OT - Dow plunges 1,175 - worst point decline in history

[MattTuck]

We get bombarded with the idea that the 'stock market is the greatest wealth creation tool in the history of the world' and stories like "Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it." and even the latest set of ETrade commercials that encourage you to invest out of envy for people who have more money than you.

There are vast swaths of companies that make money when you invest and there are entire industries with a financial interest in creating the perception that investing in the stock market can make you rich.

And, over the last decade, it has been mostly true that being fully invested in the market has generated handsome returns. But this is not because the stock market is a machine that consistently churns out 8% returns -- as the finance industry would like you to believe.

The market is a price discovery mechanism. It is primarily driven by expectations of future cash flows. If those expectations change, prices can change rapidly and by a large amount.

Put another way, there is a lot of money aimed at convincing the lay person that this is a minor correction on the way to much bigger returns. The industry would very much like you to believe that stocks are on sale right now. And those two things might be true.

But if they aren't... consider even if it is just a 2% chance that the past few months was the start of something much larger... are you prepared?

TL;DR: Stock market is not an 8% return machine. Price discovery can be violent and negative just as easily as it can be exuberant and positive. Beware commentary from sources that make money when you are invested.

[Ozz]

Originally Posted by MattTuck

We get bombarded with the idea that the 'stock market is the greatest wealth creation tool in the history of the world' and stories like "Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it." and even the latest set of ETrade commercials that encourage you to invest out of envy for people who have more money than you....

TL;DR: Stock market is not an 8% return machine. Price discovery can be violent and negative just as easily as it can be exuberant and positive. Beware commentary from sources that make money when you are invested.

That is why every investment disclosure contains the statement:

"Past performance is not indicative of future results"

[Spaghetti Legs]

Originally Posted by Tony T

Campagnolo components.

You sir, won the internet today!

[veloduffer]

Originally Posted by verticaldoug

https://www.bloomberg.com/graphics/2...n-obligations/

Does seem like a chapter out of Michael Lewis's book

Everyone wins, everyone clips a fee

It didn’t help that the current administration and Congress pushed back the risk retention rule, which enabled the smaller CLO shops to re-open for business. The rule had shut them out since they didn’t have the balance sheet/capital to retain the 5% slice.

This might be the new subprime, since much of the borrowers have only a 1st lien only capital structure (sometimes a small 2nd lien) and no subordinated debt underneath to provide a loss cushion. So when the cycle turns, loss severity for loans will be much higher than the 28% in the past (probably 50% or higher). And these loans were also being lent to small companies for middle market CLOs. This will lead to higher liquidations rather than reorganizations since the debtor-in-possession lenders have nothing to attach to.

Since the recession will be corporate-led, unemployment may be higher and longer than the last recession. It may also trigger a recession in China and globally, and in turn lead to a deflationary environment (like Japan).



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[echappist]

Originally Posted by MattTuck

But if they aren't... consider even if it is just a 2% chance that the past few months was the start of something much larger... are you prepared?

But what could one do but to be invested? Most people are invested b/c retirement funding has been “democratized”. Given a choice of TSP + SS + FERS pension vs CSRS pension, i’d gladly take the latter, but that choice isnt available for me to make. If one doesn’t invest, one likely faces a Dickensian existence in old age; if one does invest, there are the roller coaster rides.

The economic reality forces one’s hands here. At least there’s a chance that one could do comfortably if one stays invested. The same can’t be said for choosing to stay in Treasury bonds.

[MattTuck]

Originally Posted by echappist

But what could one do but to be invested? Most people are invested b/c retirement funding has been “democratized”. Given a choice of TSP + SS + FERS pension vs CSRS pension, i’d gladly take the latter, but that choice isnt available for me to make. If one doesn’t invest, one likely faces a Dickensian existence in old age; if one does invest, there are the roller coaster rides.

The economic reality forces one’s hands here. At least there’s a chance that one could do comfortably if one stays invested. The same can’t be said for choosing to stay in Treasury bonds.

My intention was just a reminder that there are risks, and that if you are reaching for yield (in the form of using margin, holding large positions in individual companies, focusing on particular industries, etc.), you may want to assess the actual risk you are taking... especially, as others have said in the past in this thread, if they are targeting 7% annually to cover their costs, if they are depending on those funds in the near term for children's college, their retirement, or a new Campy EPS group.

Being 100% invested, with 100% allocation to stocks, 10 years into a bull market rally is not the only option. Holding a diversified portfolio, perhaps with a significant chunk in cash/gold/short term debt/etc. for the next 12-18 months, doesn't seem like an outrageous idea. If the market goes up, maybe you make 4% instead of 8%.

[echappist]

got it; thanks for the clarification

i thought you had meant a more general warning re: investing overall

that said, I often what would happen if we experience what happened in Japan from the late 80's. The Nikkei just recovered to the highs of that period, and it would appear that it's headed downwards...

[MattTuck]

Originally Posted by echappist

got it; thanks for the clarification

i thought you had meant a more general warning re: investing overall

that said, I often what would happen if we experience what happened in Japan from the late 80's. The Nikkei just recovered to the highs of that period, and it would appear that it's headed downwards...

Also, I think there is a sense that prices going up is in some way "good", like a higher price is in some way better. Many market participants stand to gain when prices go up. Fewer benefit when prices go down. But whether up or down, the movements of the market are neither good nor bad. They are just reporting a price signal about people's expectations.

Imagine two sealed envelopes, both with a $100 bill in them. Now let's say, for whatever reason, there is a market for these envelopes, but no one knows what is inside. Let's say there are two universes. In one, people are buying and selling the envelopes for $80. And in the other they are buying and selling them for $120.

If the truth comes out that the envelopes contain $100, then the prices in each universe will immediately converge on that value. The holders of the envelopes in one universe are happy because they just made $20. Envelope holders in the other are sad, because they just lost $20. But the reality is just that the market price now reflects the most up to date information about the value. The price move is good because the market is working and new information is being factored into the prices. Even though the $120 universe feels like it is bad.

[veloduffer]

Originally Posted by MattTuck

My intention was just a reminder that there are risks, and that if you are reaching for yield (in the form of using margin, holding large positions in individual companies, focusing on particular industries, etc.), you may want to assess the actual risk you are taking... especially, as others have said in the past in this thread, if they are targeting 7% annually to cover their costs, if they are depending on those funds in the near term for children's college, their retirement, or a new Campy EPS group.



Being 100% invested, with 100% allocation to stocks, 10 years into a bull market rally is not the only option. Holding a diversified portfolio, perhaps with a significant chunk in cash/gold/short term debt/etc. for the next 12-18 months, doesn't seem like an outrageous idea. If the market goes up, maybe you make 4% instead of 8%.

If you look at total return performance from pre-crisis (June 2007) to 2016, 10-yr US Treasuries outperformed the S&P 500. It took a long time for returns to recover from the sharp equity shock in 2008 (-37%).

After the next down shock, stocks may take longer next time to recover their performance since real GDP is forecasted to be below 2% after 2019 for the foreseeable future. This is largely due to the demographic shift of Baby Boomers retiring, which reduces labor productivity. Further exacerbating this constraint is the low birth rate and anti-immigration policies. You can also add further automation (artificial intelligence, robotics, blockchain) to hurting labor productivity.




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[likebikes]

djia down another ~400 today, ~1,500 on the week; worst week in 10 years.

i think there's darker days ahead.

[Jeff N.]

Originally Posted by likebikes

djia down another ~400 today, ~1,500 on the week; worst week in 10 years.

i think there's darker days ahead.

Hope you're wrong but you probably ain't.

[Llewellyn]

Originally Posted by likebikes

djia down another ~400 today, ~1,500 on the week; worst week in 10 years.

i think there's darker days ahead.

Don't panic and just ride the waves.

[MattTuck]

Originally Posted by Llewellyn

Don't panic and just ride the waves.

Sounds like good advice in theory -- but in practice, sometimes feels more like this.

[el cheapo]

Redondo Beach is fun unless you're a sailor near the pier. Great analogy!

[echappist]

Originally Posted by Llewellyn

Don't panic and just ride the waves.

says the guy with a bear as his avatar

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we should do a "call the bottom" game

S&P 500 down 17% from its peak of ~2925. Where do you think this may hit bottom? I'm thinking ~1900, or about 35% down from the top. Too much irrationality going on. The irrationality that led to Netflix tripling in value in in 18 months despite insanely high P/E ratio is going to do a turn on the other end. You know, the same company that valued an one-year broadcasting rights to "Friends" at 100 million...

ETA: ~1750 instead of 1900. After we hit bear market, each additional 5% decrease, I'll be rebalancing another 2% toward equities (currently at 70%), until i get to 90%. Makes for some fun time ahead...