The title of this post is intentionally misleading. No one can call market turns as I have repeatedly stated - but don’t tell that to CNBC or any number of so-called “Chief Market Strategists”.
HOWEVER….
I did come pretty close to calling the top in oil and in gold. Pure luck? Maybe, especially since I have no special knowledge or background in commodities. BUT - read my posts and decide for yourself. In each, I talked about signs of pure exuberance and rampant bullishness that to an observer of market/human/animal behavior looked way over done, and to a natural contrarian signaled that they couldn’t go on.
In early April I reported on a feature on CNBC about former mortgage brokers taking up gold prospecting, and speculated that a top in gold must be near. As it turns out, gold had peaked a few weeks prior.
In late May and early June, I penned some posts about oil prices. Again, the fact that everyone seemed certain that oil was going to $200, all my neighbors were buying Priuses, (I bought an SUV at a huge discount with free financing), etc etc, made it feel way overdone to me once again. Sure enough, oil topped about a month and 10% later.
So what am I, some self-aggrandizer who made a couple lucky calls? No, you won’t find me Boo-yahing skee-daddy. Lord knows I have been WAY early (which some would say is equivalent to being wrong) on many stock picks. The only thing that keeps me sane here is that most of the companies behind those stocks are doing pretty well all considered, and stand to do very well coming out the other side of this mess.
I am bringing this up to reiterate that parabolic trends simply don’t continue, whether they be upward OR downward. The stock market has turned parabolic to the downside, and I am getting the feeling that we are now way beyond the looking glass. Just as the herd extrapolates the upward vertical trajectory of the parabola on the way up, so too do they on the way down - even more so since losing $100 causes twice as much pain as the joy from making $100.
There are so many silly valuations out there now - those with a long time horizon should be having a field day. This is the time when you could set yourself up for life - a time that may well not be repeated in our life times. If you have cash to invest, cash you won’t need for at least a few years, consider yourself lucky.
Here is a quick recipe for finding great investments in today’s environment - the caveat being that anything bought today could well go much lower (1/2 of absurd is still absurd), so scaling in could be smart: Look for big, well known companies with strong brands and great histories. Check the 10yr balance sheet - look for a history of net cash (cash and short term investments>debt). Check the 10 yr cash flow statement - look for consistent free cash generation. Then figure out the free cash yield on last year’s free cash, and on the average free cash for the last 5 or ten years. If you find a great company with a long history of growth and strong returns (ROA, ROE and ROIC), a free cash yield of 10% or more and no debt, it will be tough to go wrong in the longer term. If you want to be extra conservative, avoid financial companies, and target those with a strong >4% dividend yield that is well covered by the free cash flow.
HOWEVER….
I did come pretty close to calling the top in oil and in gold. Pure luck? Maybe, especially since I have no special knowledge or background in commodities. BUT - read my posts and decide for yourself. In each, I talked about signs of pure exuberance and rampant bullishness that to an observer of market/human/animal behavior looked way over done, and to a natural contrarian signaled that they couldn’t go on.
In early April I reported on a feature on CNBC about former mortgage brokers taking up gold prospecting, and speculated that a top in gold must be near. As it turns out, gold had peaked a few weeks prior.
In late May and early June, I penned some posts about oil prices. Again, the fact that everyone seemed certain that oil was going to $200, all my neighbors were buying Priuses, (I bought an SUV at a huge discount with free financing), etc etc, made it feel way overdone to me once again. Sure enough, oil topped about a month and 10% later.
So what am I, some self-aggrandizer who made a couple lucky calls? No, you won’t find me Boo-yahing skee-daddy. Lord knows I have been WAY early (which some would say is equivalent to being wrong) on many stock picks. The only thing that keeps me sane here is that most of the companies behind those stocks are doing pretty well all considered, and stand to do very well coming out the other side of this mess.
I am bringing this up to reiterate that parabolic trends simply don’t continue, whether they be upward OR downward. The stock market has turned parabolic to the downside, and I am getting the feeling that we are now way beyond the looking glass. Just as the herd extrapolates the upward vertical trajectory of the parabola on the way up, so too do they on the way down - even more so since losing $100 causes twice as much pain as the joy from making $100.
There are so many silly valuations out there now - those with a long time horizon should be having a field day. This is the time when you could set yourself up for life - a time that may well not be repeated in our life times. If you have cash to invest, cash you won’t need for at least a few years, consider yourself lucky.
Here is a quick recipe for finding great investments in today’s environment - the caveat being that anything bought today could well go much lower (1/2 of absurd is still absurd), so scaling in could be smart: Look for big, well known companies with strong brands and great histories. Check the 10yr balance sheet - look for a history of net cash (cash and short term investments>debt). Check the 10 yr cash flow statement - look for consistent free cash generation. Then figure out the free cash yield on last year’s free cash, and on the average free cash for the last 5 or ten years. If you find a great company with a long history of growth and strong returns (ROA, ROE and ROIC), a free cash yield of 10% or more and no debt, it will be tough to go wrong in the longer term. If you want to be extra conservative, avoid financial companies, and target those with a strong >4% dividend yield that is well covered by the free cash flow.
