fears of a collapse of the European Union and U.S. debt fears. Bear markets almost never result from anything well publicized ahead of time. Can you think of any time in history when bad news was widely predicted, then actually happened and after that the market falls?

Probably the only way to predict a bear market is to see a market bubble. The issue here is that true bubbles are rarely identified as bubbles. Hardly anyone thought energy was a bubble in 1980 or technology in 1999. Both times, everyone thought “this time it’s different”. The internet was going to change the world. Remember “The New Economy” and “clicks, not bricks”?

Bubbles are really about extreme overvaluation. The mood is usually euphoric with many people predicting continued large gains.

There are issues with predicting bear markets, though. First, remember that there have been only 3 “down a lot” years in the last 63 years1, which averages to one every second decade. If you are predicting them more often than that, it is probably your Stone Age human gut creating false fear. Many people predicted another bear market after 2008, but few predicted one before. The people that correctly predict bear markets are often the “permabears” that are always pessimistic.

I know 3 people that correctly predicted the 2008 crash and moved all their investments to cash before the drop. Great for them, right? The problem is that, last I heard, all 3 are still in cash today. Being permanently pessimistic is a disaster, since it means you will miss the 76% of years with gains1.

Second, if you correctly predict a bear market, you need to get invested again quickly. All three “down a lot” years where followed immediately by one or two “up a lot” years. Predicting the bear market is useless unless you buy in lower than you sold!

Third, make sure you know something few investors know. If you are only responding to scary news articles about well-publicized fears, the market has probably already accounted for them in its current price.

The last 2 bear markets show some of the issues. Each one is different. The market was not overvalued before the 2008 bear market, which is part of why few predicted it. In retrospect, the technology bubble was a clear overvaluation and bubble that could have been identified ahead of time. The issue is that the market was already overvalued in 1997. If you sold then, you missed the 3 big gains from 1997-1999 before you correctly avoided one big loss.

The reason predicting a bear market is so challenging is that if you miss even one of the “up a lot” years, you will probably underperform long term.

Today, many people are skeptical of recent market gains, and are expecting a downturn soon. However, there is no sign of euphoria or overvaluation. The market P/E is about 143, which is below the long term average. What’s more is that we just had a bear market. Remember that we should only expect one about every two decades. I believe that the skepticism today is mostly Stone Age human guts overreacting to fear and still remembering the pain of the recent crash in 2008.

Buy and hold investing

The difficulty in correctly predicting a bear market, getting the timing right, and not missing out on all the up years, is why, in general, it is best to be a “buy and hold” investor. The key to successful stock market investing is to be fully invested during the 76% of years that are gains.

The stock market has very reliably produced large gains long term. If you invested $1,000 in 1950, you would have $749,330 today1. “Buy and hold” investors can get the long term gains of the stock market. Market timers are far more likely to get lower returns.

Predicting bull markets

Should we give up on market timing altogether? From my experience, there is one type of market prediction I have been able to do successfully – predicting an “up a lot” year after a bear market. Markets have historically almost always bounced back quickly. The 3 bear markets since 1950 were all followed immediately by one or two “up a lot” years. The 27% drop in 1974 was followed by a 72% gain in 1975-76, the 22% drop in 2002 was followed by an 82% gain in 2003-7, and the 37% drop in 2008 has been followed by a 73% gain in 2009-20121 (which may be larger after 2013).

These predictions require no great insight on my part – only the assumption that the market will always recover.
In my opinion, the best investment strategy is to be a buy and hold investor (to be fully invested) all the time. Then once every decade or two, there will be a big sale – an opportunity to invest more at a discount of more than 20%. Taking advantage of every bear market is an easy way to beat the market.

My prediction for 2013

I don’t usually make short term predictions, but I do always have opinions. Certainly one of the most reliable indicators is that the popular sentiment is usually wrong, since it is already priced in. Most financial experts and most amateur investors today are predicting either a “normal” year or another downturn. Therefore, those two scenarios are unlikely.

We are starting year five of this bull market, but we have not yet had the normal gain from the last market peak. Sir John Templeton’s quote explains a lot: “Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” The mood I see from investors today is skepticism, which is why my opinion is that we are only on second base in this bull market.

Considering that the market is very cheap (especially compared to bonds), sentiment is overly skeptical and the markets have not yet had their normal gain in the last 6 years, in my opinion the most likely scenario for 2013 is an “up a lot” year.

1 Standard & Poor’s
2 Oscar Belaiche
3 Wall Street Journal. S&P500 forward P/E:

About the Author: Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.  If you would like to contact Ed, you can leave a comment in this post, or visit his website  You can read his other articles here.

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  1. on April 22, 2013 at 10:35 am

    You don’t need a whole guessing game (that’s been proven repeatedly to not work) to time the market. A proper buy and hold strategy includes three things:
    – regular contributions/dollar cost averaging
    – an asset mix that includes classes that are not equities
    – occassional rebalancing.

    If that’s all you do, then you are *guaranteed* to time the market. When equities are high, you sell and move out every time you rebalance. When equities are low, you’re buying more with your regular contributions, and rebalancing puts more into equites which is again buying low.

    The only thing that ‘timing the markets’ provides is excitement and emotion. And that excitement comes at the cost of substantial long term costs to your investments.

    Here’s an example of what’s wrong with this article:
    “Remember that we should only expect one about every two decades.”
    A basic knowledge of statistics shows that is completely misleading. the article is suggesting that it’ll be another 20 years before the market drops again, and therefore we’re safe to predict upward drift right now. That’s hooey. The market is a random walk with upward drift, and that means that a crash tomorrow is equally as likely as a crash in 20 years. The fact that a crash happened yesterday does not predict an upward market tomorrow, which is what the article incorrectly suggests.

  2. Sampson on April 22, 2013 at 11:05 am

    What to when markets have performed poorly?

    I wouldn’t necessarily agree with first sentence. Sure the American markets have been strong, but the TSX has not gained substantially.

    I would support LIC’s proposal that rebalancing when assets fall out of your targeted allocations, that you can move money in or out. Note this IS market timing, but based on presumed changed in the underlying valuations of the assets.

  3. on April 22, 2013 at 11:24 am

    Of course rebalancing is market timing. But it’s market timing based on the stock market’s current value against other asset classes. If the stock market is down in relation to other asset classes as of right now, you buy. If it’s up in relation to other asset classes as of right now, you sell. You’re market timing based on the past performance of the stock market.

    By contrast, the article’s version of market timing is based on your predictions for the stock market in the future. If you’re going to do that, you might as well just use your horoscope to direct your investments.

    So rebalancing is market timing, but certainly not in the sense that you’re predicting anything.

  4. SST on April 22, 2013 at 11:34 am

    I’m just going to sit this one out and watch the show. ;)


  5. Steve on April 22, 2013 at 1:05 pm

    Stock prices (especially the US S&P) have far out-paced the organic growth of net revenue from operations in the composite businesses. That suggests that the market may have gotten ahead of itself.

    I do not see the business income from net operations growth catching up to price growth in the next few years.

    A valid question is why did the prices soar? If businesses were underpriced, then this is a price correction for sure and should be stable and could rise further. If prices soared because of expectations that net revenue from operations is going to catch up then prices will have difficultly gaining significantly until that revenue growth materializes.

    What is the fair value pricing for current operating net revenue?
    What is the expectation for operating net revenue growth going forward?

  6. Andrew F on April 22, 2013 at 2:34 pm

    To play devil’s advocate, I would recommend reading Mebane Faber’s white paper, Global Tactical Asset Allocation (available free on SSRN, just google it).

    Ed may be right that using gut or intuition is not a good way to try to time the market. Faber suggests using a simple, mechanical timing system where you buy each component of your portfolio when its total return is above the 10 month (roughly 200 day) moving average of the total return series (ie, including distribution). When it is below, you sell and hold cash instead. His research indicates that there risk reduction in terms of reducing drawdowns and volatility.

  7. thefiscallyfit on April 22, 2013 at 4:53 pm

    you and me both SST ;)

  8. LoonieLover on April 22, 2013 at 5:57 pm

    I’m a buy and hold dividend investor, so look forward with perverse delight to bear markets. I’ve been letting dividends and contributions pile up for close to a year now, and am getting itchy to put some money down. If I put it all down now, I’ll come very close to being able to passively cover my housing costs. If I wait, I may lose the opportunity, or I may be able to cover the cable bill, too.

    I need to get a better crystal ball.

    At any rate, I’m glad I didn’t buy four weeks ago.

  9. jin on April 22, 2013 at 8:53 pm

    I will not sell all my portfolio that I built over the years just because markets are going down or market are at all time high level. how market indicators are performing might be different from stocks in my portfolio.

    I prefer to sell OTM (out of the money) calls and buy ITM (in the money) puts.

  10. Emilio on April 22, 2013 at 10:31 pm

    Came here for Ed’s critics comments…
    Left unsatisfied…

  11. Ed Rempel on April 22, 2013 at 11:12 pm

    Hi LIC,

    The point of this article is to show how difficult market timing can be. In fact, gut-based or intuition-based market is usually wrong.

    From 2009 until now, I have talked regularly with people predicting another market crash. This despite 2 major reasons another crash would be very unlikely:

    1. Crashes are rare. There are almost 8 “up a lot” years for every “down a lot” year.
    2. “Up a lot” years are the norm following “down a lot” years”.

    These predictions of another crash are fear talking and exactly the reason market timers tend to underperform.

    I’m not saying that we can assume it will be 20 years until the next bear market. However it is just as likely to be 30 years than 10. My point is that if you are predicting a large loss year after year, you are almost definitely wrong.

    I agree with you that rebalancing is a good discipline. It is also an illustration that successful market timing would almost definitely involve selling high and buying low. This is counterintuitive to all the predictions I have been hearing, which amount to selling low.

    The market is not a random walk, though. Jeremy Siegel proved that the standard deviation of stocks falls far faster over time than you would expect with a random walk. For example, the standard deviation of stocks is a bit over double that of bonds for 1-year periods, but is lower than bonds for 20-year periods or longer.

    This mean reversion to the long term upward trend (roughly 7% over inflation per year) is quite reliable over time – big downs are almost always immediately followed by big ups.

    The 3 losses of more than 20% in the S&P500 since 1950 all had a large gain the next year. Here they are:

    – First was 1974 with a loss of 27%. It was followed by a 38% gain in 1975 and a 24% gain in 1976.
    – Second was 2002 with a loss of 22%. It was followed by a 29% gain in 2003.
    – Third was 2008 with a loss of 37%. It was followed by a 27% gain in 2003.

    In short, assuming a large gain right after a large loss is a good bet – and possibly the only easy market timing move we all can make (other than the discipline of rebalancing).


  12. Ed Rempel on April 22, 2013 at 11:46 pm

    Hi Steve,

    What net revenue figures are you referring to and from when? Earnings have actually risen faster than the S&P500 since just after or just before the financial crisis.

    The figures from early 2009 are extreme because earnings collapsed temporarily, but it is back up and quite a bit higher than before the crisis.

    That’s probably the main reason why the stock markets are “soared”.


  13. Ed Rempel on April 22, 2013 at 11:58 pm

    Hi Andrew,

    Market timing based on moving averages is interesting, but my reading on it is unfavourable. It amounts to trend-following, which can reduce returns by buying high and selling low.

    The studies I’ve seen on it show that it worked in 1929, but has mostly not worked since then. Especially since 1990, it has not worked. The DOW averaged 11.76%/year from 1990-2006, but the 200-day moving average strategy would have only averaged 6.6%.

    The results vary depending on which market and which time period you take. My view is that it reduces returns and risk by reducing the large gains and losses. It misses some of the biggest gains because they are usually right after the biggest losses.

    You might end up with lower risk-adjusted returns, but I think you should expect lower actual returns.


  14. Ed Rempel on April 23, 2013 at 12:03 am

    Hi LoonieLover,

    Nice going. Why do you accumulate your dividends, though? Don’t you think you would be better off always reinvesting your dividends immediately? Why do you think that market timing will help you?


  15. Ed Rempel on April 23, 2013 at 12:10 am

    Hi Jin,

    Your options strategy reduces your market exposure at or near the bottom of the market, which means you would miss any rebound.

    You are essentially making a bet that the market fall will continue, instead of betting on a recovery. The recovery has historically been far more likely.

    Based on market history, I would suggest not to do strategies that limit your upside after a large market decline.


  16. Value Indexer on April 23, 2013 at 12:31 am

    Good one Ed, I’ve always looked to statistics much like these and came to the same conclusion. Just a couple of weeks ago TD messed up an account transfer and I lost 1-2% of the portfolio by being out of the market for a few days. I have no illusions that it will keep going up forever, I know it will only go until investor sentiment reverses itself and we never know when that point will be.

    I think a lot of people today are calling the point of maximum euphoria just because the doom stories have been toned down a bit. I’m sure more small investors are being drawn in by the recent gains but we’re not still not seeing them bite hard. Maybe they’re too scared to come back in force for the next decade. Whether they do or don’t a lot of predictions will turn out to be wrong!

    One thing is safe to say… I’m very pleased with every big drop in the market. I really hope we don’t have to wait 16 more years.

  17. Andrew F on April 23, 2013 at 1:15 am

    Ed, if you’re curious, I suggest reading the white paper I mentioned. It’s about a 30 minute read. I don’t think it’s fair to say that things suddenly changed around 1990 and trendfollowing stopped working. Trendfollowing will tend to underperform bull markets and outperform bears. So if you cherrypick a bull market, the best a trendfollowing strategy can hope to do is match market returns. If you look peak to peak or trough to trough, the story is usually different. Compare 2003 – 2009, or 2000 – 2008.

  18. Steve on April 23, 2013 at 12:06 pm

    Hi Ed,

    The P/E 10 (Schiller P/E) is well above the historical trendline suggesting over priced territory.

    Even this may be overly optimistic. The earnings data in P/E10 are unfortunately net earnings, and not revenue from continuing operations (organic growth) which is far more important for real long-term growth and dividend growth. I believe much of the net earnings growth since 2010 has come from inorganic M&A, and refinancing of debt at record low corporate rates.

    For the companies I track, the growth in revenue from continuing operations has not kept up with price growth.

  19. Jin on April 23, 2013 at 1:44 pm

    To Ed Rempel,

    let me explain a little bit more my strategy.
    First: I would not link my portfolio to the market indicator itself. I might have a very conservative portfolio or a very volatile one. if market goes up or down 10% and my portfolio or stocks are just varying 5-6% I am not too concern.

    I use technical indicators as SMA 50, SMA 200, RSI for the stock itself and if my analysis indicates that the stock grew too fast and is loosing some momentum then I sell OTM (out of the money) call options and/or buy ITM (in the money) put options.

    if the stocks runs out of steam i can cash in my puts.
    if the stocks continues to run higher then the call options will be exercised and I will sell the stocks for a higher price and cash in the option premium

    I have 5-10% of my portfolio ready to use for this ‘actions’. I am using options only to protect my capital, I know I am not going to hit a home run with it.

  20. Ed Rempel on April 23, 2013 at 2:00 pm

    Hi Value,

    Thanks for your comments.I agree. People are thinking we are at a market top, but there is no evidence at all of any euphoria – in fact the opposite.

    I recently read a study that I’m trying to find. Just a few weeks ago when the S&P500 broke its all-time high, the optimistic sentiment dropped from 35% of investors to only 10%. That means 90% are pessimistic – clearly a strong bullish sign.

    I follow what most investors are doing as a negative indicator. Mutual funds and ETF purchases are focusing on bond, balanced, income and dividend funds very heavily, so those categories will all likely underperform. The blogging community is also heavily dividend-focused. These are all generally the expensive areas now.

    Whatever the bulk of mutual fund, ETF and financial bloggers are doing, it is usually best to invest elsewhere. This plus the overly pessimistic sentiment are all very bullish indicators for equities.

    I’ve been thinking a lot about the overwhelming pessimistic sentiment. I worry for the future of most Canadians. I read an article that we have a generation that does not know that the stock market goes up over time. They think it goes up and down in a parallel band. This is because the S&P500 peaked in the 1500s in 2000, 2007 and now is there again. That is why sentiment turned negative.

    However, those times were very different. In 2000, the market was highly overvalued at the peak of the tech bubble. In 2007, it was approximately fairly valued and today it is quite cheap – especially compared to other periods with low interest rates and compared to bonds.

    What I wonder about is how much will the market need to rise before the sentiment becomes optimistic, never mind euphoric?

    I also look forward to big market drops (except that I know it is hard on our clients). It is easy to beat the market. Just stay fully invested all the time. Then whenever there is a big drop, double down or become more aggressive in some way and take advantage of the inevitable recovery.


  21. LoonieLover on April 23, 2013 at 3:41 pm

    Hi Ed,
    Excellent question, with a stomach-churning answer. Long story short, my income is not particularly reliable. About a year ago, we were told that our hours may be reduced or even eliminated. I would love to be able to live on what I make and re-invest the rest every month, but I don’t know if or when I’m going to go through periods of under- or un-employment. Knowing that I may need to withdraw that money at a bad time, it makes it difficult to expose myself to short-term market risk.
    Of course, if I can swallow hard, invest the cash I have, and cover my housing expenses, that would give me some room to manoeuvre that I don’t currently have.
    I guess the crux of it is, I’ve had market timing thrust upon me (sort of). At a certain point, if markets keep falling, I’ll probably jump in a little deeper. In a perverse way, my job instability may end up benefitting me.

  22. on April 23, 2013 at 6:32 pm

    The article and the comments are completely filled with the single biggest and most pervasive problem in the equity industry. People try and logic their way through stuff using studies and stuff that ‘just makes sense’. They string together a bunch of stuff and then say “well obviously, then this next step is true”. Unfortunately, without exception, drawing that last conclusion has been shown to be completely random. You can read this article and draw conclusions. Or you can have a monkey fling poop at a wall and draw conclusions from that. Both have equal chances of success. And both have equal chances of failure. THAT”S been shown to be true repeatedly. The only difference between the monkey and the average investor is that you’d like to believe your skill level is somehow above the monkey. It’s not.

    Let me repeat three full paragraphs from above. The paragraphs start with stuff that just kind of sounds like it makes sense. And all three end up with completely unproven conclusions. Reread them and see if you don’t agree:
    “I recently read a study that I’m trying to find. Just a few weeks ago when the S&P500 broke its all-time high, the optimistic sentiment dropped from 35% of investors to only 10%. That means 90% are pessimistic – clearly a strong bullish sign.

    I follow what most investors are doing as a negative indicator. Mutual funds and ETF purchases are focusing on bond, balanced, income and dividend funds very heavily, so those categories will all likely underperform. The blogging community is also heavily dividend-focused. These are all generally the expensive areas now.

    Whatever the bulk of mutual fund, ETF and financial bloggers are doing, it is usually best to invest elsewhere. This plus the overly pessimistic sentiment are all very bullish indicators for equities”
    Be clear – it’s been shown that over long periods of time, indexes will outperform market timers 97% of the time. SImply do nothing and you’ll have better results than 97% of the market timers.

    Or, to look at it from the other way, try and be a market timer, and 97% of the time you’ll have lower results in the long term than those that simply park and sit in index funds.

    I respect Ed’s knowledge and research on many subjects and I appreciate that he’s looking for the best for people – but this article is entirely misguided.

  23. pj on April 24, 2013 at 11:42 am

    I enjoy Eds postings because of the turmoil it causes! Keep the debates going!

  24. SST on April 24, 2013 at 11:56 am

    “It is easy to beat the market. Just stay fully invested all the time. Then whenever there is a big drop, double down…” — Ed

    Ed, how is it possible to be “fully invested” and still have cash to “double down”?

    Astounding “logic” typical of financial industry “professionals”.

    Disclaimer: I am NOT

  25. Steve on April 24, 2013 at 3:49 pm

    Assuming this is an accurate quote…

    “It is easy to beat the market. Just stay fully invested all the time. Then whenever there is a big drop, double down…” — Ed

    it reminds me of a co-worker (engineering degree, MBA) who told me he had a guaranteed way to win at the casino. I told him without even hearing his idea, he was wrong. Here was his ‘guaranteed’ way to beat the casino.

    – go place a bet at roulette on one of the red/black or even/odd type bets.
    – every time you loose, just double down on your next bet. It shouldn’t take too long for you to guess right again and that way you cover all previous losses.
    – leave the casino after a win and you’re satisfied with your winnings.

    Important tips from my co-worker to ensure you win:
    1) whatever you choose to bet on, e.g. red, stick with it. Don’t switch to black.
    – anybody with even a modest understanding of probability understands it doesn’t matter whether you stick with red or keep switching, your chance of winning on each spin doesn’t change.

    2) Only quit after a win.
    – yeah….about that….

  26. Ed Rempel on April 24, 2013 at 6:37 pm

    Hi Andrew,

    I read the white paper you mentioned. She advocates the strategy not as way to improve returns, but as a way to reduce volatility and get similar returns.

    It is mostly similar to some other studies I’ve read on tactical asset allocation using moving averages. I agree with you that it tends to lag in bull markets and outperform in bear markets (mainly the big ones), which is what you would expect being out of the market quite a bit of the time.

    Interestingly, it does well in a 1900-2009 period, which is very long, but this is almost entirely because of missing much of the 1929-32 crash. From 1933 to 2000, it lags significantly, which is also a long time.

    For some reason, she has chosen 1972-08, which is somewhat unfair because it starts and ends with a bear market.

    It is somewhat interesting, but from my perspective, only as a risk reduction strategy. If you can stomach the volatility, then you can avoid trading in and out of each of your positions many times and get similar returns.

    I generally have more confidence in value style investing, rather than momentum or trend-following investing such as this. It would be interesting to see a study, but I believe that being fully invested all the time and then doubling down in some way any time the market declines by more than 20% would likely give you a significantly higher return.


  27. Ed Rempel on April 24, 2013 at 6:53 pm

    Hi Steve,

    I don’t find the P/E 10 (or Shiller P/E) to be very helpful. It averages the P/E over the last 10 years. It’s somewhat like averaging the price of your house over the last 10 years. The final number can be very far from today’s reality.

    It is useful for knowing when we have been in the doldrums for a long time, but does not reflect today’s P/E.

    The stock market P/E has been dropping steadily since the peak in 2000 at the top of the tech bubble. It also spiked in 2008 when earnings collapsed temporarily during the crisis.

    But looking at today’s P/E of about 14, the market is relatively cheap.

    I have not heard anything about extraordinary gains from M&A inflating profits. I don’t have the facts here, but all the comments I’ve heard say the higher profits are mostly from higher gross margins. Companies have been able to keep some costs low, such as interest and salaries & wages.

    There has been some speculation whether the high gross margins are sustainable if interest rates rise or when unemployment is lower. I have also heard from quite a few fund managers that the balance sheets of companies are the strongest they have been in decades, as they have reduced debt and built up cash.

    Perhaps you should track different companies? :)

    Do you have anything that verifies what you are saying other than the companies you track? That is interesting. I’ll see what I can find on this.


  28. Ed Rempel on April 24, 2013 at 7:11 pm

    Hi Jin,

    How long have you been doing your strategy? I believe you would find over time that it would lag a buy & hold strategy.

    Essentially, you are trying to time the market by capping gains under the assumption that if a stock starts declining by a certain amount, it will keep declining – or at least will not rebound or rise sharply. You may or may not avoid some declines from this, but you will miss out on any “10-baggers”.

    Here is the point that I think is important. In the short run, stocks are not “serially correlated”. That means you cannot predict the short run future move of a stock by looking at the recent past movements.

    The stone age human gut tells people that a trend will continue, but it is just as likely to reverse.

    This is the same reason that using stop losses tends to reduce returns. (I call them “take loss orders”, not “stop loss orders”. :) ) You could set a stop loss at 10% below the current price to try to limit your declines, which would be similar to your strategy of using options to sell after a 10% move.

    The question is: Why would you want to automatically sell your stock if it falls by 10%? If you believe in the stock and it falls by 10%, wouldn’t you want to buy more since it is now a better value? In addition, wouldn’t you want to know why it fell? Did something happen that will impair the future value of the company or is this a random market movement based on some macro event?

    What I can tell you is that if I heard a fund manager was using that strategy, I would not invest with him.


  29. Andrew F on April 24, 2013 at 7:11 pm

    Ed, Faber breaks down the returns by decade as well, and I don’t think your assertion that the outperformance only occurred during the 1929 crash is accurate.

    He used 1972 onwards because there are better data series available starting at that point. He also recently updated his paper with 2012 data, but has not yet published.

    While it can be used for risk reduction, there are ways to increase the risk to be again comparable to the volatility of a 60/40 portfolio while producing returns that are superior to that strategy.

    On CAPE/ PE10, I think you’re incorrect again, Ed. TTM P/Es have next to no predictive value, whereas CAPE has well documented predictive power for long term equity returns due to mean reversion. Using 20% drawdown as a trigger for buying does not mean you will be buying when the market is cheap. You might just be buying a 20% drawdown just before it becomes a 60 – 80% drawdown. Check out this:

  30. Ed Rempel on April 24, 2013 at 7:29 pm

    Hi LoonieLover,

    Interesting. Why do you think it may benefit you? Wouldn’t the times when your income is lower possibly coincide with times when the stock market is lower? That could mean that you miss the buying opportunities.

    Would it work to cover your personal cash flow issues with a line of credit, so that you do not have to market time your investments? My guess is that the market timing would more likely lose money for you over time.


  31. Ed Rempel on April 24, 2013 at 9:42 pm

    Hi LIC,

    I hope I’m not giving the impression that timing the market is the way to go. The article was supposed to show how difficult it is to time the market.

    Let me be clear. I’m definitely firmly a believe in buy & hold. I believe the stock market will produce a good return long term. In order for my clients to make the retirement goals, I want to make sure we get all of those returns (and hopefully more).

    The only market timing that I have found to work is to take advantage of big market downturns. Any time the market is down 20% or more, historically there has almost always been a large gain soon after that, so we look for ways to take advantage of it.

    We would try to make several years new contributions, look for more money to invest, perhaps add an investment loan, or just invest more aggressively after any 20% or more market decline (assuming it makes sense for the client).

    I am a believer in buy & hold, but I always have opinions on what is likely to happen. I don’t use those opinions to time the market, though.

    The way I use my market opinions are not for market timing, but for:

    1. Evaluating fund managers. If a fund manager is getting defensive at the bottom of the market, for example, I will be much less likely to consider that fund manager to be an All Star Fund Manager.
    2. Avoiding funds in the popular trends. In the last few years, every other week a fund company announces a new income or dividend fund. I think this is too popular of a trend, so we have not used any of these new funds.
    3. Staying disciplined to avoid getting carried away. Try to avoid anyone cashing in after a large decline, for example. Also, if a fund has awesome stats for 1,3,5 and 10 year periods, then perhaps the style of that fund manager is too much in favour, so we should not get too overweight with him.

    In short, my market opinion is only a way to help evaluate fund managers and to try to stay disciplined. I don’t use it to time the market (except after 20% declines).


  32. Ed Rempel on April 24, 2013 at 10:25 pm

    Hey PJ.

    Glad you’re enjoying the show!


  33. Steve on April 25, 2013 at 10:15 am

    Hi Ed,

    With regards to your request for information regarding the revenue from continuing operations, to my knowledge there is no readily available, credible source that compiles this en masse for the S&P and publishes. Net earnings for sure, but not cash from continuing operations. This means it must be done manually which is only worthwhile for companies you are investigating.

    I am not saying I’m right or wrong, I’m just raising the consideration that cash from continuing operations in the recent past (say since the economy stabilized in 2009) may not have kept up with prices. I am proposing that cash from continuing operations is one of the most important indicators of organic growth.

    Despite the fact that I tend to disagree with nearly everything in all of Ed’s articles, I admire that you keep coming back day after day in the comments to defend and explain your position, many do not.

    I think I always have different views because Ed seems to be an asset investor, with a focus on equities. I am a business investor, I invest by taking partial ownership of businesses.

  34. LoonieLover on April 25, 2013 at 12:54 pm

    Hi again Ed,

    Re-reading my post, I guess I wasn’t as clear as I should have been.

    First, my work had been steady and predictable until about a year ago – a little longer now, I guess. Until then, yes, I invested pretty regularly (not to the extent of DRIPs or anything, but every 6-8 weeks or so, usually). When word came that things were going to change at work, I decided to stockpile a little money in case I needed it. We already had a line of credit set up to use if needed, but I really hate borrowing money if I don’t absolutely have to, which is why decided to let the cash pile up.

    Second, in the past, events have conspired such that I was able to profit from what one might call market timing. One might also call it getting lucky. Back in 2008, when I was ready to buy into the stock market for the first time, I had to get my money out of an (unlisted) MIC first, and that process took three months. It was during those three months that the bottom fell out of markets. Luckily for me, I wasn’t in yet. My money became available, and I invested, in January 2009, near the bottom.

    All I meant in my original comment was that even though I wasn’t happy with the overall situation, it could up benefitting me if, as some people think, there is a fairly major correction on the horizon – making lemonade from lemons and all that.

    (Note to self: Never try to simplify a discussion by leaving out relevant information!)

  35. SST on April 25, 2013 at 11:41 pm

    “Ed seems to be an asset investor, with a focus on equities.” — Steve

    That is because his business depends on it; he sells equities.

    You NEVER read Ed extoll the virtues of any other asset class or investment vehicles other than equities and mutual funds — even if those others are superior, either stand alone or by investor suitability.

    “I am a business investor, I invest by taking partial ownership of businesses.” — Steve

    Interesting view point, and one I share, with examples to follow.

    “It is easy to beat the market. Just stay fully invested all the time. Then whenever there is a big drop, double down…” — Ed

    **Still waiting to find out how this is mathematically possible.**

    Other than the obvious quantum physics quandary, there is absolutely no reason for anyone to ever be “fully invested” 100% in equities “all the time” — EVER.

    One basic example is Browne’s Permanent Portfolio (PP) which requires a mere 25% of liquid assets to be invested in equities, with rebalancing done once a year (in conjunction with the other sectors — bonds, cash, and gold).

    From 1972-2011 the 25% equity PP returned a CAGR of 9.7%; a 100% stock portfolio returned 9.7% over the same time period.
    The worst 1-year return for the PP was -5%.

    Amazing that someone would want to sell you 75% more stocks which do absolutely nothing but add volatility to your portfolio.

    (There is another analysis, which I am trying to locate, which places the 100% stock portfolio return at <1% greater than the PP. However, that percentage was saddled with volatility which far outweighed the miniscule additional return.)

    Now for some real-life examples.
    At the start of 2009 I divested 2/3 of my liquid assets from the stock market, that is to say, I became not fully invested all the time.

    I put 1/3 into two private equity companies (oil and farmland).
    As Steve put it, I took partial ownership in businesses (complete with certificate, something I'm sure MFGlobal clients wish they had).

    Thus far I have reaped a 13.5% CAGR vs. the 13% S&P 500 over the same time period — but without the volatility (ie. my portfolio didn't drop 140 points on a fake Twitter post).

    I took the other 1/3 and started a personal business buying and selling silver bullion.
    From 2009-2012 my CAGR was 31% — that's net profit.
    In 2013 the silver price has plummeted 24.5%, yet it's been my most profitable year with 45% gains thus far.
    (How much profit did you make last time your 100% stock portfolio was down 25%?)

    Thus, by divesting 66% of my money out of the stock market, even at it's near bottom, and investing that money in BUSINESSES — not buying more stocks — I've enjoyed a total average annual return of 23.75% vs. the 13% S&P 500 return over the same period.

    I would have lost almost 11% per year had I stayed "fully invested" and/or "doubled down".

    Yes, it is true, the stock market rarely produces millionaires.

    Next post I'll probably address the so-called stock market earnings.

    p.s. — my remaining equity money has performed at par.

  36. Jamie on April 26, 2013 at 1:47 am

    I think that this shows a great pictorial version:

    (For some reason it’s not working as well as it once did, could be my computer. You can plot gold and real estate on it as well).

    It shows quite a striking trend with the long term historical rates of returns for asset classes. (Before the “you couldn’t invest in the market back then etc” starts it’s the historical data data that’s important.

    Also of interest is the “fully invested” box.

    Interesting nonetheless.

  37. STEVEN J. FROMM, ATTORNEY, LL.M. (TAXATION) on April 26, 2013 at 10:37 am

    Very nice post. Most studies find timing the market as impossible to do. But your article refines this theme and shows some sweet spots to look at. I loved the John Templeton quote. Very nice job here!

  38. Ed Rempel on April 26, 2013 at 1:12 pm

    Hi Steve,

    You casino example is not an apples-to-apples comparison. If you lose 50% on the first bet, that does not help you for the next bet.

    With the stock market, if it falls 20%, then the market is 20% cheaper than it was (unless something has happened that reduces the mid-term profits of the companies on the stock market).

    In addition, major market crashes tend to be far over done as emotional investors panic to sell. That is probably the main reason that there has so consistently been a large up year right after a large down year.


  39. Goldberg on April 26, 2013 at 1:19 pm

    Every post is so darn long. I’m not reading anything over a few paragraphs. Please, keep your responses shorter, especially Ed and SST. Ed, as a professional to another, learn brevity.

    Ed, first question, how do you stay 100% invested at all time, and double on big drops? You borrow to leverage 2-1? And how do you judge a big drop from a smaller drop? What if you misjudged it too early, it falls more, get margin called, go bankrupt, and then it starts to go back up again… why be so aggressive with your clients retirement money?

    Ed, second question, you state: market is cheap because PE is 14. Yes it is 14. But earnings are at historical high (70% above mean). I know what you think; this time is different. But its not. It never is. When earnings reverses to the mean, PE will be above 20. Still cheap? Markets won’t fall? And when it falls, as it often does, your clients will be fully invested, taken huge paper losses, and be told to borrow to double on this drop. Right? After all, every big drop is like 2009, it comes back quickly, always.

  40. Value Indexer on April 26, 2013 at 1:55 pm

    Goldberg, you raise some good questions. So (trying very hard to keep this less than a few paragraphs), I’m wondering how you will know when earnings have reverted to the mean. Will they go back to the level they were in 2005? 1990? 1950?

  41. maybenot on April 26, 2013 at 2:41 pm

    where does one go to find the PE for overall markets (such as for the S&P 500, etc)?

    hope that’s not a naive question…

  42. thefiscallyfit on April 26, 2013 at 4:49 pm

    @SST equity diversification is always misunderstood IMO and being 100% invested makes me want to cringe a bit haha. I agree with you, especially in reference to modern portfolio theory. When it comes to equity positions, most people go overkill and even in the best cases it only marginally helps them.

    I would agrue that your real life example in fact did “double down” but not in the traditional sense. In a “depressed” market you reallocated your assets into opportunities that traditionally are more risky. I know this is a generalization, but you were rewarded for that reallocation. You saw opportunity and took advantage of it. I believe that Ed was simply trying to get the point that the average person typically panics in times of stress, when historically these are times with the greatest opportunity to build in margins of error via RoR, asset purchase, etc.

  43. Ed Rempel on April 27, 2013 at 2:38 am

    Hi Andrew,

    I guess the way I look at it, the moving average timing model is a lot of work with no real payoff other than to reduce risk. If instead of trying to avoid volatility, you embrace volatility and look at big downturns as buying opportunities, you can get a higher return with little effort.

    Jeremy Siegel studied moving averages for a 120-year period. He ran the 200-day moving average from 1886-2006, a much longer time. He found the buy-and-hold made the market return of 9.7%/year, while the market timing model mad 10.2% before costs and 8.6% after costs. It required close monitoring and there were 350 trades in total.

    When he took out only the 1929-32 crash, buy-and-hold made 11.8%/year, while the timing model made 10.8% before costs and 9.2% after costs.

    See? A lot of work with similar or lower returns.

    It is a decent strategy if you have the discipline to follow it and want to reduce volatility.


  44. Ed Rempel on April 27, 2013 at 3:04 am

    Hi Andrew,

    In the interest of keeping the posts shorter, I’ll address your 3 points separately. You are right that P/Es have no short term predictive benefits. It does have some longer term predictive benefits, though.

    I use it mainly as a general indicator of where we are and what to possibly expect long term, meaning say the next 10 years.

    Jeremy Siegel found that using the last 5-year average P/E explained 25% of the stock market movement over the following 5 years.

    Remember, I’m quoting today’s forward P/E. Shiller’s P/E is the average of the last 10 years. If P/Es stay where they are, today’s P/E will be the Shiller P/E, which is a reasonable predictor of the next 20 years or so.

    P/Es are more interesting when you compare them to bonds. The Fed Model is based on this relatively close correlation since about 1970 between the earnings yield, which is the E/P (or P/E upside down) of the stock market with the yield on the 10-year bond.

    The correlations have been quite close with stocks sometimes a couple years ahead, until early last decade when they went opposite directions. Bond yields have kept falling while the earnings yield on stocks has kept rising.

    That means that today the stock market is the cheapest relative to bonds that it has been since the 1970s – shortly before the great bull market of the 1980s through the 1990s.

    This does not tell me anything short term, but gives me confidence that stocks should provide a good average return in the mid to long term future (say 10 years or more).


  45. Ed Rempel on April 27, 2013 at 3:32 am

    Hi Andrew,

    Using the 20% drawdown as a buying opportunity has been quite reliable. I know many people fear drawdowns of 60-80%, but they don’t really happen under normal conditions.

    I have the calendar returns of the S&P500 since 1871. In calendar years, here are the largest drawdowns:

    Drawdown Years to recover
    1929-32 63% 4
    1973-74 38% 2
    2000-2 38% 4
    2008 37% 4
    1937 32% 6
    1907 24% 1

    Here are the only 5 calendar declines of more than 20% that have happened since 1871 and the next year (excluding 1929-32):

    2008 -37% 2009 27%
    1937 -32% 1938 18%
    1974 -27% 1975 38%
    1907 -24% 1908 39%
    2002 -22% 2003 29%

    If you take the top day or month to the bottom, you get larger amounts. However, in calendar years, 40% has been about the maximum. Note this is the U.S. market, for which we have the longest data.


  46. Ed Rempel on April 27, 2013 at 3:48 am

    Hi Maybenot,

    You can find the market P/Es here: . Look at the S&P500 estimate.


  47. SST on April 27, 2013 at 2:43 pm

    @Goldberg #39 — “Ed, first question, how do you stay 100% invested at all time, and double on big drops?”

    I too have been trying to solve this one, but with no luck.
    Hopefully we’ll get an answer before the next big drop.

    @Jamie #36 — “Before the “you couldn’t invest in the market back then etc” starts it’s the historical data data that’s important.”

    Sure it is — in theory.
    The only thing that counts is empirical data.

    Theoretically, time travel is possible.
    Practically, it is not. (Yet.)

    @fiscallyfit #42 — “…you reallocated your assets into opportunities that traditionally are more risky.”

    Can you explain to me how you conclude non-public companies and personal businesses to be more risky than stocks, especially basic material companies? I’m sure the owners of Cargill sleep very well at night.

    “Ed was simply trying to get the point that the average person typically panics in times of stress, when historically these are times with the greatest opportunity to build in margins of error via RoR, asset purchase, etc.”

    Except that Ed’s ONLY solution to a down market is to buy even more stocks, and to NEVER allocate any money elsewhere which could, as demonstrated, bring even greater returns.

    Buying more of the same will only get you more of the same.

    re#39: “Every post is so darn long. I’m not reading anything over a few paragraphs.”

    The internet has done such wonders in the advancement of patience and attention span. ;)

  48. SST on April 27, 2013 at 3:12 pm

    @Ed #44 — “If instead of trying to avoid volatility, you embrace volatility and look at big downturns as buying opportunities, you can get a higher return with little effort.”

    i) as requested numerous times by multiple posters, how can a person be “fully invested” in stocks and still have cash allowing “buying opportunities”?

    ii) as the Permanent Portfolio has demonstrated, the additional risk adopted with a further 75% stock allocation far outweighs the sub-1% return of being “fully invested”. The worst year for the PP was -5%, thus requiring no panic mode or “doubling down” or “20% drawdown” strategy etc. et al.

    In addition, why continually use unrealistic data which spans almost 150 years? You have said yourself the average investment range is ~35 years, so why not provide and work with 35-year data sets?

  49. Brian Poncelet,CFP on April 28, 2013 at 10:26 am

    The story is a good one to consider. HOWEVER, what is the end game?

    How can one make the money last without a lot of risk and still have money to enjoy and spend in retirement?

  50. Ed Rempel on April 28, 2013 at 1:53 pm

    Hi Steve,

    Maybe we think more alike than you think. I agree with you about investing in businesses. I talk about equities and the stock market to make a larger point about them being a reliable long term way to build wealth.

    But we are investing in businesses. Remember, my investing strategy is to invest with All Star Fund Managers. They use different strategies, but mostly they look at the companies they buy as businesses to participate in their growth, instead of stocks to buy and sell.

    Some of our fund managers are long term investors owning many of their companies for 10 years or more. More of them are value investors that tend to hold for 3-7 years or so, wanting to participate in a business but also to buy when it is out of favour and sell when it is popular. The odd one is growth oriented looking to buy companies they think will be dramatically larger in a few years.

    I find the top investors are generally not traders or market timers, but more business investors. They will trade around their position by adding a bit when it dips and trimming a bit when it jumps, but essentially most are investing in businesses.

    I don’t research the businesses myself. I find top investors to find them. Does that not mean we think similarly, Steve?


  51. Ed Rempel on April 28, 2013 at 2:11 pm

    Hi LoonieLover,

    Interesting story. You were lucky last time, but I doubt that strategy will work for you generally. Last time, waiting was forced on your by external circumstances. This time, it sounds like you are partially making a conscious choice to wait and time time market.

    I always look at different strategies and one that I looked at was whether it is worth it to hold a sizable cash position that you can invest whenever the market has a large drop. I found it dragged down returns, because there have been too few large drops to make this work. The market rises 75% of the time, or so, and mostly you just miss out on growth with the cash strategy.

    My guess is that will be your experience over time. That is not as ineffective as just simple market timing, but probably not the best strategy.

    You seem to be betting on a significant correction coming soon. That is the popular view today – which is why it is unlikely. If you ask investors today whether the market will keep rising or correct now, about 90% say we will have a correction soon. That means this pessimistic view is built into today’s stock prices.

    Whatever the popular view is about what is about to happen is almost always wrong.

    My point is that I don’t think waiting around with cash will be an effective strategy for you most of the time.

    Just some food for thought. You will likely find that investing a bit more of your cash for the long term and using your credit line occasionally for short term cash flow shortages is more likely a better strategy.


  52. Ed Rempel on April 28, 2013 at 2:29 pm

    Hi SST,

    You do like throwing out personally attacks. You have it backwards about me. I believe in equity investing which is why my practice focuses on it (not the other way around).

    You can disagree with me and make good arguments, and I may not always be right, but do not question that I sincerely believe what I am saying.


  53. Ed Rempel on April 28, 2013 at 2:37 pm

    Hi SST,

    I did explain in post #31 how to double down after a 20% market decline. There are many ways, but some are:

    “We would try to make several years new contributions, look for more money to invest, perhaps add an investment loan, or just invest more aggressively after any 20% or more market decline (assuming it makes sense for the client).”

    What I did personally in March 2009 was to move some of my large cap equities into small cap equities. I also moved a bit to an aggressive hedge fund. In general, I moved to far more aggressive investments in order to take advantage of the inevitable recovery.

    I should also add that private equity and the stock market are both businesses. The stock market is large businesses that are traded continuously on an exchange. Private equity investing often is a way to finance businesses to help them get onto the stock exchange.

    There is a perception that private equity is safer, because you may know the people involved and you don’t see the daily fluctuations in share price. However, generally they are much riskier. They are much smaller companies with fewer options to get financing.

    In reality, some are more risky and some are less risky, just like stocks. But private equities are also equities.


  54. Ed Rempel on April 28, 2013 at 2:39 pm

    Hi Jamie,

    Thanks for the interesting chart. It shows the benefits of long term investing in equities (and some other interesting things).


  55. Ed Rempel on April 28, 2013 at 2:53 pm

    Hi Steven Fromm,

    Thanks for making the effort to post and I’m glad you like the article.

    Market timing is nearly impossible to do (other than buying after 20% drops). In fact, almost all of successful “market timing” is having the discipline to stay invested when your gut tells you to sell.


  56. Ed Rempel on April 28, 2013 at 3:14 pm

    Hi Goldberg,

    Thanks for the advice. Yes, I know I get passionate about this stuff and tend to go on and on.

    I explained in #53 some of the ways to double down after a 20% market decline. If there is any leverage involved, all the leverage we do of any type never has a risk of a margin call. We would only use credit lines or no margin call investment loans, but never margin.

    The way to invest successfully in stocks is not to be scared out of them or forced to sell at the bottom.

    The reason we tend to use significant equity weightings in our portfolios is precisely because it is for our clients’ retirement. All of our clients have a specific, detailed retirement plan showing expense by expense the actual lifestyle they want, when they want to retire and what they have to do to have that retirement.

    In most cases, they need a decent long term return such as 7% or 8%/year in order to have the retirement they want. We invest in equities because we think it is the most reliable long term way to get that rate of return.

    Your #2 question is about whether today’s profits are real, which is the discussion I’ve been having with Steve. Do you have a reason to believe they are not real?

    Steve is finding some companies where much of the profit gain is M&A activity or something other than the cash-producing part of their normal operations.

    I’ve been hearing from our fund managers mostly that generally the balance sheets of companies are the strongest they have been in decades. Companies have streamlined to reduce costs, paid off debt. 2008 revealed a lot of risks and companies have been have been solidifying their operations and cutting excess costs. They seem to believe that, for the most part, these profits are real and we should expect normal profit growth from here.

    We may be above the profit trend, but there are valid reasons for that.

    Even if profits are a bit ahead of trend and come down a bit, stocks are far cheaper than bonds today. The earnings yield on stocks today is about 7% (1/14), which is the highest it has been vs. bonds at 2-3% in decades. I really doubt any profit decline would change this. Do you?


  57. Andrew F on April 28, 2013 at 4:44 pm

    Ed, you say that moving averages don’t work because one model doesn’t work very well. This is not sound reasoning. It’s like saying cars will never work because the Pinto was a death trap. Same goes for using CAPE as a guide to relative valuations. Puzzlingly, you dismiss CAPE, and then advocate using 5 year average P/E. CAPE is just a more rigorous version of what you’re trying to do with 5 year average P/E.

  58. Ed Rempel on April 28, 2013 at 6:50 pm

    Hi Andrew,

    I didn’t say moving averages doesn’t work. I said I wouldn’t use them.

    The studies I have seen mostly show that moving average strategies (like the 200-day) generally work, in that they tend to reduce risk. They generally lag in bull markets, but save you money during large market drops.

    It takes quite a bit of work, because you have to track it and do regular trades. If you miss even one trade, it could ruin the effect. For example, if there is a large market drop, it will tend to get you out before the worst of the drop. Then it will tend to get you in a bit late in the recovery. If you delay a bit in buying back in, you could miss the recovery.

    In short, I think of it as a strategy that requires quite a bit of work and does not reward you, except for lower risk.

    My issue is that it is a momentum strategy and I am a buy-and-hold and value investor. Rather than try to reduce risk with a strategy that will likely lag in a bull market, I would rather try to get all of the return all the time and then hopefully make more every time the market is on sale (with a 20% drop).


  59. Ed Rempel on April 28, 2013 at 7:26 pm

    Hi Andrew,

    The Shiller P/E (or CAPE) is somwhat useful, but you need to know what it is telling you.

    P/E in an individual year can be crazy, especially in the depths of a recession when earnings can temporarily collapse. That can give you an extremely high P/E, even though the market is quite low.

    The way to avoid this is to smooth it by taking the average of the last 5 years or 10 years. That can give you a more reliable number.

    However, you are waiting 5 or 10 years to see it when the market becomes cheap.

    For example, the Shiller P/E was around 20 in the late 1990s and now. However, the actual P/E in the 1990s was around 40 at the peak of the tech bubble, while today it is about 14. In both cases, the average of the last 10 years was about 20, but then it was shooting up and now it has been falling steadily.

    I prefer to just use the current forward P/E to give me a sense of how expensive or cheap the market is, but I would take it with a grain of salt during extreme times like at the bottom of a market crash.

    I would be confident buying stocks after a 20% market decline regardless of what the P/E was at that point.


  60. Andrew F on April 28, 2013 at 9:21 pm

    Ed, when you average P/Es over 5 or 10 years, you’re not just averaging earnings, you’re averaging prices. This tells you very little about where prices currently are, which is what matters. CAPE just averages earnings. Which makes sense, because the only price that matters is the one you’re paying today, relative to the long run average earnings stream.

    And CAPE was not 20 in the late 1990s. It peaked at 45, an obvious bubble. This is why Shiller got famous. Japan was even worse, peaking at a CAPE of 80 before their bubble burst. I don’t know where you get your info from, but I think you may need to refresh yourself on this subject.

    Current US CAPE is 22 or so. This is high, but not especially bubbly. Europe, Japan, and even Canada are cheaper at the moment.

    Using forward P/E is always questionable, because earnings estimates are consistently wrong, and make P/Es look rosy even at market peaks due to unsustainable earnings

  61. Ed Rempel on April 28, 2013 at 11:34 pm

    Hi Andrew,

    You learn something new every day. I thought the Shiller P/E was the average of the P/E for the last 10 years. Thanks for educating me.

    I think it will still show an unusually high figure for quite a few years. As you can see on this chart: , S&P earnings per share were far below trend in 2009 and 2010. That may be considered a cyclical downturn, but it still will show an unusually high Shiller P/E until this big temporary dip in profits falls off in 2010.

    I don’t think that today it accurately shows how cheap the market is. It implies a higher than normal price, while stocks are very cheap vs. bonds.

    You are doubt forward P/Es? I find they are usually relatively reliable in total. Most companies tend to estimate conservatively, which is why typically about 70% or so of companies beat their forecasts most of the time.

    I was an accountant and can tell you my forecasts tended to be conservative. I was taught and encouraged to make them conservative, so that we could look good the following year.


  62. SST on May 12, 2013 at 11:14 am

    re: Ed

    “I did explain in post #31 how to double down after a 20% market decline. There are many ways, but some are:
    We would try to make several years new contributions, look for more money to invest, perhaps add an investment loan, or just invest more aggressively after any 20% or more market decline (assuming it makes sense for the client).”

    Still confused.
    Perhaps your definition of “fully invested” differs from ‘100% invested’.
    Thus, on the 20% market drop, your client would have no accessible liquid assets available and the only solution would be a loan.
    (Perhaps also your definition of ‘double down’ differs from the version used in the casinos.)

    Thus, if a client has $100,000 100% fully invested in mutual funds and along comes a 20+% market drop, your advice is for them to get a $100,000 loan and plunk it into the market? To how many of your clients would you assume this strategy makes sense?!?

    “What I did personally in March 2009 was to move some of my large cap equities into small cap equities. I also moved a bit to an aggressive hedge fund. In general, I moved to far more aggressive investments in order to take advantage of the inevitable recovery.”

    Thus what you did was NOT “buy and hold”, but “buy and SELL and buy”.
    Your personal actions challenge your professional strategies.
    Did you also take out an investment loan equivalent in size to your portfolio? If not, why?
    Does “aggressive” simply mean increased risk?

    Just an observation, but some of your terminologies are ‘off’.

    “I should also add that private equity and the stock market are both businesses. The stock market is large businesses that are traded continuously on an exchange. Private equity investing often is a way to finance businesses to help them get onto the stock exchange.”


    If I put money into a start-up, let’s say a cupcake store, that is private equity.
    If I put money into Public X stock, that is the stock market.
    The stock market is NOT a business, and neither are stocks.

    The companies I invested in are not looking to go public.
    They are private and staying private.
    Not all companies want, nor need, to go public.
    And there are a lot of them.

    Cargill has been a private company for almost 150 years.
    How many of the original Dow or S&P components are still listed?
    One? Two?

    “There is a perception that private equity is safer, because you may know the people involved and you don’t see the daily fluctuations in share price.
    However, generally they are much riskier. They are much smaller companies with fewer options to get financing.
    In reality, some are more risky and some are less risky, just like stocks. But private equities are also equities.”

    As a shareholder in the cupcake company, my money is NOT affected by things such as bogus Twitter posts, ‘fat fingers’, HFT algorithms, Buffetspeak, headline cheerleading, or the Middle East — The Market, in other words.

    If the cupcake business goes under, I have legal claims to recover an amount of my capital.
    If the company behind the stock goes under, as a stock holder, I am last on the list of claimants, left hung-out to dry (eg. GM).

    You are assuming being a giant company with ease of financing a good thing? Such as Apple Inc. receiving ultra-low interest rates on loans to float bond sales to pay out dividends in hopes of boosting stock price? Why would I want to put money into a company that takes out a loan because it’s worried about the depressed price of it’s public stock?!

    I assume you put seed money into the formation of your company, Ed?
    Why? It’s private equity and thus must have been a “much riskier” investment than, let’s say, buying stock in IGM, a company which provides the same services as your private company.

    It’s inane to think just because a company is private that it’s “much riskier” than a publicly traded company. I would absolutely love a slice of ownership in the #1 pizza joint in my city, far more than I ever would stock of Domino’s (DPZ) .

    I’ve put money into four private enterprises thus far in my life and will continue to do so. The investment trend for the wealthy has also shifted towards private equity, and I’m pretty sure they might know a thing or two about money.

    As an aside, I have an inside track on a company which will be appearing on Dragon’s Den this season. A start-up with solid roots thus far, and massive growth potential, yet I fear the directors might not be as aggressive in that direction (or at all!) as I would like. The biggest risk is under-performance, but if they can break through…
    (and if the Dragons don’t eat all the profit!)

  63. Ed Rempel on May 20, 2013 at 12:07 pm

    Hey Steve,

    I found an article that addresses your concern about profit margins. It shows that most of the reasons for higher profit margins are long term structural reasons, not short term cyclical.

    The big factors are lower energy costs, lower taxes, lower interest rates and higher margins from more sales outside of the U.S.

    It is well-written. Here’s the article: .


  64. SST on May 20, 2013 at 5:57 pm

    “There is a perception that private equity is safer, because you may know the people involved and you don’t see the daily fluctuations in share price. However, generally they are much riskier.” — E. Rempel

    In one of my PE deals 90% of my capital is GUARANTEED.

    That is, the very worst I can do over the period of the contract is a 0% return (capital is held in a 3% account).
    Can the same be said for ANY stock or mutual fund?
    Nope, not legally, anyway.

    Ergo, I get a 12% total return on 10% risk.

    Please show me the mutual fund and/or stock which will provide me the same guarantee of capital and return on risk.

    (I haven’t reviewed my private equity contracts in detail for a couple of years, so this detail completely slipped my mind, remembered as I was searching for new deals this weekend.)

    • FrugalTrader on May 20, 2013 at 8:43 pm

      @SST, where do you find opportunities such as your example?

  65. SST on May 20, 2013 at 6:24 pm

    “I get a 12% total return on 10% risk.” — SST

    That’s an 80% annual return on risk, for those interested in the math.

    Just one example of the power of private equity.

  66. SST on May 21, 2013 at 8:26 pm

    Hi FT,

    As the venerable saying goes, you get what you pay for.
    I do a fair bit of research, digging, scrounging, etc. to find alternate avenues of investment (ie. not the stock market); leg work, basically.

    Here are a couple links which might enlighten:

    However, there are even better ‘deals’ to be had than even my PE examples.
    I know a fellow in Alberta who has fractional ownership in a handful of oil wells — not oil companies, but the actual wells themselves. A very direct and pure form of income with a very healthy return.

    The closer you can invest to the source of profit, the less diluted your
    return. But you might have to know a guy who knows a guy… ;)

    Good luck!

  67. SST on May 21, 2013 at 8:42 pm

    “…most of the reasons for higher profit margins are…lower energy costs, lower taxes, lower interest rates and higher margins from more sales outside of the U.S.”

    Thanks for bringing this up so I didn’t have to.

    In other words, the great “earnings” are manufactured and not organic (ie. cost-cutting vs. sales).
    Addendum to the list is lay-offs, closures, and stock buy-backs.

    Proof is in the pudding that QEx has done nothing to bolster the US broad economy, but has done everything to boost stock market numbers.

  68. SST on May 21, 2013 at 9:11 pm

    Here’s a timely FP article on the matter of PE:

    Private Equity Thrives Amid VC Decline

    “Canadian private equity industry has been incredibly successful and its returns over the past three, five and 10 years are among the best in the world.”

    “Private equity invests in existing companies typically in traditional industries such as oil and gas, mining, manufacturing and retail with existing products and cash flows, sales in excess of $20-million and positive earnings before interest, taxes, depreciation and amortization.”

  69. SST on May 28, 2013 at 9:06 pm

    “At the start of 2009 I divested 2/3 of my liquid assets from the stock market…I put 1/3 into two private equity companies (oil and farmland). Thus far I have reaped a 13.5% CAGR vs. the 13% S&P 500 over the same time period…” ~SST

    Had a chat with my money guy last week for detailed valuations of the companies since investment:

    Oil +30% pa
    Land +36% pa
    (S&P +13% pa)

    Obviously doing much better than the advertised minimum.

    [note: if the other 2/3rds of my liquid assets returned 0%, my total portfolio return would still be 11% pa. As it happens, my stock portfolio pays a ~7.5% annual dividend. Total liquid asset returns 2009-2012: 26.5% pa ex-savings.
    Comparatively, FT’s liquid asset value increased ~40%% pa for the same period. Not sure, however, how much of that is organic return (ie. dividends and cap gain) and how much of it is additional capital (ie. savings). ]

    Next in line, or a strong contender at least, is an oil & gas industry ancillary company.
    Their unique product has recently placed them high on Profit magazine’s Top 200 and Hot 50 (1,100% earnings growth pa), as well as featured in the Canadian Business Journal.
    The deal is to partially finance their expansion into the U.S. market.
    Pays a 15% annual dividend.

    Looking to be 90% stock market divested by the end of the year.

  70. SST on May 28, 2013 at 9:09 pm

    This always amuses the heck outta me:

    “If you invested $1,000 in 1950, you would have $749,330 today (Standard & Poor’s).” — Ed

    Ed, can you please explain to everyone exactly how an average investor in 1950 would have purchased $1,000 worth of the S&P index.

    Much obliged.

  71. SST on June 6, 2013 at 4:50 am

    Ran across this quote today which simplifies private equity vs. public equity:

    “The business of investing is not the same as investing in a business.”
    ~Mark Skousen

    Just something to ponder over the weekend. :)

    (Guess there is no logical answer to question #71…?)

  72. Ed Rempel on June 8, 2013 at 2:49 pm

    SST, the S&P500 is a proxy for stock market investing. It is just the return of most of the largest, most liquid stocks that were selected for the index. Investors could have made a similar return with a diversified portfolio of average stocks, or even with just one average stock (although that would be more volatile).

    Studying the S&P500 index by scholars is not intended to be taken literally. It just gives you a sense of how stocks performed.


  73. SST on June 9, 2013 at 11:53 am

    In other words, phrases such as: “If you invested $1,000 in 1950, you would have $749,330 today”, are “not intended to be taken literally.”

    How could it, when the modern S&P index didn’t exist until 1957 and S&P index funds didn’t exist until the ’70’s.

    Just wondering if there is a financial industry entity out there which has taken it upon themselves to formulate any type of real-life equity scenario instead of using non-literal, wholly theoretical (based on non-existent) scenarios? I think the dreamy days of fractal physics market analysis are over. People like reality when it comes to money.

    Eg. $1,000 invested in KO 50 years ago would be worth ~$175,000 today (splits; re-invested); ~11% annual return.

    Eg. One (1) share of brand-new KO bought in 1919 would be worth ~$9.8 million today (splits; re-invested); ~14.25% annual return.

    Of course you had to pick the right stock…

    Anyone willing to wait 90 years to see how their Facebook IPO turns out?

  74. SST on June 12, 2013 at 9:45 pm

    Been working/researching VERY hard and now in the pleasant throes of completing my third private equity deal since the ’08 Crisis.

    Buying a 0.4% share in two U.S. oil properties (with perhaps two more coming online). Twenty partners, largest share being 5.5%.

    The wells produce 90-95 bpd (WTI) each at a cost of ~$15 pb = $80 net profit (plus State tax incentives, ~4-5%).
    Will produce (proven) for up to thirty years.

    My real return will be +55%/year (more if the price of oil increases and twice that if the other wells are viable in terms of business model).

    Just another demonstration of how the profit/return increases dramatically the closer you invest to the source.
    Mutual funds/stocks will NEVER be able to duplicate the profits of actual production ownership.

  75. Value Indexer on June 12, 2013 at 11:58 pm

    SST, it’s a good thing that all the time you spent researching that (and the years to build the relationships that got you there?) are free. Otherwise it would really throw off the ROI calculations :)

  76. SST on June 13, 2013 at 3:27 am

    @VI: as I always say — you get what you pay for. :)

    Guess that’s why the majority of millionaires became so through business ownership/creation and not the stock market.

  77. SST on June 15, 2013 at 3:16 pm

    Just been doing some light toodling on this topic etc.
    Some points:

    i) Ibbotson (chief among similar) reports private equity gives a higher return with equal or less risk.
    [Ibbotson has also stated inclusion of precious metals in a portfolio also gives increased return and lowers risk and volatility. Thus, inclusion of BOTH private equity and precious metals in a portfolio will increase the return and decrease the volatility vs. a standard stock portfolio.]

    ii) UBS etc., besides mirroring Ibbotson’s findings, reports that top half of PE managers, on average, can achieve at least 5% more return than public equity portfolios. The top 5% of managers can bring in 40% more than a public stock portfolio.

    Eg. Harvard’s allocation returns over 20 years:
    Private equity: 19%
    Natural Resources: 13%
    Public Equity: 11%

    iii) there is almost no liquidity in PE; average ‘buy-and-hold’ time of 3-6 years up to 10+ years.

    Sandwich all these thing together and compare with the initial article.

    The author states that the best investment plan is to BUY stocks and/or mutual funds and HOLD them for 60+ years in order to lock in “very reliably produced large gains long term”.
    [note: in post #53 the OP clearly states that he did NOT ‘hold’ after the 2008 crash but participated in selling, in direct opposition to his own “professional” advice.]

    In other articles the OP states his financial company utilizes only “All-Star” fund managers (top 5%?) to reap the biggest returns in public equity fueled mutual funds.

    Thus, if “All-Star” private equity managers can return 40% more than public equity portfolios, and do it with less risk/volatility, it only makes sense to “buy and hold” private equity instead of public stocks/mutual funds.

    That is, unlike the OP, if you are a true devotee to the “buy and hold” stratagem, then you have zero need for liquidity.
    The opportunity cost of liquidity can be very high.

    Yet another reason why the retail investor doesn’t become wealthy via the stock market and/or utilization of financial advisors.

  78. SST on June 20, 2013 at 9:16 pm

    re: #62 “As a shareholder in [private equity], my money is NOT affected by things such as bogus Twitter posts, ‘fat fingers’, HFT algorithms, Buffetspeak, headline cheerleading, or the Middle East — The Market, in other words.”

    Perfect example = today.

    Bernake says QE might end = markets plunge!

    Enjoy the ride.

    p.s. – guess the new bull(****) market relies more on QE than the professionals care to admit.

  79. SST on June 28, 2013 at 11:53 am

    So there I was last weekend enjoying the rustic surroundings of a cottage get-away, in front of the fireplace flipping through a copy of the snooty NUVO magazine, when this article popped up:



    “The private equity market is four, five times bigger than the public equity market”

    “pension funds, university endowments, and the ultra-wealthy have more than $2-trillion (yes, with a t) in the private equity game as of March of last year”

    “As of September 30 of last year (the most recent data available), the [U.S. Private Equity Index] has returned an impressive 13.71 per cent annually. Compare that with the 8.01 per cent the broad-based S&P 500 index”

    Happy reading (and investing!).

  80. SST on July 13, 2013 at 3:44 pm

    Continuing the Private Equity information:

    IESE Business School PE Country Rankings:
    (Canada is #2 globally)

    Canadian Securities Institute’s PE course:

    Canada Pension Plan PE Holdings:

    The CPP has $70 billion invested in private equity, which represents over 38% of the total fund.
    (I wonder why it’s not 100% “all-in” mutual funds?)

    I’m sure for the sake your retirement (and pay-cheque contributions) PE returns will deliver just fine.

    As a matter of fact, they do:
    CPP Annual Report, Returns (Fiscal 2012; simple averages)
    Public Equities: -5%
    Private Equities: +8.9%
    Real Estate*: +13%
    Infrastructure*: +12.8%

    Returns (Fiscal 2013; weighted)
    Public Equities: +9.26%
    Private Equities: +15.33%
    Real Estate*: +9.2%
    Infrastructure*: +8.8%

    Private Equity represented 27% of portfolio equities and accounted for 30% of CPP’s dollar return; public equity returned 33% on 73%.

    *(RE and INF are consdered private equity)

    Since the inception (2006) of the CPP Reference Portfolio, private equity has provided $2.7 billion in value-added alpha/beta vs. $1.6 billion for public equity, out of $5 billion total.

    Look forward to enjoying your CPP-based retirement If this (intelligent) trend continues.

    (As a side note, a couple of years ago the CPP fund bought the shopping mall in my neighbourhood and have proceeded with extensive renovations. Unfortunately, the two anchors will be Sobey’s and Target. Hopefully they can sell for profit upon completion because I have no desire to shop at either brand in order to fuel my golden years.)

  81. SST on July 13, 2013 at 3:56 pm

    re: #75 — “The wells produce 90-95 bpd (WTI) each at a cost of ~$15 pb = $80 net profit…My real return will be +55%/year (more if the price of oil increases…”

    Submitted one month ago, since then price of oil has risen 11%…and so has my return.

    Have a great weekend!

  82. Value Indexer on July 13, 2013 at 6:05 pm

    Great return! Sounds better than land, art, and gold eh?

  83. SST on July 13, 2013 at 7:39 pm

    Mostly it just sounds (and feels) better than mutual funds or the stock market.

    Quarterly payments; in at the tail end of Q2 thus my first payment should reflect the recent increase (even when price does decline). Comprising 20% of investable net worth, it will provide a solid base for things to come.

    As for the wealthy stalwarts you mentioned…I have both land and gold, and both have treated my net worth well.
    Art, not there…yet; my fine art education is somewhere around the finger painting level.

    Owning land, gold, oil, and art puts you in good company (no matter how sarcastic the comment). I know George Bush Jr. couldn’t make money with oil (???), but don’t fret, you can be assured even the Rothschild’s own oil producers.

  84. Victor on July 25, 2013 at 6:55 am

    Timing the market is like betting your money on something you don’t have a clue about, and on the other hand deciding to buy – hold – sell based on data is a contrarian approach. Just a personal opinion.

  85. FrugalTrader on July 31, 2013 at 9:14 pm

    @Ed, looks like your personal opinion is spot on so far this year!

  86. Ed Rempel on August 1, 2013 at 12:35 am

    Hey FT. Thanks for noticing!

    The year isn’t over yet. My opinion was that we would have an “up a lot” year, meaning a gain of more than 20%. I didn’t specify which index, but I’m a global investor and mainly follow the MSCI World index and the S&P500.

    After 7 months to July 31, the MSCI World index is up 20.6% and the S&P500 is up 18.2%. I don’t have the YTD numbers in $C yet, but both would be about 3.6% higher in $C.

    The year isn’t over yet, but I’m still optimistic.

    Of course, short term predictions are never very reliable, but there was just so much pessimism at the beginning of the year in both the news and with most investors, that a large gain sometime soon seemed inevitable as sentiment normalized.

    You would expect a lot of optimism and confidence now after such a huge gain, but there still seems to be more pessimism than optimism among investors and in the business news today.


  87. SST on September 13, 2013 at 10:26 pm


    re: #35 — ““At the start of 2009 I divested 2/3 of my liquid assets from the stock market…I put 1/3 into two private equity companies (oil and farmland).” And this year, 2013, I have divested half of my remaining investable assets from the stock market (15% left in oil/energy stocks).

    Just received an update on my Private Equity farmland holdings:

    5-yr Returns (2009-2013 ytd)
    Capital Gains: 18.5%/yr
    Dividends (via rent): 6.5%/yr
    Total Returns: 25%/yr

    Morningstar’s Best Canadian Mutual Fund*: 19%/yr (ROMC)
    Bloomberg’s Best American Mutual Fund**: 20%/yr (XTR)
    S&P 500 (dividends reinvested): 18%/yr

    *(MER ?1%) **(MER ?0.5%, no loads)

    Congrats to all those who follow the proven investment methods of the wealthy: land, gold, art (and oil!).

    As an aside, my government pension plan portfolio has 5% allocated to Private Equity. Last fiscal year the PE holdings returned 14%; public equity allocation returned 11%. Reversing the allocations would have caused an increase in investment revenue of $25 million. Shame that large portfolios are shackled to under-performing stock markets.

    re: #75 — “The wells produce 90-95 bpd (WTI) each at a cost of ~$15 pb = $80 net profit…My real return will be +55%/year (more if the price of oil increases…”

    Submitted four month ago, since then price of oil has risen 15%…and so has my return, now @70%, paid monthly. Sadly, only ~15% of my investable assets are allocated to this deal (demonstrating the power of concentration vs. diversification).

    As the venerable saying goes…War is Good for Business.

    p.s. — Jeremy Siegel says the Dow will hit 17,000 in 2013, before clocking-in at 18,000 in 2014.

    I see now where Rempel adopts his unabashed enthusiasm for the stock market.

  88. SST on September 20, 2013 at 12:01 pm

    Investment Amendment:

    #1. The farm PE company has three operational divisions, the year-end email update I received from the auditor was for the entire company, no fiscal segregation (issued 7/13). This week in the snail mail, two months later!, I received a physical report of the division in which I invested. Lovely.

    5-yr Returns Average (2009-2012)
    Capital Gains: 87%/yr
    Dividends (via rent): 6.5%/yr
    Total Returns: 93.5%/yr

    Echoing post #88: Sadly, only ~15% of my investable assets are allocated to this deal (demonstrating the power of concentration vs. diversification).

    5-yr return of MOO (Market Vectors Agribusiness ETF): 0.37%.

    #2. Also received the Q2 fiscal report (my first) from the oil company. To provide a perfect example of positive value-added (vs. negative value-added via lay-offs, closures, increased debt, etc) in the first year after purchase of the first two wells (2011), they increased oil production 2,900% and gas production 360%. The market valuation of the company rose 60%.

    The company to which we sell the oil (SXL) increased 135% (8.5% dividend) over the same time period; the buying gas company (DGAS) increased 32% (5% dividend).

    Colour me an optimist of a different stripe.

  89. Ed Rempel on October 14, 2013 at 1:52 pm

    Up-date on my prediction of an “Up a lot” year for 2013, meaning a gain of more than 20%. The year is not over yet, but to September 30, the MSCI World Index is up 21.6% and the S&P500 is up 23.8%.

    The general market mood is still somewhat pessimistic, but not nearly as pessimistic as it was at the end of 2012, so I am still optimistic.

    Short term predictions are never reliable, but can be fun! With 3 months left, will returns continue to rise and maintain our “up a lot” year?


  90. SST on October 30, 2013 at 8:57 pm

    Here is a market timing theory which completely decimates the buy-n-hold theory:

    Balenthiran Switching Strategy (aka Halloween Indicator)

    “$1,000 invested in the Dow Jones Industrial Average (DJIA) in 1897 would have grown to $4,975,246, more than 19 times as much as buy-and-hold! In addition the strategy only delivered negative returns once, in 1940…A long/short strategy [during the bear phases] turbo charges returns producing 121 times as much as buy-and-hold.”

    $1,000 invested in the DJIA in 1949 using market timing returns 3.2x more than buy-n-sell ($188,802 vs. $58,080).

    $1,000 invested in 1952 using market timing returns 1.5x more than buy-n-sell ($75,384 vs. $47,582).

  91. SST on November 2, 2013 at 2:00 pm

    A great Canadian article mirroring what I posted four months ago about liquidity:
    “…if you are a true devotee to the “buy and hold” stratagem, then you have zero need for liquidity. The opportunity cost of liquidity can be very high.” (SST, #78)

    An Ode to Illiquid Stocks for the Retail Investor

    I’m sure a great many people with money in the stock market don’t realize they are paying a premium for access to liquidity (although it is a false liquidity due in part to circumstances and events such as this:
    “The one-hundredth of a second after the 1400 ET [Fed non-taper] release was the most active 10 milliseconds in the history of US stock and futures markets [100% high frequency trading activity].”) .

    Private Equity returns this premium to the investor.

  92. SST on November 11, 2013 at 12:03 pm

    A dual-pronged post:

    i) because FT is an engineer,
    ii) because PE is good.

    From slide #21:
    “In almost all cases, liquidity is inversely correlated with returns
    Cash = very liquid; Private equity = very illiquid
    Common mistake: Safety = Liquidity”

    As an addendum to #92:
    “Pound for pound, illiquid stocks should provide you with a better return than liquid stocks (and ETFs and mutual funds, which hold mostly liquid stocks).” ~ JP Koning

  93. SST on December 4, 2013 at 8:39 am

    re: #62 — “As an aside, I have an inside track on a company which will be appearing on Dragon’s Den this season. A start-up with solid roots thus far, and massive growth potential…”

    Tune in TONIGHT @8PM to see how it went!!

  94. SST on December 5, 2013 at 2:57 am

    Get ready to RUMBLE!!!

    How awesome is a 5-way dragon duel!
    Wait to see what $200k will deliver….

    Who says private equity investments don’t pay? :P

  95. SST on December 23, 2013 at 3:51 pm

    CPP invests in Private Equity Farmland

    My PE farmland average annual total returns = 93.5%.

    I’d say CPPIB are behind the curve, but if they think it’s a solid investment, I’m not too worried about my future returns dropping off any time soon.

    As an aside, the CCPIB have raised their Private Equity holdings from 3.5% of their total portfolio in 2005 to 26% in 2013. Their public market holdings went from 56% to 61% over the same time frame. Quite telling where their conviction of strong future returns lies (and these are NOT speculative risk taking managers!).

    What % of Private Equity is in YOUR portfolio?

    Happy Ho Ho! :)

  96. SST on December 27, 2013 at 4:43 pm

    For those who wish to reap the extra rewards of Private Equity but still require the liquidity of public markets:

    Red Rocks Capital Global Listed Private Equity Index (GLPE)

    S&P Listed Private Equity Index (SPLPEQTY)

    5-year Returns:
    GLPE: +23.1%
    SPLPEQTY: +26.6%
    S&P 500 TR: +15.5%
    MSCI World: +13%

    i) this was performance during the 2009-2013 Greatest Bull Market 2.0 timeframe;
    ii) these are a collection of companies, just as the constituents of the public indices.

    Compare the most coveted private equity fund, Yale, to the richest public equity investor, Buffett/Berkshire:

    Annualized Returns
    10-year (2002-2012, most current)
    Yale: +13%
    Berkshire: +9.1%

    40-year (1973-2012)
    Yale: +30%
    Berkshire: +20%
    ($1,000 invested = Yale: $37,000,000; BRK: $1,500,000)

    Private companies outstrip their public counter-parts by a great degree (and even more so when invested directly instead of via an ETF et al).

  97. SST on December 29, 2013 at 12:51 pm


    p.s. — FT, I hope you had a great Christmas and survived all the crazy East Coast weather!

  98. SST on January 10, 2014 at 4:04 am

    “My problem with the capitalism as practiced by [CEOs] is that we actually see significantly lower average shareholder returns from these “drone” corporations, when compared to corporations with owners in control.” — Robert Monks, Founder ISS (2013)

    Continued support for Private Equity.

  99. SST on April 25, 2015 at 11:55 am

    Private Equity update: re: “At the start of 2009 I divested 2/3 of my liquid assets from the stock market…I put 1/3 into two private equity companies (oil and farmland).”

    Recently finalized sale of the farmland with a 62% annual gain (vs S&P TR 18.5%).

    On a risk-adjusted basis the farmland investment obliterated stocks.

    Time to shop for the next wealth creating private investment!

  100. Ed Rempel on April 26, 2015 at 1:38 am

    We are at an interest time in the markets and I thought I would try to be helpful by sharing my view.

    The pessimism in the markets today is unbelievable. 68% of S&P500 options are betting on a decline (even though it is up 75% of the time). It seems everybody is trying to guess when this 6-year bull market will end, and when we will have the next recession or bear market.

    My view is that these are times to stay invested. Bull markets don’t die of old age. They die of overvalution and euphoria. Market crashes rarely happen when everyone is expecting them. In fact, high volume short holdings is very bullish. “The masses are always wrong” is one of the most reliable investing principles.

    Investors and the investment industry are focused today on finding lower volatility or defensive investments. Attempts to reduce volatility almost always reduce long term returns.

    My view is that sticking with solid equities for the long term produces the highest returns over your lifetime. Trying to time the market or avoid volatility is almost certain to reduce your long term returns.

    I hope this is helpful.


  101. SST on April 26, 2015 at 1:44 pm

    re: “Trying to time the market or avoid volatility is almost certain to reduce your long term returns.”

    Except that investors are ALWAYS timing the market with periodic allocations, and ALWAYS seeking to avoid volatility via diversification.

    What actually “is almost certain to reduce your long term returns” are fees, MERs, commissions, taxes, and other transaction costs.

    Might also be helpful to get a definition of i) “The Market”, as there are dozens, and ii) a “solid equity”, as there are tens of thousands.

  102. SST on June 7, 2015 at 2:18 pm

    Private Equity update pt.2: re: “At the start of 2009 I divested 2/3 of my liquid assets from the stock market…I put 1/3 into two private equity companies (oil and farmland).”

    Recent (average) figures for the oil company, which I still hold, are:
    31%/yr capital gain + 8%/yr dividend (vs S&P TR 18.5%/yr)

    Combined, my first round of Private Equity plays have reaped 48.5%/yr.

    See you at the finish line! ; )

  103. Ed Rempel on August 15, 2015 at 12:26 pm

    Hi All,

    It’s happening again. Like 2012, almost everyone seems to think we are about to have a market crash. I’ve been asked a lot lately about whether I am expecting one. With the Fed about to start raising rates, it’s a bit like the “taper tantrum” of 2012.

    The best advice it to stay focused on the long term and on your financial plan. You can’t predict the market based on these widely-known macro factors that are already priced into the market.

    Warrent Buffett says that market forecasts are always irrelevant and tell you more about the forecaster than the market. He never reads any. If you’re predicting a market crash, it probably means you are a pessimist.


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