I did a long interview with Forbes, we discuss some investing themes and ideas:

“Here’s the thing I think most people have a hard time understanding and putting into context. To say stocks are cheap or expensive today is to simultaneously discuss two different things. The first is future earnings power. So the real question when you’re evaluating, “Are stocks cheap or expensive,” is how much can earnings continue to grow? What so many people get wrong about this is that step one is to acknowledge the inherent uncertainty about the future – that you don’t truly know what is going to happen to earnings in 2014 or 2015. There are many likely scenarios, but we focus on two of them: Either the economy tips into a recession (as so many people have been claiming for many years now). When we war game different scenarios, we think that is the most likely negative one. Not the most likely outcome, but if we do get a negative outcome, that is the most likely one. If that happens, we’d expect to see earnings contract 20% to 30%. If that were to happen, the equity markets would also go down by that much.

What about the upside? The economic recovery has been woefully slow and arduous — like watching frozen molasses run uphill. But directionally, it’s been heading in the right way over time, and on a regular basis. So if this slow and painful recovery continues, we’re very likely to see earnings maintained at somewhere near the current level or better. Let’s call it $110 – $120 in profits on the S&P. Call this the more of the same scenario.

Consensus for S&P earnings is about $110 for the next 12 months, and it wouldn’t surprise us to see that tick up to $112 or $115, in which case a 1,600 S&P is a little rich. But it’s not crazy. We’ve gone a long time without a real 10% correction — though we have come pretty close. But we haven’t had a major correction at all in 2013, and the markets have strung together some very nice gains.

So it wouldn’t be surprising to see somewhat of a pullback here. We certainly don’t want to eschew U.S. markets completely, but Good Lord! We’re up 150% since March ’09. Being overweight U.S. equities after that sort of move over four and a half years, we just thought it was prudent to pare it back just a touch. If we do get a correction, we are buyers on the dip.”

Its a long interview, and that’s just a flavor. You can see the whole thing here.



Invest As If The Sun Is Coming Up Tomorrow
Wally Forbes
Forbes, October 11, 2013


Category: Index/ETFs, Investing, Psychology

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7 Responses to “Invest As If The Sun Is Coming Up Tomorrow”

  1. william@netpros.net says:

    For a long time I’ve pondered the paradox at the core of capitalism. Curious what your take on this is: how does capitalism continue to provide an increasing standard of living when the population of the world goes down? Of course there are many ways to phrase the question. I could have asked ‘how does capitalism deal with satiated markets?’ instead, but I think you get my drift. With your background in math/science/law and involvement with markets, your opinion interests me. Most people I talk to about this haven’t really thought it through. Typically they fall back on some 18th or 19th century theory camouflaged by a monetarist or Keynesian wash of linear algebra which is about as useful as a witch doctor’s spell to cure malaria.

    • Sharkbite says:

      Never underestimate human ingenuity. If capitalism reached it’s natural endpoint, humans would invent a new paradigm. If anyone knows what that is, I’d like to hear it too.

  2. rd says:

    Very interesting interview.

    In the end, history is on the side of the “Sun will come up tomorrow” side. Events like Carthage being sacked by Rome and disappearing or the complete government takeover of the Russian economy after 1917 are very rare in history. The only way to survive those events was to have assets abroad and be able to get out before the cataclysm.

    People who were not heavily indebted going into the Great Depression did ok if they were able to keep enough income coming in the door so they didn’t have to dump their assets, even though their assets had temporarily declined in value significantly. If they had broadly diversified portfolios that included government bonds, then even corporate bankruptcies didn’t wipe them out. However, it can take the discipline of Odysseus tied to the mast to resist the siren call of Wall Street brokers selling their wares that often lead to heavy surf and rocks.

    A note on China. One of my kids works for a company that supplies parts to coal mining companies that send coal to China from various countries around the world. The demand for these parts has slowed over the past couple of months to the point they just had some layoffs in the production line for these parts for the first time since the 2008-9 crisis. These parts are fracture critical, so they don’t get replaced by overseas manufacturing as quality control is essential to maintain safe conditions, so it appears that there is a significant slowing of demand for coal in China and other emerging countries.

  3. DiggidyDan says:

    Very good point. I would say be prepared for the worst, but invest for the best. After all, what is the point of “investing for the future” if the sun is not going to come up tomorrow? Have your ducks in a row, high interest and unnecessary debt paid off, a cash emergency fund on hand for difficult times, maybe some good insurance against catastrophic events such as LTD or whatnot. At that point, you are prepared for what the future brings, and can take the risk of investing on future outcomes. History has proven that the long term outcomes are invariably positive, but it doesn’t always seem so at the time.
    I do not think we will have another banking crisis similar to ’07, and that was the catalyst for the “great recession” decline. I do think that the decline would have been worse and more prolonged if the Fed had not done QE, but that does not mean we go back to the depths if QE is removed! They basically were borrowing from future returns to keep from going under at the darkest time. It’s like taking a couple of PayDay loans when stuff goes bad, like a family member has an illness or your car breaks down. You don’t want to do it, and the terms aren’t the greatest, but you need to do it at the time to keep solvent. You know things won’t be this bad in the future, at which point you will pay it off, but that will be a drag on your income in the future, as any extra money you would have had will go towards paying off that debt.
    This builds the case for historically low returns and low inflation for the next decade as QE is unwound. It doesn’t mean the economy won’t grow, and certain companies won’t prosper, but overall returns will be muted when taking into account bond returns, interest rates, and inflation. Not a bad environment for starting a new breakthrough business, I might add! I for one will be investing in small cap growth stocks and emerging markets on the dips!

  4. theexpertisin says:

    Timely article. It is always good to know where BR is making some bets.

    I hope for sun on a daily basis, but I have an umbrella handy.

  5. Manofsteel11 says:

    The global financial system is exhibiting incoherencies on multiple fronts. The levels of complexity, unregulated activities and artificial intervention go beyond the scope of the concepts and institutional capacity that make up the current paradigm. Therefore, a paradigm shift will transpire, either proactively or ad hoc.