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Dr. Paul Price
Dr. Paul Price
Articles (513)  | Author's Website |

An Irrational Fear of Haircuts?

December 08, 2013 | About:

"Fear of haircuts" can cloud your vision.

The 2008-09 de-leveraging debacle still weighs heavily on the minds of investors. Those who got out after the plunge are bitter if they missed the rebound. Traders lucky enough to benefit from the subsequent resurgence feel blessed, but remain almost universally nervous.

They are in the jittery group that stays, “The trend is your friend … but keep one eye on the door at all times.” These people tend to go into and out of cash often in reaction to every jobs report, consumer confidence reading or hint of Fed action or inaction.


We all remember getting shocked by 401k statements that were marked-down 50% to what were not-so-fondly renamed 201k’s by the media.

CNBC pundits made sure we knew that a 50% haircut meant we’d need to see a double just to get back to even. What they never focused on was the reverse effect. If you purchased shares that had already sunk from $100 to $50 you could make 100% if the stock in question just went back to where it was prior to the drop.

If fact, intrepid souls who fought the negativity did even better than that. Buyers in early 2009 had more than two months to get positioned before the ultimate low on March 9, 2009. From the start of 2009, not the nadir, the SPY has now delivered a better than 109% total return.


Does that mean stocks are expensive? Not really. Here is a chart showing where we stand today versus historical levels based on trailing earnings for the S&P 500. We are no longer at bargain levels, but the current multiple is 9.5% below the 25-year average P/E of 18.62x.

We now sit at a 42.9% discount to the P/E peak reached in the crazy days of late 1999 – 2011.


Historical P/Es were determined in times when fixed income rates were being set by the market, rather than ‘proclaimed’ to be near zero by order of the Fed Chairman. Artificially low bond yields support the view that equity multiples should be higher than typical.

What good is keeping cash if you make no interest on your deposit? How attractive is keeping $1,000,000 in a bank money market to earn a paltry $5,000 pretax while exposing yourself to ‘uninsured deposit’ risk?

The only valid reason for cashing out stocks seems to be the idea that you may get the chance to buy them back cheaper. That is always possible, but that type of negative thinking has kept many people permanently on the sidelines during the latest five years, while the broad market averaged greater than 19% annually.

Holders of precious metals have been killed since gold peaked above $1,900 an ounce in 2011. Owners of long-term bonds suffered negative total returns since rates bottomed out in the middle of 2012.

Equity returns, while volatile, have been surprisingly steady for those who stayed in the game.


Dozens of money managers and mutual funds have provided solid double-digit returns over decades to anyone smart, and patient enough to simply commit their money and leave it alone.

Value-oriented Royce Associates has run three closed-end small-cap funds dating back from 17 to 27 years. Each of them had posted annualized NAV total returns ranging from 10.3% to 11.44% from inception right through Sep. 30, 2013.


Stop trying to time the market. You’ll be happier and make more money. No other asset class comes close to stocks over time. That should be even more pronounced in the future with ZIRP as a starting point. Historically low interest rates leave little room for bond rallies and plenty of risk if rates escalate.


Every bear market in America’s history has been temporary. The next one will be also.

Disclosure: Long RVT, RMT, FUND. I own no bonds.

About the author:

Dr. Paul Price


Visit Dr. Paul Price's Website

Rating: 3.4/5 (8 votes)



Shaved_head_and_balls - 3 years ago    Report SPAM
Are you sure that you're not trying to soothe your own buy-and-hold trauma experience in recent years? Have you ever looked at your inflation adjusted returns since 2007? (I'd be surprised if you've kept up with inflation in light of your mutual fund holdings mentioned above.) Currently the median price/revenue ratio for S&P 500 stocks is now higher than at the 2000 peak. I don't need to mention the Shiller P/E, do I? The time for cheer-leading equities was 3 or 4 years ago. At current valuations, it's just typical late bull market greed-fueled speculation. After two huge bear markets resulting from excess valuations, one would think the stock market booster club would finally get the message: Less stock market greed, more bonds and other assets with low correlation to stocks.
AlbertaSunwapta - 3 years ago    Report SPAM
"The only valid reason for cashing out stocks seems to be the idea that you may get the chance to buy them back cheaper. That is always possible, but that type of negative thinking has kept many people permanently on the sidelines during the latest five years, while the broad market averaged greater than 19% annually."

Very succinct. To me that is what active investing is all about. Otherwise passive buy and hold, even a bit leveraged, DCA indexed investing makes the most sense for most investors, if not most of the savings of ALL investors. (Diversified assets of course.) So as I've discussed on another thread, why do investors in individual equities hold cash upon the sale of their 'value investments' rather than moving proceeds into an equity index fund(s)? By choosing cash are they not implicitly making a macro equity market forecast? A forecast that goes against their 'faith' in the markets and many a value investor's supposed focus on stocks within only their circle of competence.

Personally I've chosen to adopt a macro forecast position and have sold equity indexes and low quality equities and now sit mostly in cash earning next to nothing. I continue to hold some quality equity positions and small amounts of lesser quality, but what I see as cheaply valued, positions. The confidence I had in mid March '09 to make major equity purchases has slowly disappeared as market metrics have risen to much higher levels. I am both prepared and comfortable with the likelihood of being wrong, but content with making positive returns if not always market beating returns. Why? Because I believe markets can act irrationally on the upside and downside and should they do so on the downside, I really don't want to be among the casualties that discover that 'the market can remain irrational longer than I can remain solvent.' Think of the Japanese investor who was say 50 or 60 yrs old in 1990 and found himself on the wrong side of Japan's coming bargain basement stock market being forced to liquidate to live, just when he should have been loading up.
Dr. Paul Price
Dr. Paul Price - 3 years ago    Report SPAM
See my GuruFocus article from late December 2012 titled... 'A Holding Penalty' for keeping cash.

It was published at a time when many had sold out of stocks due to fear of the fiscal cliff. Those traders never got a chance to buy on a pullback and missed a tremendous year.
William.b.thomson - 3 years ago    Report SPAM
No doubt equities are for the long haul and I have some that I have ridden up and down and back up higher many times. Having said that, there is an old maxim that applies. "Stocks are always cheap at the top and expensive at the bottom." Because predictions are extrapolations, at least by most analysts, PE multiples and other measures of valuation always appear attractive at the top. If history is any guidance, and it is, we should expect trouble ahead. I have no idea where it is going to come from this time. Frankly, the only two times, in my 40 year career, when I thought the source of trouble was obvious was in 2000 and in 2007. Usually I just think stocks have run too far and then something unforseen happans to preciptate a reevaluation.
Tannor - 3 years ago    Report SPAM
Thanks for the great article,

Mr. Market is either your master or your servant. Those that choose to attempt timing the market are falling victim to his manic-depressive ways, thus are ruled by him. Finding valuable companies or workout situations priced 30%+ below intrinsic value is the only way to conduct business, thus Mr. Market is serving you. If you own a bunch of businesses priced above intrinsic value you have large book of risk, but if you are holding a bunch of 50 cent dollars, why worry?

Many futures may happen but only one will happen, predicting is in the same genre as snake oil, dressed in a different bottle. Look back at all the fallible predictions over the last 100 years and imagine you were the sucker who sold during any of those fears. Don't be afraid to buy the top, I feel sorry for the guy that didn't buy the "new high" in the DJIA during the early 80s…….

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