RE:RE:Experienced a Migraine todayNice post Migraine
A few thoughts
Over the years, I have looked at the stock market like a pendulum on an old grandfather clock. About 10% of the time it is grossly overpriced through greed and excitement and another 10% it is grossly undervalued due to excessive pessimism. The rest of the market fluctuates in a narrow band and, as you point out, over the long run the direction arrow is up. I call this "the I don't know period"
I guess in its simplest terms what I was trying to get at in my earlier posts, I am generally fully invested with some cash reserves to take advantage of mispriced companies during the "I don't know phase" which is about 80% of the time. During these times your comment in an earlier post about a rising tide raises all boats is very true and as a general rule you will do Ok irrespective of which company you invest in. A point you made which I agree with.
What I do try to figure out are the signals for the 10% extremes and prepare for them and then take advantage of those situations. I believe that we heading for one of those time periods. Back in 2006, I saw the storm clouds on the horizon and gradually increased my cash position, lowered my stock position and increased my bond holdings. I started doing this in August 2006 and the market didn't peak until about a year later. When the market tanked, I had a very small stock portfolio. The market bottomed out in March 2009 and I waited until May to confirm that the storm had passed and then used my cash reserves to buy stocks at about 30-40% below what I sold them for. As interest rates fell I took profits on my bonds.
If I could use another analogy to respond to your posts. You are living on a barrier island in south Texas. Most of the time the weather is sunny and warm. You hear that there is a Cat 4 hurricane coming but the long range forecast is for the weather to return to sunny and warm after the hurricane passes.
What do you do?
1.....stay and hope that the 15 foot tidal surge doesn't kill you cause you think everything will great once the sun is shining again
2....board up your house, put sand bags around your house and go and stay with your cousin in Austin until the storm is over
Me?
I have always picked Option 2. Not saying everybody should be like me - all depends on a lot of factors such your financial position, age and tolerance to risk.
In terms of your comment about inflation and long term interest rates signalling things, I strongly disagree. In the early 1980s, the 10 years were in the high teens. If that was the signal for long term inflation it was totally wrong.
Interest rates reflect the supply and demand for fixed income instruments at a particular point in time and as a general rule there is a relationship between them. Right now interest rates and in particular the 10 year are very low cause there is a buyer (The Fed) which literally has an infinite amount of money to buy bonds. So to use the rates generated by this artifical situation to project future inflation is a bad idea in my books.
From time to time this relationship gets out of whack and this is yet another clue that something is going to happen. You mentioned the flat yield curve. Historically it is not flat and so to me that is a warning sign - not something that gives me a warm and fuzzy feeling.