Over the long term equities are driven by two things. One, fundamental and the other sentimental.
The Fundamental
The fundamental driver of equities values is earnings. Earnings are a function of revenues (demand), margins (efficiency) and tax regimes. Earnings may vary over time, but trend positive.
The Sentimental
The sentimental driver of equities values (which is to some extent and at different times more important than earnings) is the multiple. What the market is prepared to pay for earnings at any particular point in time. It is a function of confidence and risk. The multiple the market is prepared to pay for present (and implied future earnings) varies from a high of 35x to a low of 8x.
Since bottoming in 2009 the market has been propelled by substantial earnings recovery and earnings growth ($30 EPS to $115 EPS), and by multiple expansion (11x to 16x). With earnings plateauing, future market performance is likely a function of multiple performance. If the multiple goes from the present 16x to 20x then the market can rise to 2300 (30% above the present level). Projecting earnings is relatively easy (or if not easy, more stable). Projecting multiples is a lot more difficult.
Showing posts with label trends. Show all posts
Showing posts with label trends. Show all posts
Wednesday, October 30, 2013
Saturday, October 26, 2013
Implications of Momentum Investing
Trend following, aka momentum investing is probably the weakest part of my investing DNA. I am a natural contrarian with a strong value tilt. I have learned the value of growth and the importance of sentiment and momentum, but they are still both hard for me to fully commit to.
Over the past 10-15 years research has vindicated and validated trend following strategies as a way to add alpha. Consequently, and in conjunction with the increasingly quantitative/algo driven basis of the market, I believe trends, predicated upon more momentum investors and trend followers, will be longer and of greater magnitude that previously. The nature of momentum is that it feeds upon itself. It is self perpetuating, self replicating. There are three major implications. First, you need to incorporate momentum into your investment strategy. Second, a momentum based market leaves opportunity for fundamental based value investors. Because the trend goes longer and for a greater duration than fundamental value would indicate, it creates an opportunity for a fundamental based value perspective. Third, turns in the market or changes in trend will trip up a lot more investors. Trend followers, quant or qual, always get burnt by the turns in the market. The length and magnitude of trends will be greater on boths sides of a trend. Significant alpha will come from picking a change in trend. Incorporating a market reversal component into an investment process (albeit incredibly difficult) will be very rewarding.
The old adage, go with the flow will be the dominant characteristic of future markets.
Over the past 10-15 years research has vindicated and validated trend following strategies as a way to add alpha. Consequently, and in conjunction with the increasingly quantitative/algo driven basis of the market, I believe trends, predicated upon more momentum investors and trend followers, will be longer and of greater magnitude that previously. The nature of momentum is that it feeds upon itself. It is self perpetuating, self replicating. There are three major implications. First, you need to incorporate momentum into your investment strategy. Second, a momentum based market leaves opportunity for fundamental based value investors. Because the trend goes longer and for a greater duration than fundamental value would indicate, it creates an opportunity for a fundamental based value perspective. Third, turns in the market or changes in trend will trip up a lot more investors. Trend followers, quant or qual, always get burnt by the turns in the market. The length and magnitude of trends will be greater on boths sides of a trend. Significant alpha will come from picking a change in trend. Incorporating a market reversal component into an investment process (albeit incredibly difficult) will be very rewarding.
The old adage, go with the flow will be the dominant characteristic of future markets.
Thursday, October 3, 2013
Speculations on the Consensus
At a purely intuitive level (and I hope I am not projecting here) I get the very distinct impression that the unremitting rise in the market this year has managed to shape and mould the consensus toward a very positive perspective on 2014.
Focus will shortly shift from 3rd and 4th quarter (which are accepted as strong and solid) to a more critical look at 2014. I just don't get the impression that anyone is expecting a pullback of any size. Having been wrong on that count since the bottom was put in back in 2009, the market is crushing any resistance. If anyone has been anti, then they have paid a very steep price.
For my part, although it is incredibly hard to go against the flow and there are no specific things to get overly worked up about, my contrarian radar is saying now is the time to make the hard trade. Put some money in the bank and see what the market throws up.
Focus will shortly shift from 3rd and 4th quarter (which are accepted as strong and solid) to a more critical look at 2014. I just don't get the impression that anyone is expecting a pullback of any size. Having been wrong on that count since the bottom was put in back in 2009, the market is crushing any resistance. If anyone has been anti, then they have paid a very steep price.
For my part, although it is incredibly hard to go against the flow and there are no specific things to get overly worked up about, my contrarian radar is saying now is the time to make the hard trade. Put some money in the bank and see what the market throws up.
Friday, May 10, 2013
When Contrarianism Can Hurt You
Contrarianism when things are falling is a slightly safer bet than contrarianism when things are rising.
In both cases, you are following the go against the herd dictate - "buy when they are selling and sell when they are buying."
However if you stick your toe in the water at -10% and it goes to -20%, then to -30%, then that is very painful. But at least there is a floor somewhere, and if history is any guide, the market will eventually recover and sometimes will do so in spectacular fashion. So you are better off sucking it up, waiting for the turn and then letting it flow.
Conversely, when the market is moving up and you dip your toe in to sell, it can be incredibly painful watching it go up another 10%, 20%, 30%, because you have no way to recoup that lost opportunity cost and you have no idea how much further it might rise. Even if you know there is a short term limit, you don't know where it is and you can't be assured you'll be able to get your timing right when the dip comes.
In both cases, you are following the go against the herd dictate - "buy when they are selling and sell when they are buying."
However if you stick your toe in the water at -10% and it goes to -20%, then to -30%, then that is very painful. But at least there is a floor somewhere, and if history is any guide, the market will eventually recover and sometimes will do so in spectacular fashion. So you are better off sucking it up, waiting for the turn and then letting it flow.
Conversely, when the market is moving up and you dip your toe in to sell, it can be incredibly painful watching it go up another 10%, 20%, 30%, because you have no way to recoup that lost opportunity cost and you have no idea how much further it might rise. Even if you know there is a short term limit, you don't know where it is and you can't be assured you'll be able to get your timing right when the dip comes.
Friday, November 18, 2011
Global Socio-Politico Trends
Post the Great Depression the global socio-economic trend among political elites was toward greater government involvement in the economy. That trend finally came to an end, shipwrecked on the rocks of the 70s recession. But by the time it had run its course, it had blended opposing socio-economic ideologies into indistinguishable political forms. Turning, so-called "conservatives," such as Richard Nixon, Edward Heath, Helmut Schmidt, Valery Giscard d'Estaing, Malcolm Fraser, and Robert Muldoon into quintessential socialists. Such is the pressure of a trend and a supportive ideology (Keynesianism).
The natural backlash to the expanding Statism of the 50s, 60s, and 70s, was the countermove toward deregulation and financial liberalization in the 80s and 90s, led by Margaret Thatcher and Ronald Reagan (supported incidentally by ideological liberals Francois Mitterand, Bob Hawke and David Lange in France, Australia, and New Zealand respectively). This trend now appears to have run its own course, shipwrecked on the shoals of the Global Financial Crisis, with Tony Blair and Bill Clinton the best examples of political actors who melded their opposing ideological disposition to the dominant ideology of the time (monetarism). Whether Democrat or Republican, Labour or Liberal, the times and the culture might change, but the dominant political parties seem to move symbiotically together.
Interestingly, the role that President Carter played (serving in the transitional flux between periods) might serve as a template for the role that President Obama is playing, as socio-political forces work out a new direction.
"plus ça change, plus c'est la même chose"
The natural backlash to the expanding Statism of the 50s, 60s, and 70s, was the countermove toward deregulation and financial liberalization in the 80s and 90s, led by Margaret Thatcher and Ronald Reagan (supported incidentally by ideological liberals Francois Mitterand, Bob Hawke and David Lange in France, Australia, and New Zealand respectively). This trend now appears to have run its own course, shipwrecked on the shoals of the Global Financial Crisis, with Tony Blair and Bill Clinton the best examples of political actors who melded their opposing ideological disposition to the dominant ideology of the time (monetarism). Whether Democrat or Republican, Labour or Liberal, the times and the culture might change, but the dominant political parties seem to move symbiotically together.
Interestingly, the role that President Carter played (serving in the transitional flux between periods) might serve as a template for the role that President Obama is playing, as socio-political forces work out a new direction.
"plus ça change, plus c'est la même chose"
Thursday, May 28, 2009
Chanos is onto something
Just saw some notes on a presentation Jim Chanos gave at an investment conference.
They reflect a thought I have had for sometime, but of course he puts it much more eloquently and identifies the underlying impetus for change.
I am referring to the idea that when an industry derives excess profits, this attracts the govt to increase its share of the take. Chanos puts his finger on the impetus for change coming from the cultural and political acceptance that health and education are rights and not privileges (and this changes how they should be viewed and treated by govt).
Chanos talks about a 30 year deregulatory boom in education, healthcare, defense, govt services, and finance. The govt has a stake in these sectors either directly or indirectly, whether because they are deriving outsized margins (against the public good) or the govt subsidizes them. Bottom-line: there is payback to be had. He is particularly focused on the potential for change in healthcare and education.
They reflect a thought I have had for sometime, but of course he puts it much more eloquently and identifies the underlying impetus for change.
I am referring to the idea that when an industry derives excess profits, this attracts the govt to increase its share of the take. Chanos puts his finger on the impetus for change coming from the cultural and political acceptance that health and education are rights and not privileges (and this changes how they should be viewed and treated by govt).
Chanos talks about a 30 year deregulatory boom in education, healthcare, defense, govt services, and finance. The govt has a stake in these sectors either directly or indirectly, whether because they are deriving outsized margins (against the public good) or the govt subsidizes them. Bottom-line: there is payback to be had. He is particularly focused on the potential for change in healthcare and education.
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