I am bearish on stocks. I have been for about a year. I positioned my (pathetic) portfolio accordingly about six months ago. My goal is to reexamine my logic and to attempt to understand the emotional and mental circumstances that have shaped/warped my views.
This post is a self-examination. It’s like a personal journal entry in which I try to understand my own shortcomings. If you wish to read and comment, you are welcome to. I only ask this, please don’t rehash the party line about market timing. It’s a basic truism that I failed to heed, and I don’t need my face rubbed in it.
Part One: Logic
I am negative on equities because of historical precedent:
1. Secular Bear – For two hundred years or so, stocks have experienced long-term trends in valuations (most easily measured by P/E ratio). Rising valuations are known as secular bull markets, while falling valuations are called secular bear markets. In 2000, we peaked at P/E 42 and have been falling ever since. History suggests that this trend will not bottom until we go well below the historical average P/E of 14. This will be a great buying opportunity for those with strong stomachs.
2. Residential Investment – We’ve had seven occasions since WWII where residential investment has risen above 5% of GDP. Each time (with the exception of the 2005 peak) the following correction has resulted in recession.
3. The US Consumer – consumer spending began declining about a year ago. A clear downtrend has been apparent for about six months.
Part Two: My Cynicism
(This is where my post strays from the Foolish ideal. It’s personal and emotional. I wish I could have left this out of my investing, but it crept in.)
I realize now that I am wishing for a recession. If it happens, I hope it sparks a cultural shift that allows/forces us to get away from the ever-expanding consumption economy. It’s killing people like me. I’m about to get away from another Foolish tradition and use real numbers. I take home about six hundred a week. My wife stays home with the baby. I live in the D.C. Metro area (which is a rather pricey part of the country). My household profit margin is contracting while we cut cost left and right (at the same time, “they” tell us inflation has moderated. “They” are full of it.).
The situation has made me bitter and cynical about the whole system. I try to understand what has changed since I was a kid, where my dad provided for his family on bricklayer wages. He told me that the house I grew up in cost about 2.5 times his annual income. The median house in this area now costs about 325,000 dollars. Something has gone off course. A friend of mine recently bought a new townhouse with two walk-in closets in the master bedroom. Upper-middleclass homes built 30 years ago didn’t need walk-in closets (let alone two). What the hell has happened over the last generation that makes people think they need a king’s wardrobe? My hunch is that the double walk-in closet phenomenon is a counter-indicator suggesting a top in consumption (Please note: My hunches are wrong most of time).
My attitude is poisonous. My analysis and hunches are distorted by fear or envy or whatever it is that makes me wish for an economic overhaul. People like me should not invest, trade, or follow financial news. I’ve closed 2/3 of my positions over the last week (both long and short), and I’m feeling beaten and at ease.
I will now let professionals handle everything. I understand that they will skim a little off the top every month and rip me off whenever possible. Fine.
I bought my first stock exactly two years ago. The experiment is over. I will now resume a more productive existence and focus my time and energy on good things.
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