Does it make sense to consider that stocks are 'on sale' when there's a correction?

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Lauretta
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Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by Lauretta » Fri Oct 12, 2018 3:46 am

I have seen the expression 'stocks on sale' in many places, including the writings of Jonathan Clements and some posts on Bogleheads. When Warren Buffett linekend himself to an oversexed person in a harem after the stock crash of 1973-74, he was saying the same thing.
Yet yesterday I came across a post by nisiprius which strongly argued against the use of this expression:
I hate the "stocks on sale" meme. Even the slightest thought will make you realize it is distorted marketing talk. In a supermarket, usually we know that an item on sale really is exactly the same item as it was a week before.

But when we buy day-old bread, or--in our local supermarket--meat with a "manager's special" mark-down, which means it's close to the pull date--it is not the same item. Ditto a "scratch and dent sale," or an "out of box sale." They are priced less because they are worth less. You don't automatically buy them just because the price is low. You make a personal evaluation of how much the reasons for the sale price matter to you. If you're going to cook meat loaf tonight, then the short date on the hamburger on sale doesn't matter to you, because you aren't going to store it, and really fresh taste isn't important. If you're going to serve it to guests in a backyard cookout three days from now, it might be important.

There's no guarantee that today's stocks have "the same" value as yesterday's. Under the dividend discount theory of stock valuation, a rise in interest rates has made them really be worth less.
Nisiprius post is very odd to me. He speaks of the dividend discount theory and rising rates. Yet rates did not rise suddenly overnight to justify the drop on Wednesday morning in US stock prices. What is even more odd, is that European stocks, particularly small caps, sharply dropped on Wednesday at 3.30pm (time in Milan) when the stock exchange opened in the US, even though rates of German bunds, which are considered the risk free rate in Euroland, if anything have very slightly decreased.
How can a sharp drop like that of the last 2 days (and the corresponding recovery this morning in European markets), rationally be explained by the dividend discount model? How can some stocks really have become worth 10% less in 24 hours, and now be worth again close to what they were worth on Tueday?
How can someone with an open, clear and rational mind (unaffected by academic dogmas) not recognise that those sudden drops are due to fear and the irrational behaviour of crowds rushing to sell (it would be interesting to know how many of the people who sold on Wednesday knew about the DDM), and not recognise that indeed stocks in the past two days were at a 'sale' compared to earlier in the week? (I am not saying that they may drop further, I am saying that no new information, become available since Tuesday night, has justified the drop in prices we have witnessed).
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by The Wizard » Fri Oct 12, 2018 4:20 am

Stock prices are only weakly linked to academic theories and financial facts.
Majority of pricing moves are based on emotional expectations.

So especially when talking about an S&P 500 or total market index fund, yes, those are definitely "on sale" now.
Individual stocks like Tesla or Apple? Hmmm, I'm not sure, but I'm not interested in buying individual stocks.

I also like to buy on the dips, so now is a good time to play that card as opposed to when the indices were pushing record highs.
I'm retired, so no longer have regular contributions to stock funds going in with each pay check.
So it's much easier to accumulate excess income (when there is some) and buy VTSAX when on sale now...
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by oldzey » Fri Oct 12, 2018 4:38 am

I buy total U.S. stock market index funds & ETFs, which I currently consider to be on sale.
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by nps » Fri Oct 12, 2018 4:48 am

Maybe if we're only looking relative to very recent prices, but you don't have to go back that far to question why today's prices would be thought of as a "sale." I don't remember anyone claiming that VTI (Vanguard Total Stock Market ETF) was on sale at the beginning of 2018 when it was close to the same price, after having a massive run-up that returned 21 percent in 2017 and 13 percent in 2016.

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by typical.investor » Fri Oct 12, 2018 4:58 am

Lauretta wrote:
Fri Oct 12, 2018 3:46 am
I have seen the expression 'stocks on sale' in many places, including the writings of Jonathan Clements and some posts on Bogleheads. When Warren Buffett linekend himself to an oversexed person in a harem after the stock crash of 1973-74, he was saying the same thing.
Yet yesterday I came across a post by nisiprius which strongly argued against the use of this expression:
I hate the "stocks on sale" meme. Even the slightest thought will make you realize it is distorted marketing talk. In a supermarket, usually we know that an item on sale really is exactly the same item as it was a week before.

But when we buy day-old bread, or--in our local supermarket--meat with a "manager's special" mark-down, which means it's close to the pull date--it is not the same item. Ditto a "scratch and dent sale," or an "out of box sale." They are priced less because they are worth less. You don't automatically buy them just because the price is low. You make a personal evaluation of how much the reasons for the sale price matter to you. If you're going to cook meat loaf tonight, then the short date on the hamburger on sale doesn't matter to you, because you aren't going to store it, and really fresh taste isn't important. If you're going to serve it to guests in a backyard cookout three days from now, it might be important.

There's no guarantee that today's stocks have "the same" value as yesterday's. Under the dividend discount theory of stock valuation, a rise in interest rates has made them really be worth less.
Nisiprius post is very odd to me. He speaks of the dividend discount theory and rising rates. Yet rates did not rise suddenly overnight to justify the drop on Wednesday morning in US stock prices. What is even more odd, is that European stocks, particularly small caps, sharply dropped on Wednesday at 3.30pm (time in Milan) when the stock exchange opened in the US, even though rates of German bunds, which are considered the risk free rate in Euroland, if anything have very slightly decreased.
How can a sharp drop like that of the last 2 days (and the corresponding recovery this morning in European markets), rationally be explained by the dividend discount model? ... I am saying that no new information, become available since Tuesday night, has justified the drop in prices we have witnessed).
I think Nishi is 100% correct. There's no guarantee that today's stocks have "the same" value as yesterday's.

It's like if a dealership prices a vehicle at 200% of sticker and gave you 50% off. Is it on sale? Only if you don't know the sticker.

The market has priced equities reflecting all available information and given that information, stocks are priced how they are. Do I think it's a great time to buy? Yes, but you have to understand your are taking the risk, more risk than was perceived a few days ago.

So what's happened in the world recently. Um lower expected GDP growth due to a tariffs. The specter of inflation in the US and economic impact of higher rates by those raising them fearing said inflation.

Not only that, but sheesh globally the head of Interpol in China has gone missing, the Saudi's are accusing of running a murder squad out of their consulate in Turkey. Not sure how important you think law and order are for equities globally but some think these are bad signs.

Anyway, I have as much basis to say that stocks were overvalued before and you to say they are undervalued now. I don't think the outlook is as rosy as just a little while back especially for the global economy. I mean do you think that European company's don't have exposure to the US and that a recession there won't hurt them? Do you think lower US growth (due to tariffs) will have no effect? Do you think there is no risk the economic system when America puts in a poison-pill agreement with it's NAFTA (aaah I mean new Mexican Canada and US agreement) to counter their deals with China?

If stocks were on sale, you'd be buying the same rosy outlook at a discounted price. You aren't. You are buying lowered expectations. That might be a good thing though because most likely we'll get through these political and economic challenges. That is not guaranteed though.

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by mary1969 » Fri Oct 12, 2018 5:09 am

i love market corrections. who needs academic studies when the best indicator out there is CNBC "Markets in turmoil" Special reports.

you may be early buying dips but that is when the serious money is made. keep it simple.

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by warner25 » Fri Oct 12, 2018 5:32 am

nps wrote:
Fri Oct 12, 2018 4:48 am
Maybe if we're only looking relative to very recent prices, but you don't have to go back that far to question why today's prices would be thought of as a "sale." I don't remember anyone claiming that VTI (Vanguard Total Stock Market ETF) was on sale at the beginning of 2018 when it was close to the same price, after having a massive run-up that returned 21 percent in 2017 and 13 percent in 2016.
I agree with this. Just because the price is lower than last week doesn't mean it's "on sale" in any useful sense of the term. When PE10 falls below 15 or 20, then OK, I'll say stocks are "on sale."

And I think the quote by nisiprius, like everything he writes, is brilliantly insightful.

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by livesoft » Fri Oct 12, 2018 5:36 am

Lauretta wrote:
Fri Oct 12, 2018 3:46 am
...
How can a sharp drop like that of the last 2 days (and the corresponding recovery this morning in European markets), rationally be explained by the dividend discount model? How can some stocks really have become worth 10% less in 24 hours, and now be worth again close to what they were worth on Tueday?

How can someone with an open, clear and rational mind (unaffected by academic dogmas) not recognise that those sudden drops are due to fear and the irrational behaviour of crowds rushing to sell (it would be interesting to know how many of the people who sold on Wednesday knew about the DDM), and not recognise that indeed stocks in the past two days were at a 'sale' compared to earlier in the week? (I am not saying that they may drop further, I am saying that no new information, become available since Tuesday night, has justified the drop in prices we have witnessed).
Shhhh! Don't tell anyone that some of these short-term market movements are due to psychological human behavior in aggregate.

But I guess a problem is that sometimes it could be the data, too.
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by jadd806 » Fri Oct 12, 2018 5:43 am

mary1969 wrote:
Fri Oct 12, 2018 5:09 am
i love market corrections. who needs academic studies when the best indicator out there is CNBC "Markets in turmoil" Special reports.

you may be early buying dips but that is when the serious money is made. keep it simple.
Shouldn't "serious money" already be fully invested such that there's nothing left over to buy dips?

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by The Wizard » Fri Oct 12, 2018 5:45 am

nps wrote:
Fri Oct 12, 2018 4:48 am
Maybe if we're only looking relative to very recent prices, but you don't have to go back that far to question why today's prices would be thought of as a "sale." I don't remember anyone claiming that VTI (Vanguard Total Stock Market ETF) was on sale at the beginning of 2018 when it was close to the same price, after having a massive run-up that returned 21 percent in 2017 and 13 percent in 2016.
That's not how it works.
We *expect* the price of both hamburger and VTI to increase something like 5% to 10% per year, but certainly not as a smooth exponential curve.
So it's the deviations from recently established plateaus that matter...
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by The Wizard » Fri Oct 12, 2018 5:50 am

jadd806 wrote:
Fri Oct 12, 2018 5:43 am
mary1969 wrote:
Fri Oct 12, 2018 5:09 am
i love market corrections. who needs academic studies when the best indicator out there is CNBC "Markets in turmoil" Special reports.

you may be early buying dips but that is when the serious money is made. keep it simple.
Shouldn't "serious money" already be fully invested such that there's nothing left over to buy dips?
Define serious money.
In my case, 99% of assets remain fully invested.
I'm just playing with a few thousand $$ in checking for these dips.

For more protracted corrections, of course, I might rebalance to get my AA back toward target...
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by nps » Fri Oct 12, 2018 5:56 am

The Wizard wrote:
Fri Oct 12, 2018 5:45 am
nps wrote:
Fri Oct 12, 2018 4:48 am
Maybe if we're only looking relative to very recent prices, but you don't have to go back that far to question why today's prices would be thought of as a "sale." I don't remember anyone claiming that VTI (Vanguard Total Stock Market ETF) was on sale at the beginning of 2018 when it was close to the same price, after having a massive run-up that returned 21 percent in 2017 and 13 percent in 2016.
That's not how it works.
We *expect* the price of both hamburger and VTI to increase something like 5% to 10% per year, but certainly not as a smooth exponential curve.
So it's the deviations from recently established plateaus that matter...
By that logic why not call every daily VTI price a "sale," and every daily hamburger price, since we expect they will both be much higher in the future?

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by livesoft » Fri Oct 12, 2018 5:57 am

jadd806 wrote:
Fri Oct 12, 2018 5:43 am
Shouldn't "serious money" already be fully invested such that there's nothing left over to buy dips?
Serious money is invested not only in equities, but also in bonds. So bonds can be sold and the money used to buy equities.
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by jadd806 » Fri Oct 12, 2018 6:13 am

livesoft wrote:
Fri Oct 12, 2018 5:57 am
jadd806 wrote:
Fri Oct 12, 2018 5:43 am
Shouldn't "serious money" already be fully invested such that there's nothing left over to buy dips?
Serious money is invested not only in equities, but also in bonds. So bonds can be sold and the money used to buy equities.
If you're trying to rebalance to bring your portfolio back in line with your risk tolerance, sure.

If you're trying to market time and buy the dip like many of the posters in this thread are hinting at, you're better off just holding more equities.

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by cjking » Fri Oct 12, 2018 6:26 am

On the subject of interest rates, in "Valuing Wall Street" Andrew Smithers said that central bank interest rates and bond yields are irrelevant in valuing stocks, therefore any models that use them are worthless. (This includes "the Fed model", whatever that is.) I think he said you can use the dividend discount model but the interest rate you need to discount by is not a bond rate, but an expected return on equities, or something like that. (I'm repeating from memory something I read more than fifteen years ago, so can't promise accuracy.)

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by columbia » Fri Oct 12, 2018 6:34 am

They’re more expensive than they were on January 2, 2018.

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by aristotelian » Fri Oct 12, 2018 6:38 am

The idea is that it is better to buy 10 shares for $900 than it is to pay $1000. If your expectation is that the market will eventually go to $200, it would be better to have a correction at the beginning of your accumulation than when the market is at $199.

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by watchnerd » Fri Oct 12, 2018 6:43 am

Lauretta wrote:
Fri Oct 12, 2018 3:46 am


Nisiprius post is very odd to me. He speaks of the dividend discount theory and rising rates. Yet rates did not rise suddenly overnight to justify the drop on Wednesday morning in US stock prices.
The market doesn't have to look backwards or react to what happens.

The market can look forward, i.e. "price in", what people think is going to happen.

If people think that interest rates are going to continue to rise, then the dividend discount theory can lead them to sell.

For me, personally, if long term Treasury rates hit 4%, I will reassess by asset allocation because I could fund my needs floor for decades with a long Treasury allocation.
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by nisiprius » Fri Oct 12, 2018 6:53 am

1) The very phrase "correction," if taken literally, does not suggest that stocks are undervalued, merely that they are now fairly valued after a period of being overvalued.

2) People don't just use the expression "stocks on sale" to refer to sudden, seemingly-inexplicable daily movements. On 9/12/2011, Steven Goldberg in Kiplinger's wrote:
5 Reasons to Buy Emerging-Markets Stocks Now: These stocks are selling well below their 2011 highs. It's a great time to buy.... 1. Emerging markets are on sale....
3) I agree that market movements are driven by a combination of forces including a large component of irrationality. Jesse Livermore said he was more successful when he was betting in "bucket shops," gambling parlors in which people bet on stock movements but no actual transactions took place; he was able to psych out the other bettors on a real-time, second by second basis. He won too much at bucket shops and wore out his welcome. When he was forced to actually buy and sell stocks at real brokerages, where execution wasn't instantaneous, he didn't do nearly as well.

The problem is that "stocks on sale" does not simply imply that stock movements contain elements of irrationality, "animal spirits," fear, greed, and so forth. It implies a specific plan of action, and a specific reason behind that plan of action. It has always seemed to me that it has a specific sales or propaganda value, which is to counteract customers' natural unhappiness at stock price drops, and keep them happy and enthusiastic about buying stocks at all times.

4) It's just an analogy, but we can stretch it a little farther. Our local CVS has a strategy of high prices and frequent sales. The sales are gimmicky. They're very fond of "buy one, get second at 50% off." The sales are of items with long shelf lives and usually are very wide in scope--it is not just selling something that's close to expiration. Thus, when an item is "on sale," yes, we do know that it is an example of literally the same item now being priced lower.

So, when there is a sale going on, should I automatically use my spare cash to stock up on anything I can an use that is on sale? The answer is "no, because if it is an item that is also sold by the Safeway in the same strip mall, the Safeway regular price is sometimes lower than the CVS sale price."

It is quite possible for stocks to drop 6%, not because 500 companies have all just issued weekly balance sheets showing that their fundamentals have instantaneously dropped 6%, but because they were irrationally high in the first place. Now something in the air spooks investors and suddenly made a lot of them realize that. The sudden downward dip is another irrational lurch, mostly irrational but triggered in part by accurate realization that the pre-dip price was irrational. But that doesn't mean they are undervalued now, just because the price has dropped. After the drop they might be too low--the market has overshot and they now are a bargain. Or they might now be fairly valued. Or they might well still be too high. Just like prices at CVS, certainly, if you need a gallon of distilled water, and you use it regularly, and you have no-cost storage for a second gallon, it is better to pick up two gallons at buy-one-get-second-50% off ($1.89 + $0.95 = $2.84) = than to buy two at the regular price.

But it may be better yet to buy them at Safeway for $1.19 each. And better yet to buy only what you need when you need it.

Footnote: If you'd invested $10,000 in the Vanguard Emerging Markets Index Fund, VEIEX, when Stephen Goldberg told us that EM stocks were on sale, today you'd have $10,769. In the developed markets fund, VDVIX,$14,544. Certainly, better to have bought them on 9/12/2012 than at the 2011 highs, but still not very good.
Last edited by nisiprius on Fri Oct 12, 2018 7:19 am, edited 2 times in total.
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by Lauretta » Fri Oct 12, 2018 7:16 am

watchnerd wrote:
Fri Oct 12, 2018 6:43 am
Lauretta wrote:
Fri Oct 12, 2018 3:46 am


Nisiprius post is very odd to me. He speaks of the dividend discount theory and rising rates. Yet rates did not rise suddenly overnight to justify the drop on Wednesday morning in US stock prices.
The market doesn't have to look backwards or react to what happens.

The market can look forward, i.e. "price in", what people think is going to happen.

If people think that interest rates are going to continue to rise, then the dividend discount theory can lead them to sell.
these are good points, but do you think that on Wednesday morning people suddenly thought that interest rates were going to be significantly higher than whant they had thought up to then? If so, why?
And how can the DDM explain the fall in stock prices in Europe, at 3.30 pm (the time at which the markets opened in the US)? Did European also suddenly think that rates were going to go up in Europe too, faster than previously expected?
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by typical.investor » Fri Oct 12, 2018 7:17 am

nisiprius wrote:
Fri Oct 12, 2018 6:53 am

3) It's just an analogy, but we can take it a little farther. Our local CVS is one that follows the too-familiar pattern of high prices and frequent sales. The sales are usually complicated and gimmicky. In this case, when an item is "on sale," we know that it is an example of literally the same item now being priced lower.
Right - same item.

What if it weren't? What if baby food was 50% or even 70% off because there was a 0.1% chance it was (slightly) contaminated (wouldn't kill anyone but might cause discomfort, sleepless nights, etc for some time).

It's clearly discounted, but is it on sale? I think it'd be mislabeled to suggest it's on sale.

Buying equities at a discount is a good way to make money (especially if other people are overreacting to the newly perceived risks and doing panic sales) if things get sorted out and go well, I don't mean to dispute that. But if there wasn't more risk or lowered expectations, there wouldn't be a discount.

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by watchnerd » Fri Oct 12, 2018 7:19 am

Lauretta wrote:
Fri Oct 12, 2018 7:16 am
watchnerd wrote:
Fri Oct 12, 2018 6:43 am
Lauretta wrote:
Fri Oct 12, 2018 3:46 am


Nisiprius post is very odd to me. He speaks of the dividend discount theory and rising rates. Yet rates did not rise suddenly overnight to justify the drop on Wednesday morning in US stock prices.
The market doesn't have to look backwards or react to what happens.

The market can look forward, i.e. "price in", what people think is going to happen.

If people think that interest rates are going to continue to rise, then the dividend discount theory can lead them to sell.
these are good points, but do you think that on Wednesday morning people suddenly thought that interest rates were going to be significantly higher than whant they had thought up to then? If so, why?
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by typical.investor » Fri Oct 12, 2018 7:27 am

Lauretta wrote:
Fri Oct 12, 2018 7:16 am
watchnerd wrote:
Fri Oct 12, 2018 6:43 am
Lauretta wrote:
Fri Oct 12, 2018 3:46 am


Nisiprius post is very odd to me. He speaks of the dividend discount theory and rising rates. Yet rates did not rise suddenly overnight to justify the drop on Wednesday morning in US stock prices.
The market doesn't have to look backwards or react to what happens.

The market can look forward, i.e. "price in", what people think is going to happen.

If people think that interest rates are going to continue to rise, then the dividend discount theory can lead them to sell.
these are good points, but do you think that on Wednesday morning people suddenly thought that interest rates were going to be significantly higher than whant they had thought up to then? If so, why?
And how can the DDM explain the fall in stock prices in Europe, at 3.30 pm (the time at which the markets opened in the US)? Did European also suddenly think that rates were going to go up in Europe too, faster than previously expected?
Maybe it had to do with Tuesdays IMF forecast that revised global growth downward due to trade frictions.
Maybe people felt BMW (and others) couldn't make as much money if the US devolved into a recession.
Maybe news from Italy (and more potential challenges to the EU) is scaring Americans and they pulled their money from European equities as they were going into risk-off mode?
____(fill in the blank )____

Not saying we should worry about those things, but the market does reflect that information.

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by vineviz » Fri Oct 12, 2018 7:33 am

Lauretta wrote:
Fri Oct 12, 2018 7:16 am
these are good points, but do you think that on Wednesday morning people suddenly thought that interest rates were going to be significantly higher than what they had thought up to then?
Sure. Why not?
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by Peculiar_Investor » Fri Oct 12, 2018 7:35 am

Are we in Correction territory?
Investopedia wrote:A correction is a movement, almost always temporary and happening in reverse, that accounts for at least a 10 percent adjustment to fix the overvaluation of a stock, bond, commodity or index.
My preferred way of thinking of things such as the recent 3% daily movements downward are to use Ben Graham's Mr. Market parable.
Zacks wrote:The fable centers on a business relationship between you and the famous Mr. Market. Each day, with the exception of the weekend when Mr. Market retreats to his quarters, he knocks on your door and presents you with an offer. You can either buy his ownership stake of the partnership or, on the other hand, you can sell your share to him. It is completely up to you—the proverbial ball is in your court. But if it were only that easy…

Mr. Market constantly rides an emotional rollercoaster. On the days in which he offers to purchase your stake in the partnership, optimism is flowing out of his ears. He is in a great mood and firmly believes the future is nothing other than bright. As a result, he will freely purchase your piece of the pie—at a premium, nonetheless.

Then there is his other side, when Mr. Market’s pessimism is oozing out of every pore of his body. He sees nothing other than a dismal future for your partnership and wants out as soon as possible. Consequently, he is prepared to sell you his stake at a highly-reduced price. He desires to simply wipe his hands clean of the deal.

Even though Mr. Market’s emotions teeter on the brinks of insanity, and are very difficult to deal with, you should learn to take advantage of them. They can in fact work in your favor.

Greed and Fear Rule the Market

Those who participate in the stock market often find themselves caught up in waves of over-optimism, which can quickly lead to greed. This in turn drives the price of stocks through the roof. There are also those days where investors find themselves weighed down by pessimism, rapidly being overtaken by fear. Stock prices plummet as a result, often to lows never seen before. Investors are human beings after all, and they are not immune to various emotions that can create havoc.

Getting back to Mr. Graham, he once stated, “Basically, price fluctuations have only one significant meaning for the true investor. They provide him an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times, he will do better if he forgets about the stock market.”
Most days it is best to ignore the stock market and particularly the noise from the talking heads who attempt to interpret what it means. That's the purpose of having a plan and staying the course of your plan. Ignore the noise, such as whether or not stocks are "on sale".

The market is made up of many participants who have a large variety of reasons to be investing and a huge range of valuation techniques. What is "on sale" to one market participant doesn't mean that it is "on sale" to everyone, because market pricing and action isn't an exact science and rationale. Remember Mr. Market constantly rides an emotional rollercoaster.
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by bgf » Fri Oct 12, 2018 7:49 am

price and value are not the same thing. over long periods of time, the market price tends to track the value of a company (its earnings power), but there are certainly times when price and value diverge, sometimes by a great deal. that is all Buffett means by "buying stocks on sale." he is buying a stock for a price that is far below what Buffett believes is its value (its future earnings power). this is what he calls its "margin of safety."

if this seems simple and common sense to you, that is because it is. the opposing EMH view is distorted. it conflates price and value as being the same thing.
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by Alexa9 » Fri Oct 12, 2018 7:59 am

It's all based on perspective. A young investor shouldn't mind a dip or even a crash and can consider stocks on sale. If you're in retirement you don't want stocks to be on sale because it could be a significant chunk of your nest egg. However, the market can't go up forever, so you should be insulated with a large chunk of bonds in retirement.

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by watchnerd » Fri Oct 12, 2018 8:14 am

Alexa9 wrote:
Fri Oct 12, 2018 7:59 am
It's all based on perspective. A young investor shouldn't mind a dip or even a crash and can consider stocks on sale. If you're in retirement you don't want stocks to be on sale because it could be a significant chunk of your nest egg. However, the market can't go up forever, so you should be insulated with a large chunk of bonds in retirement.
I would say the exact opposite.

For a young investor, the whole idea that present day values have any predictive worth as an indicator of future returns is almost entirely irrelevant if she has decades until retirement.

The price today has very little bearing on valuation and returns 20-30 years from now. Anything could happen in the intervening period.
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by ReformedSpender » Fri Oct 12, 2018 8:38 am

It's all relative. Are US stocks "on sale" when P/E is still around 24 after this recent pullback yet International stocks sit at 13?

:beer
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by Alexa9 » Fri Oct 12, 2018 8:41 am

watchnerd wrote:
Fri Oct 12, 2018 8:14 am
I would say the exact opposite.

For a young investor, the whole idea that present day values have any predictive worth as an indicator of future returns is almost entirely irrelevant if she has decades until retirement.

The price today has very little bearing on valuation and returns 20-30 years from now. Anything could happen in the intervening period.
Buy low, sell high. If I was a young investor, I would rather buy in 2008 than 2007. I would want a strong bull market before I retire. I don't really care what it does before that. With dividends reinvested and rebalancing in market swings, it's not that important what the market does when you're young.

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by minimalistmarc » Fri Oct 12, 2018 8:46 am

For the next 20 years I will only be a buyer if the all world and will be 100% equities so I do see a price drop as a sale.

I hate it when mini drops like this one quickly rebound.

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by watchnerd » Fri Oct 12, 2018 8:47 am

Alexa9 wrote:
Fri Oct 12, 2018 8:41 am
watchnerd wrote:
Fri Oct 12, 2018 8:14 am
I would say the exact opposite.

For a young investor, the whole idea that present day values have any predictive worth as an indicator of future returns is almost entirely irrelevant if she has decades until retirement.

The price today has very little bearing on valuation and returns 20-30 years from now. Anything could happen in the intervening period.
Buy low, sell high. If I was a young investor, I would rather buy in 2008 than 2007. I would want a strong bull market before I retire. I don't really care what it does before that. With dividends reinvested and rebalancing in market swings, it's not that important what the market does when you're young.
What you want has nothing to do with what you can predict.

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by alex_686 » Fri Oct 12, 2018 8:52 am

Lauretta wrote:
Fri Oct 12, 2018 3:46 am
He speaks of the dividend discount theory and rising rates. Yet rates did not rise suddenly overnight to justify the drop on Wednesday morning in US stock prices.
Are you sure? Unpack the dividend discount model. The P/E ratio of a stock is driven by the driven by the difference in the "Required Return" and "Growth Rate". Currently the difference between these are very narrow. Small changes in either can have a large impact on the PE ratio.

Next, the "On Sale" idea does not square with the Boglehead's philosophy. Boglehead's is built on top of the Efficient Market Hypothesis. Maybe the market is high, maybe it is low, but we are not smart enough to tell - so we stick to our IPS. Warren Buffet is not a passive investor. He makes lots of active bets. Then again, I don't totally buy it when he says things are on sale. I always feel it is a bit of a ad hoc response when he buys something. After all, would he buy anything at or above market value?

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by The Wizard » Fri Oct 12, 2018 8:58 am

nps wrote:
Fri Oct 12, 2018 5:56 am
The Wizard wrote:
Fri Oct 12, 2018 5:45 am
nps wrote:
Fri Oct 12, 2018 4:48 am
Maybe if we're only looking relative to very recent prices, but you don't have to go back that far to question why today's prices would be thought of as a "sale." I don't remember anyone claiming that VTI (Vanguard Total Stock Market ETF) was on sale at the beginning of 2018 when it was close to the same price, after having a massive run-up that returned 21 percent in 2017 and 13 percent in 2016.
That's not how it works.
We *expect* the price of both hamburger and VTI to increase something like 5% to 10% per year, but certainly not as a smooth exponential curve.
So it's the deviations from recently established plateaus that matter...
By that logic why not call every daily VTI price a "sale," and every daily hamburger price, since we expect they will both be much higher in the future?
I effectively did that for forty years of employment and it worked out fine.
Now in retirement, I don't have as much excess income to invest, but when I have an extra thousand or two, I simply look for a good day to toss it into VTSAX.
Yesterday at 3:45pm was a good time to do so...
Attempted new signature...

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by digit8 » Fri Oct 12, 2018 9:04 am

Like a lot of rules of thumb, "stocks on sale" is a succinct way to put something that only makes sense if you add some qualifiers mentally, foremost among them that while there are no guaruntees in life, you can make an educated guess. It was not unreasonable in 2007-2008 for those hardy souls buying heavily of the S&P 500 to think they were picking up sale prices. If they'd gone all in on Kmart or Sears during the same time period, on the other hand.....
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by Lauretta » Fri Oct 12, 2018 9:14 am

alex_686 wrote:
Fri Oct 12, 2018 8:52 am
Lauretta wrote:
Fri Oct 12, 2018 3:46 am
He speaks of the dividend discount theory and rising rates. Yet rates did not rise suddenly overnight to justify the drop on Wednesday morning in US stock prices.
Are you sure? Unpack the dividend discount model. The P/E ratio of a stock is driven by the driven by the difference in the "Required Return" and "Growth Rate". Currently the difference between these are very narrow. Small changes in either can have a large impact on the PE ratio.

Next, the "On Sale" idea does not square with the Boglehead's philosophy. Boglehead's is built on top of the Efficient Market Hypothesis. Maybe the market is high, maybe it is low, but we are not smart enough to tell - so we stick to our IPS. Warren Buffet is not a passive investor. He makes lots of active bets. Then again, I don't totally buy it when he says things are on sale. I always feel it is a bit of a ad hoc response when he buys something. After all, would he buy anything at or above market value?
Maybe the idea of 'stocks on sale' does not square with the Boglehead's philosophy, but this does not mean it is not true. Also, EMH may be the foundation of Bogleheads philosophy, but it has nothing to do with Mr Bogle's decision to create index funds. I saw an interview of him where he says that he didn't even know about EMH at the time.
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by Lauretta » Fri Oct 12, 2018 9:20 am

watchnerd wrote:
Fri Oct 12, 2018 7:19 am
Lauretta wrote:
Fri Oct 12, 2018 7:16 am
watchnerd wrote:
Fri Oct 12, 2018 6:43 am
Lauretta wrote:
Fri Oct 12, 2018 3:46 am


Nisiprius post is very odd to me. He speaks of the dividend discount theory and rising rates. Yet rates did not rise suddenly overnight to justify the drop on Wednesday morning in US stock prices.
The market doesn't have to look backwards or react to what happens.

The market can look forward, i.e. "price in", what people think is going to happen.

If people think that interest rates are going to continue to rise, then the dividend discount theory can lead them to sell.
these are good points, but do you think that on Wednesday morning people suddenly thought that interest rates were going to be significantly higher than whant they had thought up to then? If so, why?
IPCC global warming report
Right. So today I guess people are finding inaccuracies in it since stocks are up nearly 2%
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by bgf » Fri Oct 12, 2018 9:21 am

Lauretta wrote:
Fri Oct 12, 2018 9:14 am
alex_686 wrote:
Fri Oct 12, 2018 8:52 am
Lauretta wrote:
Fri Oct 12, 2018 3:46 am
He speaks of the dividend discount theory and rising rates. Yet rates did not rise suddenly overnight to justify the drop on Wednesday morning in US stock prices.
Are you sure? Unpack the dividend discount model. The P/E ratio of a stock is driven by the driven by the difference in the "Required Return" and "Growth Rate". Currently the difference between these are very narrow. Small changes in either can have a large impact on the PE ratio.

Next, the "On Sale" idea does not square with the Boglehead's philosophy. Boglehead's is built on top of the Efficient Market Hypothesis. Maybe the market is high, maybe it is low, but we are not smart enough to tell - so we stick to our IPS. Warren Buffet is not a passive investor. He makes lots of active bets. Then again, I don't totally buy it when he says things are on sale. I always feel it is a bit of a ad hoc response when he buys something. After all, would he buy anything at or above market value?
Maybe the idea of 'stocks on sale' does not square with the Boglehead's philosophy, but this does not mean it is not true. Also, EMH may be the foundation of Bogleheads philosophy, but it has nothing to do with Mr Bogle's decision to create index funds. I saw an interview of him where he says that he didn't even know about EMH at the time.
there is no logical inconsistency or contradiction between investing in index funds and also claiming that stocks can be bought "on sale" from time to time.
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by watchnerd » Fri Oct 12, 2018 9:23 am

Lauretta wrote:
Fri Oct 12, 2018 9:20 am
watchnerd wrote:
Fri Oct 12, 2018 7:19 am
Lauretta wrote:
Fri Oct 12, 2018 7:16 am
watchnerd wrote:
Fri Oct 12, 2018 6:43 am
Lauretta wrote:
Fri Oct 12, 2018 3:46 am


Nisiprius post is very odd to me. He speaks of the dividend discount theory and rising rates. Yet rates did not rise suddenly overnight to justify the drop on Wednesday morning in US stock prices.
The market doesn't have to look backwards or react to what happens.

The market can look forward, i.e. "price in", what people think is going to happen.

If people think that interest rates are going to continue to rise, then the dividend discount theory can lead them to sell.
these are good points, but do you think that on Wednesday morning people suddenly thought that interest rates were going to be significantly higher than whant they had thought up to then? If so, why?
IPCC global warming report
Right. So today I guess people are finding inaccuracies in it since stocks are up nearly 2%
That's exactly my point. We don't know and it's pointless to speculate.

Wed could have been anything. Today could be anything.
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by alex_686 » Fri Oct 12, 2018 9:33 am

Lauretta wrote:
Fri Oct 12, 2018 9:14 am
Also, EMH may be the foundation of Bogleheads philosophy, but it has nothing to do with Mr Bogle's decision to create index funds. I saw an interview of him where he says that he didn't even know about EMH at the time.
Eh - Bogle is not noted for being a theorist. And does a practitioner need to know the theory before they do something? That being said, the people who first theorized about passive investing and launched the first index fund explicated credited their graduate professor Eugene Fama and his work on EMH.
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by alex_686 » Fri Oct 12, 2018 9:38 am

bgf wrote:
Fri Oct 12, 2018 9:21 am
there is no logical inconsistency or contradiction between investing in index funds and also claiming that stocks can be bought "on sale" from time to time.
OK, please explain. To restate my position, for stocks to be "on sale" this means one can figure out that the market has mispriced stocks. If so, the rational choice would be to buy more stocks. Sell your bonds, mortgage your home, buy on margin. That is, to make a active choice on your AA. Conversely, this also means one can tell if the market is too high, that one should sell your stocks, buy bonds, or maybe even short stocks.

I will grant that we are able to tell these things in retrospect, but can you forecast them?

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by Lauretta » Fri Oct 12, 2018 10:03 am

alex_686 wrote:
Fri Oct 12, 2018 9:33 am
Lauretta wrote:
Fri Oct 12, 2018 9:14 am
Also, EMH may be the foundation of Bogleheads philosophy, but it has nothing to do with Mr Bogle's decision to create index funds. I saw an interview of him where he says that he didn't even know about EMH at the time.
Eh - Bogle is not noted for being a theorist. And does a practitioner need to know the theory before they do something? That being said, the people who first theorized about passive investing and launched the first index fund explicated credited their graduate professor Eugene Fama and his work on EMH.
Exactly, Mr Bogle said in the video that Fama and collegues claimed all the credit for index funds, whereas he had never even heard of them when he created his. In other words, my take on it is that to be an indexer you don't have to believe in EMH. I think EMH is pretty absurd, some of the claims are preposterous, but I index because of low cost and my own inability to pick stocks. For Buffett or Swensen indexing does not make sense, because they know how to pick stocks or how to pick fund managers. I don't know how to do either.
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by Lauretta » Fri Oct 12, 2018 10:11 am

watchnerd wrote:
Fri Oct 12, 2018 9:23 am
Lauretta wrote:
Fri Oct 12, 2018 9:20 am
watchnerd wrote:
Fri Oct 12, 2018 7:19 am
Lauretta wrote:
Fri Oct 12, 2018 7:16 am
watchnerd wrote:
Fri Oct 12, 2018 6:43 am


The market doesn't have to look backwards or react to what happens.

The market can look forward, i.e. "price in", what people think is going to happen.

If people think that interest rates are going to continue to rise, then the dividend discount theory can lead them to sell.
these are good points, but do you think that on Wednesday morning people suddenly thought that interest rates were going to be significantly higher than whant they had thought up to then? If so, why?
IPCC global warming report
Right. So today I guess people are finding inaccuracies in it since stocks are up nearly 2%
That's exactly my point. We don't know and it's pointless to speculate.

Wed could have been anything. Today could be anything.
but if you can't objectively determine what it is, how can you say that there was a rational cause for the drop? In science, if I say there is a cause for an observed phenomenon, I can tell what cause it is, and my statement can be tested.
You are saying that you know there was a cause because markets are rational, but that this cause is unknown and unknowable.
It does not make any sense to me.
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by Valuethinker » Fri Oct 12, 2018 10:20 am

minimalistmarc wrote:
Fri Oct 12, 2018 8:46 am
For the next 20 years I will only be a buyer if the all world and will be 100% equities so I do see a price drop as a sale.

I hate it when mini drops like this one quickly rebound.
Be warned, bear markets don't come with signs "this is a bear market".

Stocks drop. Buyers rush in. A down day or week is seldom followed by another down day or week. Stocks bounce.

And then it goes down again. I have lost count of the number of times we thought the Japanese bear market was finally over. Long ago Japanese stocks dropped to ridiculously cheap levels on a PE basis or P/ Book basis.

I don't see any particular thing out there that says "we should be in a bear market" a la Lehmans bankruptcy. But, then, it's entirely unclear why the market decided in May 2000 that stocks had gotten over cooked, and that they should revert to mean. Was it the flotation of Lastminute.com? Was it the publication of the Barron's article on dot com cash burn? Or was it something else.

I remember hanging on through the next 12 months, ever more sure that we had hit bottom. Once 9-11 hit, I more or less gave up hope (and my job gave up hope, too). The bear market however continued then for another 18 months.

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by MichCPA » Fri Oct 12, 2018 10:21 am

Stocks are priced logically over time, but daily movements are a random walk.

As far as 'on sale' that is relative to some other price. A stock can be 'on sale' and still be a terrible deal. I hear Sears is about to go on clearance. All sales final!! :wink:

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by Valuethinker » Fri Oct 12, 2018 10:25 am

cjking wrote:
Fri Oct 12, 2018 6:26 am
On the subject of interest rates, in "Valuing Wall Street" Andrew Smithers said that central bank interest rates and bond yields are irrelevant in valuing stocks, therefore any models that use them are worthless. (This includes "the Fed model", whatever that is.) I think he said you can use the dividend discount model but the interest rate you need to discount by is not a bond rate, but an expected return on equities, or something like that. (I'm repeating from memory something I read more than fifteen years ago, so can't promise accuracy.)
The Fed Model compares interest rates to the PE ratio of stocks (actually the E/P ratio which is kind of like an interest rate).

There are hedge funds that trade on it, because it does move markets - even though there's no good theoretical basis for it.

DDM

Ke = D1/P0 + g

Or P0 = 1/(Ke -g)

where P0 = current share price
D1 = dividend next year expected (sometimes set = (1+g)D0)
Ke = required cost of equity (may determine by CAPM or other means)
g = expected long run growth rate of dividends

Main problem in using it is adjusting for share buybacks. Also forecasting something to infinity

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by Valuethinker » Fri Oct 12, 2018 10:27 am

Lauretta wrote:
Fri Oct 12, 2018 3:46 am
I have seen the expression 'stocks on sale' in many places, including the writings of Jonathan Clements and some posts on Bogleheads. When Warren Buffett linekend himself to an oversexed person in a harem after the stock crash of 1973-74, he was saying the same thing.
Yet yesterday I came across a post by nisiprius which strongly argued against the use of this expression:
I hate the "stocks on sale" meme. Even the slightest thought will make you realize it is distorted marketing talk. In a supermarket, usually we know that an item on sale really is exactly the same item as it was a week before.

But when we buy day-old bread, or--in our local supermarket--meat with a "manager's special" mark-down, which means it's close to the pull date--it is not the same item. Ditto a "scratch and dent sale," or an "out of box sale." They are priced less because they are worth less. You don't automatically buy them just because the price is low. You make a personal evaluation of how much the reasons for the sale price matter to you. If you're going to cook meat loaf tonight, then the short date on the hamburger on sale doesn't matter to you, because you aren't going to store it, and really fresh taste isn't important. If you're going to serve it to guests in a backyard cookout three days from now, it might be important.

There's no guarantee that today's stocks have "the same" value as yesterday's. Under the dividend discount theory of stock valuation, a rise in interest rates has made them really be worth less.
Nisiprius post is very odd to me. He speaks of the dividend discount theory and rising rates. Yet rates did not rise suddenly overnight to justify the drop on Wednesday morning in US stock prices. What is even more odd, is that European stocks, particularly small caps, sharply dropped on Wednesday at 3.30pm (time in Milan) when the stock exchange opened in the US, even though rates of German bunds, which are considered the risk free rate in Euroland, if anything have very slightly decreased.
How can a sharp drop like that of the last 2 days (and the corresponding recovery this morning in European markets), rationally be explained by the dividend discount model? How can some stocks really have become worth 10% less in 24 hours, and now be worth again close to what they were worth on Tueday?
How can someone with an open, clear and rational mind (unaffected by academic dogmas) not recognise that those sudden drops are due to fear and the irrational behaviour of crowds rushing to sell (it would be interesting to know how many of the people who sold on Wednesday knew about the DDM), and not recognise that indeed stocks in the past two days were at a 'sale' compared to earlier in the week? (I am not saying that they may drop further, I am saying that no new information, become available since Tuesday night, has justified the drop in prices we have witnessed).
The problem with "stocks on sale" is whether there is a permanent change in the future value & growth of dividends.

Normal logic says not, that stocks in the long run "fade" back to the long run average.

Hence, if you have a long enough time horizon, stocks are "on sale" when they fall in price.

However this is a problem with all macroeconomic modelling. Productivity growth has not recovered to pre 2008 levels, pretty much across the world. If productivity growth and hence in the long run GDP growth and corporate earnings growth (these cannot diverge forever) are not going to recover, then something has fundamentally changed about equity values.

Stocks are not "on sale" but are actually repriced to reflect a new, slower growth world.

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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by Lauretta » Fri Oct 12, 2018 10:31 am

MichCPA wrote:
Fri Oct 12, 2018 10:21 am
Stocks are priced logically over time, but daily movements are a random walk.

As far as 'on sale' that is relative to some other price. A stock can be 'on sale' and still be a terrible deal. I hear Sears is about to go on clearance. All sales final!! :wink:
Yes that's correct. But for ETFs it's a bit different: suppose you wanted to add to an ETF, when there's a price drop it's a good time to do it.

I also think it might make sense to increase one's allocation in stocks after a bear market. For example I am roughly 50/50 at the moment. If stocks fell by 30% I would probably go 60/40 (at least that's what I say now, not sure I'd have the courage to do it then :wink: ) Jonathan Clements went close to 100% stocks in 2009.
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by Valuethinker » Fri Oct 12, 2018 10:33 am

The Wizard wrote:
Fri Oct 12, 2018 4:20 am
Stock prices are only weakly linked to academic theories and financial facts.
Majority of pricing moves are based on emotional expectations.
Stocks, in other words, tend to follow a random walk ;-). Hence Burton Malkiel "A Random Walk down Wall Street".
So especially when talking about an S&P 500 or total market index fund, yes, those are definitely "on sale" now.
Individual stocks like Tesla or Apple? Hmmm, I'm not sure, but I'm not interested in buying individual stocks.
On sale ... compared to what? Do you know their future prospects.
I also like to buy on the dips, so now is a good time to play that card as opposed to when the indices were pushing record highs.
I'm retired, so no longer have regular contributions to stock funds going in with each pay check.
So it's much easier to accumulate excess income (when there is some) and buy VTSAX when on sale now...
And hope we are not in 1968, nor Japan 1989. Because "buying the dips" quickly turns into "digging an ever deeper trench".

Of course, if it's 1968, you are only going to lose c. 40% of your real value over the subsequent 12 years so not too bad -- as long as you don't need to spend any of that money ;-).

Even if it is just May 2000 then we have quite a long way to go - March 2003 was when the market bottomed.

FWIW I think this is a correction and until the market gets sight of the next US recession (and it will get there before any of us as individuals) things will likely continue as they are.

But there are some big risks brewing out there: under regulated parts of the financial system; Italy & Italian banks: Shadow Banking System; declining credit quality in corporate loans and bonds; geopolitical risk & political risk (US-Iran for example; flashpoints with Russia).

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Lauretta
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Re: Does it make sense to consider that stocks are 'on sale' when there's a correction?

Post by Lauretta » Fri Oct 12, 2018 10:35 am

Valuethinker wrote:
Fri Oct 12, 2018 10:27 am

Stocks are not "on sale" but are actually repriced to reflect a new, slower growth world.
So you mean that the growth prospects for European small caps suddenly changed on Wednesday at 3.30 pm (when their price suddenly dropped), and have today improved?
When everyone is thinking the same, no one is thinking at all

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