No. of Recommendations: 27
Valuemonger, former REIT board poster Eurotrash1, posted the full article a few years ago on the Berkshire Hathaway board:

A few comments:

1) This type of investing is akin to TAA (Tactical Asset Allocation) where you slowly change asset allocation percentages as market conditions change. It is a form of "market timing" but it is very different from the approaches that work in nanoseconds up to say a few months. Many of today's followers of this method base the timing signals on dividend yield, P/E ratio, P/B ratio, inflation, interest rate, corporate profitability etc. Today's advocates of this method include:

Jeremy Grantham with his 7 year forecasts
Robert Shiller with "Cape"
John Hussman with his model
Andrew Smithers with "Tobin’s Q ratio"
Ed Easterling with Financial Physics

2) All of these methods did a relatively good job warning you before the dotcom and 2008 crashes. However, they were all very early, as in years.

3) All of these methods have done a relatively POOR job since about 2011. They were all saying the US market was fairly to overvalued. Yet the market continued to rise. So the models gave "stronger" sell signals and the market continued to rise and rise and rise.

For example, Jeremy Grantham's latest 7 year forecast for the SP 500 is to have an annual real return of -1.1%. Seeing this, you would NOT be inclined to own the SP 500. Yet, it is entirely possible the market continues to rise and rise and rise from here. Grantham and all of the others admit their models are not good for short term forecasts.

4) I track all of these models and believe they are good for the long term, but will cause you to be early, particularly in selling. The dotcom uptrend went much further up than any of the models would rationally predict. It is possible and I think likely something similar will occur in this uptrend. Instead of being dramatically overvalued in a short period of time, the market can be slightly overvalued for a long period of time.

5) There are three possible conclusions you might have:

a) Its different this time, the investing world has changed for some reason and the models no longer work.
b) The models are early, but will eventually be proven correct
c) Combination of a and b, caused by outside factors, which can last longer than most people think

6) I have spent a reasonable amount of time on these models. I have a lot of data and a theory, but it is not ready to publish yet. It might turn out to be a wasted, unproductive effort with no additional insight.

BOTTOM LINE is that each investor will have to decide if they want to use a TAA type model or not. The vast majority of less sophisticated investors SHOULD NOT attempt TAA. They should use low cost index funds with annual re-balancing IMO. If you are reading this, I consider you a SOPHISTICATED investor that MIGHT use TAA. As long as you understand the limitations, I think it is fine. Personally Yoda has used a similar approach for many years. I had a home grown model before I had ever heard of these more famous folks and their models. Yoda’s approach was most similar to Ed Easterling’s financial physics approach. Ed did a much better job than Yoda, particularly since he took the time to write books about it. At times, our stock allocation was almost zero percent consistent with our very conservative approach. Clearly this approach is not right for everyone.


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