Demand for stocks too high? (investor behavior)

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Snowjob
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Demand for stocks too high? (investor behavior)

Post by Snowjob » Fri May 19, 2017 2:35 pm

Anyone else worried about the demand for stocks?

- People don't need to buy or follow individual names, indexing is more prevalent today
- Buying the dip has been a rewarded behavior for many years now
- 8 years into a recovery
- The great recession (which was a traumatic experience), had a short recovery time
- Bond yields & savings yields are still really low in nominal terms

I feel like this encourages speculation and the believe that equities always go up. That it is translating to a slow grind higher for equities without really an end in sight. Not that I'm hoping for a 2008 crisis but I get the same feeling today that I did back around 2006 where everything seemed to be fully valued (or more) and nothing could really stop it. I did understand that housing was in a bubble but I had no idea it would spread like it did. At this point I don't even see a bubble, maybe excess supply in autos, commercial RE and O&G production but I cant see anything huge on the horizon that would really overcome the recent learned (rewarded) investor behavior of ignore it all and keep buying

alex_686
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Re: Demand for stocks to high? (investor behavior)

Post by alex_686 » Fri May 19, 2017 2:40 pm

Snowjob wrote:Anyone else worried about the demand for stocks?

- People don't need to buy or follow individual names, indexing is more prevalent today
- Buying the dip has been a rewarded behavior for many years now
- 8 years into a recovery
- The great recession (which was a traumatic experience), had a short recovery time
- Bond yields & savings yields are still really low in nominal terms


I don't think any of these point to high demand for stocks. Why does it matter if people prefer individual stocks or passive funds? Demand is calculated in aggregate.

You other items may point to complacency.

2 better lines of though are "Secular Stagnation" and "New Normal". Both put forward fairly strong ideas that there is a surplus supply of savings verse a low demand for new investment. While not automatically suggesting bubble territory it does suggest many years of low returns.

Snowjob
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Re: Demand for stocks to high? (investor behavior)

Post by Snowjob » Fri May 19, 2017 3:06 pm

alex_686 wrote:I don't think any of these point to high demand for stocks. Why does it matter if people prefer individual stocks or passive funds? Demand is calculated in aggregate.

You other items may point to complacency.

2 better lines of though are "Secular Stagnation" and "New Normal". Both put forward fairly strong ideas that there is a surplus supply of savings verse a low demand for new investment. While not automatically suggesting bubble territory it does suggest many years of low returns.


Well said, I would agree on the those other two of thought as being a reasonable assessment of today's situation, though excess savings does not necessarily equate to increased demand for stocks. I think there still needs to be a fair amount of complacency as you say, for people people to accept higher and higher PE's over time.

As far as indexing, that adds very much to the complacency idea in my mind, you don't need to pay attention, safety and resilience in diversity etc

NiceUnparticularMan
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Re: Demand for stocks to high? (investor behavior)

Post by NiceUnparticularMan » Fri May 19, 2017 5:25 pm

Is it 2006 . . . or 1996?

No clue, personally. Carry on.

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patrick013
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Re: Demand for stocks to high? (investor behavior)

Post by patrick013 » Fri May 19, 2017 8:43 pm

Many observations point to a soft landing. The cycle slows
but swings into new growth somehow. No runaway inflation
or runaway growth for interest rates to rise above. Actually
business and mortgage loan demand is declining putting less
pressure on interest rates potentially.

But the original question is the market overbought ? Optimism
keeping prices up while PE's go into dangerous territory giving
an indication of a major correction. The Dow index is a better
buy than the 500 index as far as valuation. Hold rather than
buy, and many people are holding.
age in bonds, buy-and-hold, 10 year business cycle

aristotelian
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Re: Demand for stocks to high? (investor behavior)

Post by aristotelian » Fri May 19, 2017 8:53 pm

If you are worried, your stock allocation is too high. I have no idea whether a 50% drop will happen tomorrow or ten years from now, but it certainly will happen at some point. If you can't absorb that risk you shouldn't be playing.

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nedsaid
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Re: Demand for stocks to high? (investor behavior)

Post by nedsaid » Fri May 19, 2017 9:58 pm

Actually, I have heard quite often on financial shows that there is a shortage of quality bonds. Treasuries get snapped up like crazy despite larger deficits in recent years.
A fool and his money are good for business.

snarlyjack
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Re: Demand for stocks to high? (investor behavior)

Post by snarlyjack » Fri May 19, 2017 10:52 pm

Maybe...

My plan is to keep dollar cost averaging into my fund.
Good time's...Bad time's... just keep buying and dollar cost
average into anything & everything.

I don't watch the financial news...I keep my nose to the grindstone...
& I'm always buying. I don't check account value's or prices.
I just buy...accumulate, accumulate, accumulate.
That's the secret!

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JoMoney
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Re: Demand for stocks to high? (investor behavior)

Post by JoMoney » Sat May 20, 2017 12:24 am

Generally speaking, if the demand for stocks was too high relative to the prices being paid on the public market, I would expect to see increases in the supply of stocks to the market... that is, IPOs and investment bankers getting active breaking up large companies or cranking out new companies of questionable business merit. But instead we're seeing relatively few (with some exceptions in certain hot areas), and we have lots of mergers and buybacks.
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alex_686
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Re: Demand for stocks to high? (investor behavior)

Post by alex_686 » Sat May 20, 2017 6:37 am

JoMoney wrote:...I would expect to see increases in the supply of stocks to the market... that is, IPOs and investment bankers getting active breaking up large companies or cranking out new companies of questionable business merit.


I will agree with the creation of new questionable IPOs. I don't agree with breaking up of large companies. What would that do? I have a high demand for money. I take a $20 bill and break it into 2 $10 bills. Demand would be the same but supply would not change.

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JoMoney
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Re: Demand for stocks to high? (investor behavior)

Post by JoMoney » Sat May 20, 2017 7:00 am

alex_686 wrote:
JoMoney wrote:...I would expect to see increases in the supply of stocks to the market... that is, IPOs and investment bankers getting active breaking up large companies or cranking out new companies of questionable business merit.


I will agree with the creation of new questionable IPOs. I don't agree with breaking up of large companies. What would that do? I have a high demand for money. I take a $20 bill and break it into 2 $10 bills. Demand would be the same but supply would not change.

In aggregate, if everyone held a cap weighted portfolio, and the relative price multiples was proportionately adjusted between the larger company and it's spinoff perhaps you'd be right... But the story when it's done though, is usually that it's believed the companies will somehow perform better focused on their individual areas, and in a hot market it may even appear that way. If there's a hot sector trading at higher price multiples it may be a better way to raise capital and unlock value. If widget companies are selling at a 30x earnings price multiple, and your large conglomerate is selling at 15x earnings, relative to doing a seasoned equity issue of the conglomerate stock at 15x the management may see it as a better value to just spinoff their widget segment getting 30x.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Demand for stocks to high? (investor behavior)

Post by Call_Me_Op » Sat May 20, 2017 7:06 am

While the demand for stocks has been increasing, the memory of 2008 still weighs heavily. All you can (intelligently) do is make sure your stock allocation is consistent with your risk tolerance and stay the course.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

NiceUnparticularMan
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Re: Demand for stocks to high? (investor behavior)

Post by NiceUnparticularMan » Sat May 20, 2017 7:22 am

alex_686 wrote:
JoMoney wrote:I don't agree with breaking up of large companies. What would that do? I have a high demand for money. I take a $20 bill and break it into 2 $10 bills. Demand would be the same but supply would not change.


I guess part of the question is whether the demand is for shares in the underlying assets, or for stocks. The latter doesn't necessarily make much sense to me, but behavioralists don't necessarily think the markets make sense.

And certainly there is often a story about how companies are worth more broken apart than as a whole. Which again may or may not make much sense, but if true it would motivate such activities.

alex_686
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Re: Demand for stocks to high? (investor behavior)

Post by alex_686 » Sat May 20, 2017 7:58 am

JoMoney wrote:I will agree with the creation of new questionable IPOs. I don't agree with breaking up of large companies. What would that do? I have a high demand for money. I take a $20 bill and break it into 2 $10 bills. Demand would be the same but supply would not change.
In aggregate, if everyone held a cap weighted portfolio, and the relative price multiples was proportionately adjusted between the larger company and it's spinoff perhaps you'd be right... But the story when it's done though, is usually that it's believed the companies will somehow perform better focused on their individual areas, and in a hot market it may even appear that way. If there's a hot sector trading at higher price multiples it may be a better way to raise capital and unlock value. If widget companies are selling at a 30x earnings price multiple, and your large conglomerate is selling at 15x earnings, relative to doing a seasoned equity issue of the conglomerate stock at 15x the management may see it as a better value to just spinoff their widget segment getting 30x.


This is true. However I think this affects things marginally, it is not going to make much macro impact. Oddly enough the story is the same for mergers. There is a optimal configuration and companies will merge and spin off to get there. Today the market consensus is that merging is the way to add value, not by spin offs.

Snowjob
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Re: Demand for stocks to high? (investor behavior)

Post by Snowjob » Sat May 20, 2017 8:44 am

aristotelian wrote:If you are worried, your stock allocation is too high. I have no idea whether a 50% drop will happen tomorrow or ten years from now, but it certainly will happen at some point. If you can't absorb that risk you shouldn't be playing.


Quite the opposite. As an accumulator, I'm more frustrated that elevated asset prices translate to low growth !

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Re: Demand for stocks to high? (investor behavior)

Post by LadyGeek » Sat May 20, 2017 8:56 am

The focus of this discussion is a bit unclear to me.

Is the intent to show investor behavior may not continue a trend to buy stocks (and funds holding stocks), i.e. stay in the market?

What should an individual investor do (or not do) as a result?
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

aristotelian
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Re: Demand for stocks to high? (investor behavior)

Post by aristotelian » Sat May 20, 2017 9:35 am

Snowjob wrote:
aristotelian wrote:If you are worried, your stock allocation is too high. I have no idea whether a 50% drop will happen tomorrow or ten years from now, but it certainly will happen at some point. If you can't absorb that risk you shouldn't be playing.


Quite the opposite. As an accumulator, I'm more frustrated that elevated asset prices translate to low growth !


If you are an accumulator with infinite risk tolerance, you should not care either way where the market is right now because the market will do what it will in the long term.

If you have less than zero risk tolerance, you might be concerned about low growth, but you also might be concerned about a crash. Or a crash followed by low growth for a sustained period, particularly at a time when you have no income, such as unemployment or retirement.

CurlyDave
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Re: Demand for stocks to high? (investor behavior)

Post by CurlyDave » Sat May 20, 2017 10:22 am

Snowjob wrote:...Quite the opposite. As an accumulator, I'm more frustrated that elevated asset prices translate to low growth !


OK, what is your alternative?

I am retired, but transitioning from accumulator to distributor. My worry about elevated asset prices is that I will become accustomed to a withdrawal rate based on current prices. This can either lead to portfolio failure, or lifestyle disappointment.

But, unless we get really wild and wooly, investing in penny stocks and venture capital, a good chunk of our assets are in stocks.

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patrick013
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Re: Demand for stocks to high? (investor behavior)

Post by patrick013 » Sat May 20, 2017 1:34 pm

LadyGeek wrote:The focus of this discussion is a bit unclear to me.

Is the intent to show investor behavior may not continue a trend to buy stocks (and funds holding stocks), i.e. stay in the market?

What should an individual investor do (or not do) as a result?


It depends on what type of investor one is. Each one has a different
mindset. Short term, long term, accumulation or safety. So each needs
to focus on their AA. But I know one thing, you can't tell a stay the course
investor not to stay the course. There's always demand for stocks and
they've read the book so their focus is quite clear. Which is good.
age in bonds, buy-and-hold, 10 year business cycle

Bastiat
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Re: Demand for stocks to high? (investor behavior)

Post by Bastiat » Sat May 20, 2017 6:04 pm

Snowjob wrote:Anyone else worried about the demand for stocks?

- People don't need to buy or follow individual names, indexing is more prevalent today
- Buying the dip has been a rewarded behavior for many years now
- 8 years into a recovery
- The great recession (which was a traumatic experience), had a short recovery time
- Bond yields & savings yields are still really low in nominal terms

I feel like this encourages speculation and the believe that equities always go up. That it is translating to a slow grind higher for equities without really an end in sight. Not that I'm hoping for a 2008 crisis but I get the same feeling today that I did back around 2006 where everything seemed to be fully valued (or more) and nothing could really stop it. I did understand that housing was in a bubble but I had no idea it would spread like it did. At this point I don't even see a bubble, maybe excess supply in autos, commercial RE and O&G production but I cant see anything huge on the horizon that would really overcome the recent learned (rewarded) investor behavior of ignore it all and keep buying


The recovery from the great recession has been among the slowest and weakest in history... The Keynesian response may have lowered volatility at the expense of productivity and growth. To me this would suggest a longer recovery period to get back to the top of the business cycle. Which would mean we may wait longer than normal for the next bust. If indexing, passive investing in particular, is indeed more prevalent today, this would also suggest less volatility.

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MEA
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Re: Demand for stocks too high? (investor behavior)

Post by MEA » Sun May 21, 2017 6:25 am

Snowjob wrote:Anyone else worried about the demand for stocks?

- People don't need to buy or follow individual names, indexing is more prevalent today
- Buying the dip has been a rewarded behavior for many years now
- 8 years into a recovery
- The great recession (which was a traumatic experience), had a short recovery time
- Bond yields & savings yields are still really low in nominal terms

I feel like this encourages speculation and the believe that equities always go up. That it is translating to a slow grind higher for equities without really an end in sight. Not that I'm hoping for a 2008 crisis but I get the same feeling today that I did back around 2006 where everything seemed to be fully valued (or more) and nothing could really stop it. I did understand that housing was in a bubble but I had no idea it would spread like it did. At this point I don't even see a bubble, maybe excess supply in autos, commercial RE and O&G production but I cant see anything huge on the horizon that would really overcome the recent learned (rewarded) investor behavior of ignore it all and keep buying
When it comes to investing the best advice you will ever get is don't think too much.
It is speculators speculating on other speculators speculations. It is a tale told by an idiot, full of sound and fury signifying nothing.

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