Cover Story, by Mark Robertson, Managing Partner
Posted on January 1st, 2014
With the low total return forecast currently at 3%, caution is warranted. We don’t know when the next correction will happen or how big it will be. We know it will happen.
“The only people who think buy-and-hold is dead are short-term thinkers frustrated by their inability to follow it.” — Morgan Housel, The Motley Fool (2013)
The S&P 500 gained 32.2% in 2013. (Wilshire 5000, 33.3%; Value Line Arithmetic Average, 38.4%; Dow Jones Industrial Average, 29.6%) I was surprised by 2013. I didn’t expect that to happen. We’re reminded that the results of any given year are fleeting and random. We’re reminded in a powerful way that stocks, sectors, and markets can remain “overbought” for a very very long time. And there’s a reason that Value Line use 3-5 year forecasts.
In one of the opening scenes of Martin Scorsese’s “Wolf of Wall Street”, experienced broker Matthew McConaughey takes a brand new Wall Streeter out for lunch on his first day on the job.
Mark Hanna (Matthew McConaughey): Nobody knows if a stock is going to go up, down, sideways or in circles. You know what a fugasi is?
Jordan “The Wolf” Belfort (Leonardo DiCaprio): Fugazy, it’s a fake.
Mark Hanna: Fugazy, fugasi, it’s a wazi it’s a woozy, it’s [makes a flittering sound] fairy dust.
Morgan Housel is right and Matthew and Leo bring home the fairy dust. Because it’s a matter of time, patience, discipline … and a time-honored long-term perspective. The Motley Fool has been hailed as one big investment club and Housel is one of their best scribes and thinkers. Clubbers who dwell at places like Manifest Investing and www.bivio.com know that investing with friends can deliver a bedrock of discipline. And hence the otters, because we know that investing together — sharing opportunities, remaining vigilant for threats, comparing notes and most of all enabling patient success is a formidable recipe. Otters lock arms and turn a potentially dangerous investing world into something much less forbidding. Sleep-at-night investing, indeed.
Mark Hulbert featured some thoughts on the merits of Value Line and our usage of Value Line forecasts in a Wall Street Journal/MarketWatch column back in March.
At the time, I shared, according the Value Line low total return forecast, that stocks were getting overpriced. And they continued to get steadily more overpriced for the balance of 2013. Does this mean I was wrong or a victim of a fairy dust drone attack?
Not exactly. Because the results of a single year whether we’re talking about a stock, sector or market can be very elusive when compared against any forecast. And it actually gets more difficult the shorter the time frame. So, McConaughey is right about that no matter how many martinis had been consumed.
McConaughey: My good man, bring us a fresh martini and then another every 7 1/2 minutes until one of us is no longer able to stand.
DiCaprio: Oh, I’m good with water for now.
McConaughey: It’s his first day on Wall Street. Give him time.
As shown in the accompanying Value Line forecast (VLLTR) chart, the forecast efficacy improves with age. We also note the pendulum swing of momentum that sprang to life after the 2002 forecast peak where the actual returns remained elevated for several quarters. Chances are we’re seeing a sequel in 2013. The 2008-2009 peak forecasts during the Great Recession gave way to elevated returns four years later and they seem to be persisting at fairly high levels.
The quarterly low total return forecasts for the Value Line Standard Edition versus the actual results four years later. The correlation is pretty strong and it’s the shape that matters. We note the vagaries of time and expected fluctuations. The 12/31/2009 forecast of 8% compares to an actual return of 15.4% — another suggestion that 2013 may have been an overachiever.
Annual Total Returns, S&P 500 (1941-2013). 2013 assumes a special place in stock market history and nearly joined 1954 and 1958 in our hearts.
One of our other favorite charts is the actual annual return chart that we’ve featured regularly over the years and shown in the accompanying figure. We’ve used it to point out how “unique” 2008 was and we’ve shared Ken Fisher’s sage observation that the “block” for any given year can pretty much land anywhere. Get over it. Deal with it.
Jeff Gundlach observed (one year ago) that the overall advance in stock prices during 2012 was “unwarranted.” We can’t wait to hear what he has to say about 2013’s inertial roll and what he expects from 2014 and the longer road ahead.
In a recent column for Bloomberg, Barry Ritholtz shared his forecast for the Dow on 12/31/2014, “No idea.” The S&P 500? “Why are you asking me?”
Yet a lot of ink flows along these lines at this time of year. Henry Blodget recently shared his perspective: “I do not know what the market is going to do.”
“No one else knows what the market is going to do, either.”
“This was a revelation for me.”
“When I finally realized that no one knows what the market is going to do, I developed a very different philosophy about money management — including, importantly, the management of my own money … when you finally accept and embrace the idea that no one knows what the market is going to do — when you stop looking for that one brilliant fund manager or advisor or analyst who is finally going to make you rich without accidentally making you poor — you will [have an opportunity] to be able to outperform the vast majority of other investors, including professionals, with a lot less time, stress, and hassle.”
Value Line projected an 8-10% annualized total return for the period from 12/31/2010 through 12/31/2014. Based on the historical variances, 2014 could deliver a total return anywhere from -6 % to +12% and land within a sigma of Value Line’s forecast. But it doesn’t matter, Ken Fisher is right about the plopping of the next brick.
With the low total return forecast currently at 3%, caution is warranted. We don’t know when the next correction will happen or how big it will be. We know it will happen. And we know that we’re statistically more vulnerable, based on the lessons of history. Morgan Housel is right … and it’s easier discovering and owning high-quality stocks by investing with friends. Stick to the best in 2014. Switch lower-quality and lower-PAR stocks to stronger replacements when appropriate. Keep portfolios well positioned.