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

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
alex_686
Posts: 3936
Joined: Mon Feb 09, 2015 2:39 pm

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 10:41 am

Lauretta wrote:
Fri Oct 12, 2018 10:03 am
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.
First, what claims of EMH do you find preposterous?

Second, let me counter you argument by pointing you to another famous person, Marconi. He was pretty ignorant of physics, and the theories he came up with to explain radio were wrong. So, do you need to know theory to be a inventor? No. Do you need to know physics to play a radio? No.

Can we close our eyes are pretend on the underlying theories of passives investing does not work? Tell me what parts of EMH you don't believe in and I will show you what parts of passive investing no longer works. As a start, if you discount EMH entirely then their is no Equity Risk Premium and thus no expectation that the market will generate positive returns. If you don't believe that the market will generate positive returns, then why are you investing in the stock market?

User avatar
willthrill81
Posts: 6136
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

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

Post by willthrill81 » Fri Oct 12, 2018 10:48 am

alex_686 wrote:
Fri Oct 12, 2018 10:41 am
Lauretta wrote:
Fri Oct 12, 2018 10:03 am
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.
First, what claims of EMH do you find preposterous?
Preposterous is too strong of a description of the EMH, but the EMH assumes that market participants are rational beings, the biases of any one of whom are cancelled out in the other direction by the other participants. Behavioral finance has shot that down IMHO. I know several with Ph.D.s in finance, and none of them believe the EMH to be strictly accurate.

Is the EMH mostly accurate? Probably, which is why it's difficult to consistently generate alpha after expenses. But that doesn't mean that it's entirely accurate in every situation all the time. Bogle's 'animal spirits' are all too real I'm afraid.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

alex_686
Posts: 3936
Joined: Mon Feb 09, 2015 2:39 pm

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 10:50 am

Lauretta wrote:
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?
We don't need to growth to get lower prices.

The Equity Risk Premium could have increased. Growth remains the same but the risk associated with it increases. Or growth and risk remains constant, but the price people are willing to pay for either increases.

Or the Risk Free Rate changed. Maybe people are finally confident that long term rates will start to increase. Long term bonds are inching up.

Lastly, most of the formulas we have been kicking around are liner. Most of the better models I have seen are non-liner, with multiple stable nodes where the market shifts back and forth between the 2. For example, non-liner models can kick out heads (1) or tails (0), but not .5. There is no gradual shift from one stable node to the next.

bloom2708
Posts: 4907
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

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

Post by bloom2708 » Fri Oct 12, 2018 10:57 am

Stocks might be on sale today.

We could also have 12 more trading days in a row down 500 to 800. Or 23 days. Nobody knows. Don't sell. Keep buying when you plan to buy. Re-balance if you get "off" by 5%. There are sales (small caps) and Sales (Cap) and SALES (all caps). If you are fully invested, just keep doing what you are doing.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

alex_686
Posts: 3936
Joined: Mon Feb 09, 2015 2:39 pm

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 10:59 am

willthrill81 wrote:
Fri Oct 12, 2018 10:48 am
Preposterous is too strong of a description of the EMH, but the EMH assumes that market participants are rational beings, the biases of any one of whom are cancelled out in the other direction by the other participants. Behavioral finance has shot that down IMHO. I know several with Ph.D.s in finance, and none of them believe the EMH to be strictly accurate.

Is the EMH mostly accurate? Probably, which is why it's difficult to consistently generate alpha after expenses. But that doesn't mean that it's entirely accurate in every situation all the time. Bogle's 'animal spirits' are all too real I'm afraid.
First, EMH does not assume that each and every market participant is rational. It assumes that in aggregate that the market is rational. One investor's irrational fear is offset by another's irrational greed. All you need for the model to work is for a few rational investors with large pots of money.

Second, "mostly accurate" is a pretty good description of the semi-strong version of the model, which is the one that I ascribe too. So were are back in EMH land. And this is important, because it tells us how strong EMH is (pretty strong) and where the holes are, and how to exploit them. And you can exploit the holes, and you can buy stocks when they are cheap with skill and luck, but you have to leave the land of passive investing.

User avatar
Lauretta
Posts: 805
Joined: Wed Jul 05, 2017 6:27 am

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

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

alex_686 wrote:
Fri Oct 12, 2018 10:41 am
Lauretta wrote:
Fri Oct 12, 2018 10:03 am
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.
First, what claims of EMH do you find preposterous?

Second, let me counter you argument by pointing you to another famous person, Marconi. He was pretty ignorant of physics, and the theories he came up with to explain radio were wrong. So, do you need to know theory to be a inventor? No. Do you need to know physics to play a radio? No.

Can we close our eyes are pretend on the underlying theories of passives investing does not work? Tell me what parts of EMH you don't believe in and I will show you what parts of passive investing no longer works. As a start, if you discount EMH entirely then their is no Equity Risk Premium and thus no expectation that the market will generate positive returns. If you don't believe that the market will generate positive returns, then why are you investing in the stock market?
For example, prices are not correlated to the stream of new information becoming available, because they fluctuate a lot every day and this is totally uncorrelated to the stream of information on the corresponding securities. They change all the time during the day, whilst the available information hasn't. This is an empirical finding. Jean Philippe Bouchaud published an article on this (I think I posted the link in another Bogleheads post - don't have it here now). The reason this does not disprove EMH is that EMH is not a scientific theory, in the sense that Karl Popper defined scientific theories, which should be falsifiable. EMH is not falsifiable because it is a dogma or a tautology and can never be tested, because of the joint hypothesis problem https://en.wikipedia.org/wiki/Joint_hypothesis_problem

Second, as Buffett has argued in the Superinvestors of Grahamanddoddsville, many investors have beaten the market using the same method, taught by Graham. The chances that this was due to luck for all of them are extremely small.

Third, as I said above it makes sense to use index funds even though I believe EMH is totally absurd. The reason is that I think that there are people out there who can pick stocks and beat the market, but I can't pick stocks and I don't know how to identify those people in advance. So I am content with getting market returns (if I were to buy stocks myself, I would probably be taken advantage of by those who are smarter than me at this). :happy
When everyone is thinking the same, no one is thinking at all

User avatar
vineviz
Posts: 2066
Joined: Tue May 15, 2018 1:55 pm

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

Post by vineviz » Fri Oct 12, 2018 11:20 am

alex_686 wrote:
Fri Oct 12, 2018 10:41 am
Tell me what parts of EMH you don't believe in and I will show you what parts of passive investing no longer works.
I'd go one step farther: tell me what parts of EMH you don't believe in and I will show you what parts of EMH you don't fully understand.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
Lauretta
Posts: 805
Joined: Wed Jul 05, 2017 6:27 am

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

Post by Lauretta » Fri Oct 12, 2018 11:20 am

willthrill81 wrote:
Fri Oct 12, 2018 10:48 am
alex_686 wrote:
Fri Oct 12, 2018 10:41 am
Lauretta wrote:
Fri Oct 12, 2018 10:03 am
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.
First, what claims of EMH do you find preposterous?
Preposterous is too strong of a description of the EMH, but the EMH assumes that market participants are rational beings, the biases of any one of whom are cancelled out in the other direction by the other participants. Behavioral finance has shot that down IMHO. I know several with Ph.D.s in finance, and none of them believe the EMH to be strictly accurate.

Is the EMH mostly accurate? Probably, which is why it's difficult to consistently generate alpha after expenses. But that doesn't mean that it's entirely accurate in every situation all the time. Bogle's 'animal spirits' are all too real I'm afraid.
This is a bit off topic, but I am wondering, did your trend following method protect you on Wednesday? I am wondering because Antonacci says that having 100% in Dual momentum is ok - and I was wondering how such an investor would have felt in the past 2 days.
When everyone is thinking the same, no one is thinking at all

User avatar
vineviz
Posts: 2066
Joined: Tue May 15, 2018 1:55 pm

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

Post by vineviz » Fri Oct 12, 2018 11:24 am

willthrill81 wrote:
Fri Oct 12, 2018 10:48 am

Preposterous is too strong of a description of the EMH, but the EMH assumes that market participants are rational beings, the biases of any one of whom are cancelled out in the other direction by the other participants.
Many people think that EMH makes that assumption, but it doesn't.
willthrill81 wrote:
Fri Oct 12, 2018 10:48 am
I know several with Ph.D.s in finance, and none of them believe the EMH to be strictly accurate.
That's a straw man: no model is "strictly accurate". That's what they call them models, and why the test of a model is whether or not it makes useful predictions not whether or not it's possible to imagine a scenario in which it might not be "strictly accurate".

I suspect your friends with Ph.D.s in finance know this. If they don't, they probably out to ask about a refund for the cost of their degrees.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
Lauretta
Posts: 805
Joined: Wed Jul 05, 2017 6:27 am

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

Post by Lauretta » Fri Oct 12, 2018 11:31 am

vineviz wrote:
Fri Oct 12, 2018 11:24 am
willthrill81 wrote:
Fri Oct 12, 2018 10:48 am

Preposterous is too strong of a description of the EMH, but the EMH assumes that market participants are rational beings, the biases of any one of whom are cancelled out in the other direction by the other participants.
Many people think that EMH makes that assumption, but it doesn't.
willthrill81 wrote:
Fri Oct 12, 2018 10:48 am
I know several with Ph.D.s in finance, and none of them believe the EMH to be strictly accurate.
That's a straw man: no model is "strictly accurate". That's what they call them models, and why the test of a model is whether or not it makes useful predictions not whether or not it's possible to imagine a scenario in which it might not be "strictly accurate".

I suspect your friends with Ph.D.s in finance know this. If they don't, they probably out to ask about a refund for the cost of their degrees.
EMH is not a model. It doesn't have any predictive power. It cannot be tested and as such it can never be falisfied. It is a dogma or tautology, because you always need an asset pricing model to go with it, and you could always claim that the problem lies with the latter which need improving. You can google the 'joint hypothesis problem'.
I don't have a PhD in finance but I have one in physics, so I know a bit about predictive models and how to test them..
When everyone is thinking the same, no one is thinking at all

Valuethinker
Posts: 36349
Joined: Fri May 11, 2007 11:07 am

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

Post by Valuethinker » Fri Oct 12, 2018 11:36 am

Lauretta wrote:
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?
No I mean the marginal buyer & seller in the market on that day at that time decided that. If the market was particularly illiquid at that moment, then you could get a large price move.

There's lots of technical factors in ST stock price movements by the way. If for example retail investors pull money out, then the associated funds will have to sell holdings. Or "Bonfire of the Quants" in August 2007 when value stocks fell - some hedge fund was forced to liquidate its holdings, these are illiquid stocks thus you see a sharp downward movement in stock prices.

It's also often the case that there are limit orders, that start buying if the price drops too much. Stocks don't usually drop in a straight line (indices that is - individual stocks can drop an awful lot on a piece of news) but often bounce after 1-5 bad days. That doesn't mean that the bear market is over (or conversely that the bull market is over).

In the case of the Crash of 1987 it was not clear until a long time after what a large role Portfolio Insurance (which dictated selling into falling markets) had played. I suspect that low volatility in recent times has played a trick on investors and has led to some investors being quite exposed when volatility restored itself.

There's a rich literature on market microstructure - Alisa Roel is a name that comes to mind (she was at LSE in the early 1990s).

User avatar
nisiprius
Advisory Board
Posts: 36883
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

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

Post by nisiprius » Fri Oct 12, 2018 11:46 am

Let me put it this way. If you believe that a 3% drop in a single day automatically means that stocks are "on sale" and "should" be bought at a presumed bargain price, than formalize this carefully into a testable model, test it, and present the results.

That is, test "whether buying the dips works." It's tricky formalizing what that really means and what should be tested.

It requires two things: a definition of what constitutes a "dip" ("I know it when I see it" isn't testable), and some description of where you get the money with which to buy the dip.

One possibility is "opportunistic rebalancing" between stocks and bonds, i.e. back to the target allocation but no further. The "control" then is: rebalance on schedule, or with rebalancing bands, or whatever your preferred method is. The test is: in addition to rebalancing according to rule, also perform an off-schedule rebalance whenever the conditions for "a dip" are met.

I'm pretty sure that, as with rebalancing systems themselves, the result of such a test will be tiny differences that are a) down in the noise and b) can go either way depending on small differences in chosen endpoints.

Notice that if you are 100% stocks, then it's not clear where the money comes from. If it comes out of a cash reserve somewhere, then you should expand the portfolio to include that cash reserve and consider that you are doing "opportunistic rebalancing" between stocks and cash.

Notice too that I think there's a consensus that it is not beneficial to wait for a dip to invest.

(lifesoft believes in buying something extra on "really bad days." I've never felt that he has express a full formalized rule within one single posting, but I think he has said that he has, in fact, done exactly that.)
Last edited by nisiprius on Fri Oct 12, 2018 11:50 am, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
vineviz
Posts: 2066
Joined: Tue May 15, 2018 1:55 pm

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

Post by vineviz » Fri Oct 12, 2018 11:50 am

Lauretta wrote:
Fri Oct 12, 2018 11:31 am
EMH is not a model. It doesn't have any predictive power. It cannot be tested and as such it can never be falisfied. It is a dogma or tautology, because you always need an asset pricing model to go with it, and you could always claim that the problem lies with the latter which need improving.
Yeah, none of those statements is true.

Google is powerful, but it's not a substitute for a Ph.D in finance.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

WhiteMaxima
Posts: 1457
Joined: Thu May 19, 2016 5:04 pm

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

Post by WhiteMaxima » Fri Oct 12, 2018 11:54 am

No I don't think so. Buying stock after correction just means you can buy stock for fair price. People are overpaying stock , real estate at 0% interest environment. Once the fed start get interest to normal (as W Buffett said the tide down, you will see who is swimming naked), the stock will come down to it's fair price. Stock will be very attractive when there is a depression like 2008, 1929. Then you will get a sale price. During most of correction period, you will get fair price. W. Buffett always but stock at fair price and sometimes at discount price. So stay put.
Last edited by WhiteMaxima on Fri Oct 12, 2018 12:02 pm, edited 1 time in total.

User avatar
Lauretta
Posts: 805
Joined: Wed Jul 05, 2017 6:27 am

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

Post by Lauretta » Fri Oct 12, 2018 11:56 am

Valuethinker wrote:
Fri Oct 12, 2018 11:36 am
Lauretta wrote:
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?
No I mean the marginal buyer & seller in the market on that day at that time decided that. If the market was particularly illiquid at that moment, then you could get a large price move.

There's lots of technical factors in ST stock price movements by the way. If for example retail investors pull money out, then the associated funds will have to sell holdings. Or "Bonfire of the Quants" in August 2007 when value stocks fell - some hedge fund was forced to liquidate its holdings, these are illiquid stocks thus you see a sharp downward movement in stock prices.

It's also often the case that there are limit orders, that start buying if the price drops too much. Stocks don't usually drop in a straight line (indices that is - individual stocks can drop an awful lot on a piece of news) but often bounce after 1-5 bad days. That doesn't mean that the bear market is over (or conversely that the bull market is over).

In the case of the Crash of 1987 it was not clear until a long time after what a large role Portfolio Insurance (which dictated selling into falling markets) had played. I suspect that low volatility in recent times has played a trick on investors and has led to some investors being quite exposed when volatility restored itself.

There's a rich literature on market microstructure - Alisa Roel is a name that comes to mind (she was at LSE in the early 1990s).
ok but don't these examples show that the idea that prices reflect available information on firms is absurd? Prices may fall a lot, like you note, just because there's a big seller (and no change in the information about the firm). EMH postulates that prices are not affected by these things. Indeed one of the critiques of EMH by Dreman is based on this issue.

I'll check the study by Alisa Roel; I noticed you often mention LSE, I have a friend who teaches there, next time I'm in London I'll visit him to check out the place :happy
When everyone is thinking the same, no one is thinking at all

User avatar
Lauretta
Posts: 805
Joined: Wed Jul 05, 2017 6:27 am

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

Post by Lauretta » Fri Oct 12, 2018 12:00 pm

vineviz wrote:
Fri Oct 12, 2018 11:50 am
Lauretta wrote:
Fri Oct 12, 2018 11:31 am
EMH is not a model. It doesn't have any predictive power. It cannot be tested and as such it can never be falisfied. It is a dogma or tautology, because you always need an asset pricing model to go with it, and you could always claim that the problem lies with the latter which need improving.
Yeah, none of those statements is true.

Google is powerful, but it's not a substitute for a Ph.D in finance.
Yes they are. If you want a finance PhD to instruct you on the subject, you can check the writings of Asness on the joint hypothesis. Anyway you obviously don't seem to have spent much time at University. I examine PhD students regularly; I can tell you that having a PhD is no big deal. Having a PhD mainly has an appeal to those who don't have one...
When everyone is thinking the same, no one is thinking at all

User avatar
JoMoney
Posts: 6132
Joined: Tue Jul 23, 2013 5:31 am

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

Post by JoMoney » Fri Oct 12, 2018 12:02 pm

If you believe that the fundamental expectations of the investment haven't changed, then a lower price does mean it's on sale.
If you were happy buying a 10 year bond yielding 3%, then it's "on sale" when yielding 3.3%... BUT that assumes you're ignoring other fundamentals or that they haven't changed, like inflation or credit worthiness.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
vineviz
Posts: 2066
Joined: Tue May 15, 2018 1:55 pm

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

Post by vineviz » Fri Oct 12, 2018 12:15 pm

Lauretta wrote:
Fri Oct 12, 2018 12:00 pm
Yes they are. If you want a finance PhD to instruct you on the subject . . .
Asness and I both studied with the same professor who, not coincidentally, won a Nobel Prize for his work on the topic. So I'm feeling pretty good about my instruction already.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
Lauretta
Posts: 805
Joined: Wed Jul 05, 2017 6:27 am

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

Post by Lauretta » Fri Oct 12, 2018 12:20 pm

vineviz wrote:
Fri Oct 12, 2018 12:15 pm
Lauretta wrote:
Fri Oct 12, 2018 12:00 pm
Yes they are. If you want a finance PhD to instruct you on the subject . . .
Asness and I both studied with the same professor who, not coincidentally, won a Nobel Prize for his work on the topic. So I'm feeling pretty good about my instruction already.
Cool. I am happy that you have such a great education.
Since at your level I am sure you understand that education is a never ending process, may I suggest that you peruse the work of Robert Shiller, who got the Nobel Prize the same year?
And perhaps read Taleb, both his books and his article on the subject of the Nobel Prize for Economics.
When everyone is thinking the same, no one is thinking at all

User avatar
vineviz
Posts: 2066
Joined: Tue May 15, 2018 1:55 pm

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

Post by vineviz » Fri Oct 12, 2018 12:22 pm

Lauretta wrote:
Fri Oct 12, 2018 11:56 am
ok but don't these examples show that the idea that prices reflect available information on firms is absurd? Prices may fall a lot, like you note, just because there's a big seller (and no change in the information about the firm).
The efficient market hypothesis concerns more than just information about the firm. It concerns ALL information that is relevant to the price of the security (in this case the stock).

In other words changes in expectations about economic growth, about discount rates, about the equity premium, etc. are just as relevant as changes in expectations about the particular firm's growth or profitability. In this sense, the fact that there is a "big seller" is one of the pieces of relevant information that the market will process efficiently (or not). The "big seller" isn't exogenous to the process.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
Portfolio7
Posts: 437
Joined: Tue Aug 02, 2016 3:53 am

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

Post by Portfolio7 » Fri Oct 12, 2018 12:24 pm

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?
Interesting. I have a story, a fairy tale if you wish, built on DDM and EMH and Behavioral theory... that all have a role in explaining the drop. I tend to think of strong market movements sometimes like pressure building in earth's crust prior to an earthquake. Little things build and build and build, and sometimes nothing comes of it, or it takes a very long time. Sometimes, something gives, and the plates shift. I think a big part of why the plates shifted this week was the realization that the FED really is serious about increasing rates for the next 1-2 years; it seems a lot of doubt was built into prices, and now FED direction is being given more credence, and there are real DDM implications to that. I don't think this was the trigger, this is what enabled the trigger. In the camel analogy, this was the big load the camel carried. I don't know what the straw was. The trigger was probably something minor, but was enough to tilt conviction just enough to drive a number of sell orders big enough to trigger the drop. Was there an over-reaction? Probably. Why did the rest of the world drop also? Because everyone knows the US plays a key role in the Global economy. Was that overdone? Probably. I think most dramatic movements are overdone (but not always. Sometimes the risk is greater than first realized.) The FED's stance also reflects a lot of confidence in the US economy, which is a realization that I think takes longer to percolate across the investment world with any conviction (this part is mostly behavioral; fear being immediate and strong, greed taking longer to gain traction)... and so a week later the markets turn back up, perhaps because that conviction is growing, and opinion has shifted back somewhat. Whether they will immediately recover in full or not depends on many things, but if the DDM impact is believed significant enough (net of all the other considerations, which are many), then we may settle a bit lower than a week ago, if nothing else intervenes to tilt prices one way or the other (and something always does, right?). This all is all still pretty consistent with EMH, people reacting swiftly to what they know, using their best judgement at the time (which judgement is perhaps refined over the space of a week or two.) In the end is this what happened? I guess if someone cares enough to make the case and everyone accepts that explanation, then perhaps so... & maybe someone else crafts a more convincing story, which is fine too. In the end people want to think they know a simple reason for the marked decline, without taking the time to really understand the causality (which may be too obscure to identify anyways)... so the final explanation in the media will usually be simple and wrong. The story above is what makes sense to me, but I'm probably wrong too, on multiple levels. Still I suspect that the models mentioned above are mostly correct, do identify key market mechanisms, all of which do interact.
An investment in knowledge pays the best interest.

User avatar
vineviz
Posts: 2066
Joined: Tue May 15, 2018 1:55 pm

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

Post by vineviz » Fri Oct 12, 2018 12:25 pm

Lauretta wrote:
Fri Oct 12, 2018 12:20 pm
Cool. I am happy that you have such a great education.
Thanks. Since you clearly have an interest in finance, I sincerely hope that someday you get to study it with at least some of the depth I have.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
Lauretta
Posts: 805
Joined: Wed Jul 05, 2017 6:27 am

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

Post by Lauretta » Fri Oct 12, 2018 12:28 pm

vineviz wrote:
Fri Oct 12, 2018 12:22 pm
Lauretta wrote:
Fri Oct 12, 2018 11:56 am
ok but don't these examples show that the idea that prices reflect available information on firms is absurd? Prices may fall a lot, like you note, just because there's a big seller (and no change in the information about the firm).
The efficient market hypothesis concerns more than just information about the firm. It concerns ALL information that is relevant to the price of the security (in this case the stock).

In other words changes in expectations about economic growth, about discount rates, about the equity premium, etc. are just as relevant as changes in expectations about the particular firm's growth or profitability. In this sense, the fact that there is a "big seller" is one of the pieces of relevant information that the market will process efficiently (or not). The "big seller" isn't exogenous to the process.
so you are saying that if there's a big seller and prices drop because there are not enough buyers on the other side at the initial price, this also counts as 'information'.
So EMH is basically saying that the market reflects...well the market. To me, and to many since LeRoy (1976) this is a tautology. Anyway I won't argue with you anymore, because with your PhD under Fama you are definitely too knowledgeable for a simple scientist like myself.
When everyone is thinking the same, no one is thinking at all

User avatar
bertilak
Posts: 6126
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

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

Post by bertilak » Fri Oct 12, 2018 12:34 pm

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

YES, if the correction has triggered a re-balance point.

NO, if it has not.

ASSUMPTION: Your available cash is included in your AA.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

Admiral
Posts: 1396
Joined: Mon Oct 27, 2014 12:35 pm

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

Post by Admiral » Fri Oct 12, 2018 12:54 pm

I think you're taking the term "on sale" too literally. Many (most?) people on the forum who buy stocks do so on a regular schedule that coincides with their paychecks and hence retirement account contributions.

Assuming the amount invested each period is fixed, and the stocks being purchased are the same, one gets more stock for the same amount of money invested versus some previous purchase price... hence "on sale" in the sense of getting a better "value."

Now, if you're talking about those who invest "on the dips" or whatever, that's simply market timing. It may work, or it may not, but it doesn't really have a fixed association with what stocks cost a month or a year or ten years ago, unless one is simply waiting until current prices are below what was previously paid.

MJW
Posts: 589
Joined: Sun Jul 03, 2016 7:40 pm
Location: Pacific Northwest

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

Post by MJW » Fri Oct 12, 2018 1:06 pm

I suspect a lot of people say it because they've seen others say it and so it becomes something to say. Same is true for other oft-used expressions on the forum. Not sure how many of them actually think about it.

User avatar
goodenyou
Posts: 1382
Joined: Sun Jan 31, 2010 11:57 pm
Location: Skating to Where the Puck is Going to Be..or on the golf course

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

Post by goodenyou » Fri Oct 12, 2018 1:18 pm

Lauretta wrote:
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?
I think that buyers are less interested in them regardless of the reason.
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

User avatar
UpsetRaptor
Posts: 235
Joined: Tue Jan 19, 2016 5:15 pm

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

Post by UpsetRaptor » Fri Oct 12, 2018 1:25 pm

If you're a long term investor, they're always on sale.

User avatar
watchnerd
Posts: 1432
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

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

Post by watchnerd » Fri Oct 12, 2018 1:31 pm

Lauretta wrote:
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

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.
Oh, I wouldn't go so far as to say markets are rational.

I would say markets / humans look for "rationales" for behaviors that may, in fact, be mostly driven by emotions.

We are pattern-matching creatures. We are biologically wired to look for causality and explanations even when such things are actually unknowable. It is not possible to confidently reverse engineer the cause of market moves that are ultimately caused by an intersection of thousands of different trading algorithms, each using different rules and logic, and millions of human beings, each feeling different emotions.

Is there a cause to market movements? Or more accurately, causes...plural? Yes, of course. Stocks are not sentient things that move on their own free will. Are all those causes knowable? Not even remotely.
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

User avatar
vineviz
Posts: 2066
Joined: Tue May 15, 2018 1:55 pm

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

Post by vineviz » Fri Oct 12, 2018 1:45 pm

Lauretta wrote:
Fri Oct 12, 2018 12:28 pm
vineviz wrote:
Fri Oct 12, 2018 12:22 pm
Lauretta wrote:
Fri Oct 12, 2018 11:56 am
ok but don't these examples show that the idea that prices reflect available information on firms is absurd? Prices may fall a lot, like you note, just because there's a big seller (and no change in the information about the firm).
The efficient market hypothesis concerns more than just information about the firm. It concerns ALL information that is relevant to the price of the security (in this case the stock).

In other words changes in expectations about economic growth, about discount rates, about the equity premium, etc. are just as relevant as changes in expectations about the particular firm's growth or profitability. In this sense, the fact that there is a "big seller" is one of the pieces of relevant information that the market will process efficiently (or not). The "big seller" isn't exogenous to the process.
so you are saying that if there's a big seller and prices drop because there are not enough buyers on the other side at the initial price, this also counts as 'information'.
So EMH is basically saying that the market reflects...well the market. To me, and to many since LeRoy (1976) this is a tautology. Anyway I won't argue with you anymore, because with your PhD under Fama you are definitely too knowledgeable for a simple scientist like myself.
Data about supply and demand are some of the most valuable pieces of information in economics.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

The Wizard
Posts: 12355
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

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 2:12 pm

Valuethinker wrote:
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"...
Indeed.
My underlying assumption is that total return of the broad stock market will be something like 5% to 10% per year on average over the long run.
So I'm basically putting excess retirement income into total stock market index within a week or two of it becoming available.
Except that I'm reluctant to buy if the market is pushing new record highs.
This is obviously a personal behavioral defect, but I'm ok with that...
Attempted new signature...

User avatar
Lauretta
Posts: 805
Joined: Wed Jul 05, 2017 6:27 am

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

Post by Lauretta » Fri Oct 12, 2018 3:58 pm

vineviz wrote:
Fri Oct 12, 2018 1:45 pm
Lauretta wrote:
Fri Oct 12, 2018 12:28 pm
vineviz wrote:
Fri Oct 12, 2018 12:22 pm
Lauretta wrote:
Fri Oct 12, 2018 11:56 am
ok but don't these examples show that the idea that prices reflect available information on firms is absurd? Prices may fall a lot, like you note, just because there's a big seller (and no change in the information about the firm).
The efficient market hypothesis concerns more than just information about the firm. It concerns ALL information that is relevant to the price of the security (in this case the stock).

In other words changes in expectations about economic growth, about discount rates, about the equity premium, etc. are just as relevant as changes in expectations about the particular firm's growth or profitability. In this sense, the fact that there is a "big seller" is one of the pieces of relevant information that the market will process efficiently (or not). The "big seller" isn't exogenous to the process.
so you are saying that if there's a big seller and prices drop because there are not enough buyers on the other side at the initial price, this also counts as 'information'.
So EMH is basically saying that the market reflects...well the market. To me, and to many since LeRoy (1976) this is a tautology. Anyway I won't argue with you anymore, because with your PhD under Fama you are definitely too knowledgeable for a simple scientist like myself.
Data about supply and demand are some of the most valuable pieces of information in economics.
One last thing. As you know you friend Cliff Asness studied the momentum effect early on, though Jagadeesh and Titman published first. Anyway, even Fama admits that the momentum effect is inconsistent with EMH, since it cannot easily be explained by a risk story. Of course it doesn't disproove EMH officially, because like I said above you can always make up a crazy enough asset pricing model that invents a risk story for momentum stocks. But like I said even Fama admits that it's not really possible to explain momentum by risk.
So how do you explain the momentume effect in terms of EMH?
When everyone is thinking the same, no one is thinking at all

User avatar
willthrill81
Posts: 6136
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

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

Post by willthrill81 » Fri Oct 12, 2018 7:02 pm

alex_686 wrote:
Fri Oct 12, 2018 10:59 am
willthrill81 wrote:
Fri Oct 12, 2018 10:48 am
Preposterous is too strong of a description of the EMH, but the EMH assumes that market participants are rational beings, the biases of any one of whom are cancelled out in the other direction by the other participants. Behavioral finance has shot that down IMHO. I know several with Ph.D.s in finance, and none of them believe the EMH to be strictly accurate.

Is the EMH mostly accurate? Probably, which is why it's difficult to consistently generate alpha after expenses. But that doesn't mean that it's entirely accurate in every situation all the time. Bogle's 'animal spirits' are all too real I'm afraid.
First, EMH does not assume that each and every market participant is rational. It assumes that in aggregate that the market is rational. One investor's irrational fear is offset by another's irrational greed. All you need for the model to work is for a few rational investors with large pots of money.
That's a more accurate description than I used. By "market participants," I meant the market participants in aggregate. Andrew Lo and others contend that the market, in total, is rational most of the time, but that during times of increased uncertainty that that rationality breaks down.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
willthrill81
Posts: 6136
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

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

Post by willthrill81 » Fri Oct 12, 2018 7:05 pm

Lauretta wrote:
Fri Oct 12, 2018 11:20 am
willthrill81 wrote:
Fri Oct 12, 2018 10:48 am
alex_686 wrote:
Fri Oct 12, 2018 10:41 am
Lauretta wrote:
Fri Oct 12, 2018 10:03 am
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.
First, what claims of EMH do you find preposterous?
Preposterous is too strong of a description of the EMH, but the EMH assumes that market participants are rational beings, the biases of any one of whom are cancelled out in the other direction by the other participants. Behavioral finance has shot that down IMHO. I know several with Ph.D.s in finance, and none of them believe the EMH to be strictly accurate.

Is the EMH mostly accurate? Probably, which is why it's difficult to consistently generate alpha after expenses. But that doesn't mean that it's entirely accurate in every situation all the time. Bogle's 'animal spirits' are all too real I'm afraid.
This is a bit off topic, but I am wondering, did your trend following method protect you on Wednesday? I am wondering because Antonacci says that having 100% in Dual momentum is ok - and I was wondering how such an investor would have felt in the past 2 days.
If by "protect" you mean "avoid," no. The purpose of trend following is most definitely not to try to avoid all drawdowns. It is to largely avoid the biggest drawdowns in the market. I entirely expect my chosen strategy to have around a 25% drawdown at some point, perhaps higher. Historically, that's around half the drawdown that would be expected of a 100% stock allocation.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

bgf
Posts: 636
Joined: Fri Nov 10, 2017 9:35 am

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

Post by bgf » Sun Oct 14, 2018 3:02 pm

alex_686 wrote:
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?
I prefer Ed Thorp's conception of the stock market. It is an inherently difficult game, and for most people, the odds are against them (it's a losers game).

on the other hand, just like Thorp showed in blackjack and roulette, for those who have a quantifiable and applicable edge the odds can be flipped in ones favor.

ed thorp beat the casinos and then he beat the market. what he did was not an anomaly or luck. he made enough trades and can explain why he made them that they statistically cannot be attributable to luck alone.

I am not Ed Thorp. this is why I think index funds are a great strategy for me.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

Post Reply