Where we might part ways is in other risk assets. There are areas of the global stock market that — even after this huge rally — are still priced for positive long-term returns. In specific, developed intl value stocks are priced for returns that are slightly under the average stock returns — not great but ok. Emerging value stocks are priced for substantially higher than normal returns.
[/quote]
So here is where I get confused.
I’m pretty sure I’ve heard you say, Rich, that one shouldn’t try and time the market but should invest for the long term as in decades.
But the above sounds like you’re advocating investing in those areas that, at the present time, give the best chance for above average returns.
Is that not timing the market?[/quote]
No, that is not timing the market!
And also no, the thing above that is not what I am saying. I’ll start with that one. I’m not saying you have to invest for decades. I’m saying that you have to consider that the price for stocks is based on decades’ worth of their expected earnings. So, shorter term changes to that earnings stream should not, in theory, change their fair value all that much. (In practice, of course, it often does, but that’s a whole separate topic). But that’s not the same as saying that an investor necessarily needs to hold them for decades.
OK, onto the fun question. This is one that I have strong opinions on, so apologies in advance for what will probably be a surfeit of exclamation points.
Anyway no, a thousand times no — value investing is NOT market timing!
Let me illustrate with an example to start. Let’s say there is a modest condo that, if you bought it, you could rent out for $1,000/month. It’s for sale for $5 million.
Would you buy it? No, of course not. Why would you buy something for $5 mil when it only rents out for $1k/month? It’s way too expensive.
Is this market timing? Again — of course not. You simply evaluated what the investment is worth, and compared that to the actual price (the key point here being that those 2 things can be different).
It’s no different with stocks or anything else.
Market timing entails making guesses about what the market will do over the short term. It’s path dependent.
The thing I’m talking about here (which I describe as value investing as shorthand) entails having an estimate of likely longer term returns, and investing accordingly. It is not path dependent.
Let’s take US stocks as an example. I mentioned that I’m bearish on the S&P500. Is this because of a necessarily dismal economic outlook? No! It’s due to valuation. The S&P500 is very expensive. It is pricing in an unusually great outcome. If you merely get an average or even above-average outcome… it is likely to do poorly.
So my “claim” here is that the S&P500 is likely to generate poor returns over the coming 7-10 years.
But how will that look? Will there be a crash? Will it just waffle along sideways, without going much of anywhere for many years? Something in between?
I have no idea. To answer that question would be market timing.
But what I’m saying here is: I don’t know the path it will take, but I think it’s likely that when we look back a decade from now, this thing will have done pretty poorly. That’s not market timing. It’s simply having an awareness of what something is worth, and thus the likely returns, before you invest in it.
