Where Have All The Bears Gone?

Published in Investing on 19 March 2012

All were bears not long ago. Now it seems everyone's a bull. What's an investor to do?

I read in one major national newspaper this weekend that these are great times for stock-market investors and major indices are set to go nuts over the next decade.

Apparently, bullish brokers at Citigroup have advised investors that the FTSE will "rocket" over the next 10 years. Great; I'll just put everything into a FTSE tracker and sit back.

But can this really be so? Was it not just a few short months ago that the only place to stash your cash was in gold ingots and that European debt contagion would be an end to the world as we know it?

As usual, both extreme views are wrong.

Not as cheap as it was

Three weeks ago when I looked at the FTSE's cheapest shares by the simplest of all measures, the price-to-earnings (P/E) ratio, the overall average FTSE 100 P/E stood at 10.6. And the FTSE had already put on 22% from its absolute lowest point in early October.

If you think looking at the FTSE is too simplistic, the performance of all the other main UK indices, including AIM, has been roughly the same. So if you've been making money hand-over-fist since early October, and think it's down to your share selections, you probably need to think again, unless you've beaten 22% by some distance.

Personally, I'm finding it harder than I have for a long time to find individual companies in which I perceive fundamentally good value. Various companies have risen in value to a level I think is more commensurate with their true underlying worth, so I've been content to sell. Such is the value of a value-driven investment strategy; you tend to "automatically" follow Warren Buffett's advice of being fearful when others are greedy, and vice-versa.

Reasons to be cheerful

That isn't to say, of course, that markets aren't in for a good run, or that I expect a major fall for any specific reason. I have no idea, and nor does anyone else, no matter what they may say after the event. But to call the market for a decade may be overdoing things a little!

Nevertheless, the FTSE did manage an all-time high of almost 7,000 over 12 years ago now, so perhaps we are in for an overall bull run? And shares do look the best single asset class if you had to choose only one today, to me.

Furthermore, there are genuine signs of recovery in the USA and whether we've really had a Greek default or not, perhaps corporate earnings will hold up better than was feared a few months ago.

Cocktail party theory

Who really knows? Personally, I like to start from the bottom up, tempering those individual decisions a little with my own take on the macro picture.

A more entertaining way to read the market signs is by using Peter Lynch's cocktail party theory. Lynch reckoned he was largely ignored when he told people what he did for a living during stage one; when the market has been down for a while.

At the next stage, the market is up 15%, but the conversation is still mainly around how risky the stock market is. At stage three, the market is up 30% from stage one and a crowd of people are interested. Everyone at the party has bought something, and all are interested in what they should be buying next.

At the final stage, everyone has advice on which stocks to buy and they're telling Peter Lynch where to invest! As he says: "When the neighbours tell me what to buy and then I wish I had taken their advice, it's a sure sign that the market has reached a top and is due for a tumble."

We aren't at stage four yet, but it's beginning to feel we're somewhere between stages two and three. Overall, it's best not worry about market ups and downs, but to find the right companies in my opinion.

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vinchainsaw 19 Mar 2012 , 10:55am

If inflation picks up so too will company profits as everything will expand.

In that way I could see the the ftse shoot up, but in real terms the gains will be less I imagine.

F958B 19 Mar 2012 , 11:53am

Optimism and bullish articles are beginning to appear, which a contrarian will be wary of.

Markets have had a great few years in terms of percentage gains. Bull markets don't last forever; usually 3-5 years - and this one is now in its fourth year, with possible negative influences of the US election cycle in 2013 (the president usually does the unpopular dirty work in his first 18months, knowing that he will have 2-3 years after that, to pump-up the economy before he's up for election again).

Over the next few months (but probably not just yet), I'll be looking for opportunities to lock-in profits and start to build a cash reserve for the next scare which sends markets into another bout of despair. There'll be plenty more ups and downs on this rollercoaster in the next fewa years, as the underlying problems are just being kicked down the road by governments.

I've certainly gone on a "buyer's strike" and won't be adding to any positions until the excessive bullishness has been worked off.

shinygoldcar 19 Mar 2012 , 1:03pm

The cocktail party theory is interesting. I've never been to one, but I have had a friend ask me what shares I think he should buy. So that sounds like between stages two and three.

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