Investing Archives - Lazy Man and Money

Why (and When) You SHOULD Try to Time the Market

August 10, 2017 by Lazy Man 1 Comment

There’s a lot of great investment advice out there. My favorite for years has always been to NOT try to time the market. No one accurately predicts crashes. Just because the market is at its peak, it doesn’t mean it can’t go higher.

Have you heard any of these?

A lot of it makes sense. However, I’m going to tell you why a lot of seemingly sound advice might be… let’s just say, “Less than ideal.”

Today’s article is inspired by a couple of personal finance articles I read yesterday The Tiny Truths That Completely Changed How We Money and Why You Should Invest, Even in Peak Markets. I don’t read as many personal finance articles as I used to nowadays, so it is significant for me to see two articles in one day that have a focus on this advice.

I’ll start with the Tiny Truths article as it was the easiest. The point made was:

“Condensed version of all this: don’t try to time the markets, and especially don’t hold off on investing just because the markets seem ‘high,’ a term that is so relative as to be essentially meaningless.”

If you think the markets “seem ‘high'”, yes it’s a probably a good idea to just continue investing anyway. However, what if there was a way to statistically quantify how “high” the markets are and look at how similar markets have performed over the past… say nearly 140 years? Would you be interested in that?

Let me introduce you to the Shiller P/E (also known as CAPE)

(For more on Shiller P/E see How Expensive Are Stocks Now? and How We KNOW Where the Stock Market Will Go.)

A number such as Dow 22,000 doesn’t really tell us anything. It’s like saying that IBM at $141 a share is expensive while Citigroup at $68 is much cheaper. Citigroup is the larger company (by market capitalization) because their are fewer shares.

Instead of using share price to evaluate stocks, we can use value metrics. The most famous of which is price/earnings (or P/E). People have been using price/earnings ratios for determining the value of a stock for decades. Benjamin Graham has used it in his winning strategy for 60 years. Value investors look for a small price for a high earnings. Thus the smaller the P/E the better. (There are other factors and this is an over-simplification, but hopefully you get the general idea).

The Shiller P/E is essentially the price/earnings of the market. Take a look at the above graph and write down on a piece of paper or in a note taking app what you see. (Or just cheat by continue reading, I can’t see what you are doing anyway.)

Here’s what I see. From 1880 until 1995… a span of 115 years, nearly any time the Shiller P/E got above 20 the market would crash:

It hovered in the 20’s around 1990… and worked its way down to 5 in 1920.
Then over the next 10 years people got really excited and it worked its way to 30 at the top of 1929 stock market crash… and then it crashed back down to 5 by ~1932
Then ~1936 it got up around 22… and then it crashed down 9 by ~1942.
From ~1955 to ~1965 it hovered around the 20 range peaking at around 24… and then it crashed to around 7 in ~1982
From that 1982 to 1987 it moved up from 7 to 17 and then had a mini-drop to 14 on Black Monday.

From the above, it feels to me like 20 is DEFCON 3, 25 is DEFCON 2, and 30 is DEFCON 1.

From 1995 to now, things get very interesting.

From 1995 to 2000, Shiller P/E jumped from 20 to 44. That DotCom Boom was really something, wasn’t it?
From 2000 to 2002, it went from 44 to ~23. That DotCom Bust was really something, wasn’t it?
From 2002 to 2008, we a recovery up to around 27
From 2008 to 2009, the P/E dropped from that 27 to 15. This period is commonly known as the Great Depression
From 2009 to today, the P/E has mostly gone straight up from 15 to 30. For the majority of personal finance bloggers, they’ve only known this era of prosperity.

We’ve seen the Shiller P/E reach 30 three times. The first was the 1929 crash. The second was May of 1997 a couple of years before the peak and DotCom crash in Dec. 1999. From the graph these two crashes look to be the largest in American history… and it’s not even close.

The third Shiller P/E is now.

Remember that before 1995, investing when the Shiller P/E got in the 20-25 was a sign of a significant downturn. Maybe the new normal in the Internet economy is that the Shiller P/E should be 25. In that case maybe 30 isn’t too bad.

Is it reasonable to suggest that we should be cautious with investing in high P/E environment? Of course! Usually, investors only pay 30 P/Es for companies due to their growth potential. CitiGroup is reasonable 13.65 P/E with a decent dividend. IBM is at 11.77 P/E with a better dividend (Full disclosure: I own IBM stock.) Investors may be attracted to these companies because the price for the earnings is low.

So would you buy the S&P 500 at 30 P/E if you knew it that it generally trades at 16 P/E? (Again, that’s an over simplification, but it illustrates the point). Wouldn’t you like to own nearly twice as many shares for the same price? I know I would!

So let’s turn our attention to MamaFishSaves:

“On August 26, 2014, the S&P 500 closed above 2,000 for the first time. At the time, plenty of people were there to say that valuations were too high, the underlying economy wasn’t strong enough, and we would see a downturn in the near term. Some claimed that even if the economy improved, stocks would have to drop by about half to see normal rates of return in the next cycle (source). But if you had listened to the naysayers and pulled your money out of the market in August of 2014, you would have missed out on 7.8% annual returns (9.8% if you reinvested dividends) between then and now.”

She’s not wrong. However, what if this is like investing in 1997 when valuations are high (Shiller P/E of 25+), but still went higher? In early 1999, someone could make a great case that by not investing you missed out on a ton of gains. In 2002, you could have said, “I told you so!” Maybe in 2019, one could say the same thing.

I think the strongest argument that Mama Fish makes is:

“In March of 2009, your $10,000 would have fallen to $4,322 in value. A greater than 50% drop would be a pretty big gut punch. But by holding steady and recognizing that the market naturally rises over time, you would have recouped your whole investment by August 2013. By now, you would be up over $5,000. Your average annual return would be 4.7% with a total return of 54.7%. Not the 7% long-term average, but well above the 0% of your checking account and the 1%-2% annual inflation rate. And this is forgetting one very important thing. Dividends.”

This is part of an illustration of investing at the market peak of the Great Recession on October 9, 2007. For reference that was Shiller P/E at 27… below today’s 30 Shiller P/E. Let’s pause for a second on this point: The valuation of the market before “the Great Recession” is quite a bit less than it is today. So this is making a point about investing at the peak of a historically bad period, but when there was MORE value in investing than today.

The point that you would have made all your money back and more over the long haul is a strong one. Again, if you are new to investing you shouldn’t be scared to invest because it works out eventually… and eventually is usually a pretty short time.

However, isn’t it fair for me to suggest that going from one bubble to the next isn’t a great measuring stick?

What if we ask the question, “Maybe I can do better?”

So let’s say that you decided that Shiller P/E 25 is too risky for you. You don’t buy at the Great Recession peak in 2007. Instead, you start buying in from Jan 2008 and continue to invest until May 1, 2014 according to this Shiller P/E table. Wouldn’t you have done better? Let’s find out.

Rather than being a “Negative Nate”* and thinking about investing at the worst time (and a bad value), wouldn’t it be great to measure what your investment could do if you invested at a good valuation? This calculator seems to allow us to do that. Investing $10,000 on Jan. 2008 grows to $21,495.21 (in July of 2017 – close enough). The graph from Mama Fish of investing at the peak shows that you’d “only” have $15,233. (“Only” is in quotes, because that’s still a solid return.)

This isn’t a calculation about predicting the bottom of the market. That’s impossible… like bending spoons. This is simply investing at the time that the Shiller P/E is below 25, an arbitrary number that I feel is a warning sign.

What if we are “Positive Patty”** What if you were able to bend spoons and predict the bottom.

If you use the same calculator, you’d find that investing $10,000 from March 2009 would be $37,953.93 (July 2017)! Where did that March 2009 come from? I picked it from the Shiller P/E chart when it was at its low, 13.32.

It’s amazing to think that you could have somewhere between $15,000, $21,000, and $38,000 by just changing the time when you invest.

Can we objectively look at a valuation and say that 25+ is “fire bad” and that ~13 is “tree pretty” when it comes to investing? Even cavewoman Buffy would agree that your brain doesn’t need to be functioning on the higher levels to understand this, right?

Unfortunately, I lack the tools to backtest the performance of investing at various Shiller P/E numbers.

The counter argument is that by not investing the $10,000 you are getting a return of nothing. Also inflation is making that $10,000 worth 2.5% less every year. Some quick math tells me that you’d have the buying power of ~$8800 if you didn’t invest for 5 years. So there’s a downside of losing around 12% of your investment by doing nothing for 5 years. Is it better to lose $1200 through inaction or make an extra $6000 ($21,000 vs. $15,000) or $23,000 ($38,000 vs. $15,000) by waiting for a good valuation?

Conclusion: Pick a Path That’s Right For You

I’m divided on this topic. I see two paths:

1. There’s the behavior finance view that for people who don’t invest you should be like Nike, “Just do it!” I agree, because I know people like this. It is probably most of America (if most of America actually invested). Take your blue pill and “the story ends… and believe whatever you want to believe.” As Mama Fish shows you’ll do very well over the long haul.

2. There’s the informed investor view for people who want to take charge of their investing. I tend to think this is the majority of my readers. It’s not like you are here for my late 90’s pop-culture references, right?

I think we should tell people that it is okay to be in the second group. It’s not wrong for people to pause when valuations are so high that they historically lead to crashes. It’s something that investors should at least consider, right?

To be clear, I’m not suggesting that one should exit the market completely. I’m still heavily invested in this market. Instead, I think it makes more sense to adjust your risk allocation which may mean investing in countries with lower Shiller P/Es.

It’s your turn. What are your thoughts on using Shiller P/E for market timing? Have you read any good articles using Shiller P/E with relation to market timing? If so, could you pass them along in the comments?

* I feel like the terms “Negative Nancy” and “Debbie Downer” are sexist. So “Negative Nate” it is.
** Will you allow me to sexist in positive way with this one?

Getting that Real Estate Buying Itch Again

July 31, 2017 by Lazy Man 5 Comments

A few months ago, I had this weird little “thing” happen. I thought, “Hmmm, that’s odd”, bookmarked what I was reading and moved on. About 6 weeks ago, I had another “thing” happen, and after some discussion with my wife we kind of moved on. About 3 weeks ago, I was on the verge of a life event that made me think of finances in a new way. About 10 days ago, I published my alternative income update and I started to notice a pattern.

And recently, a cartoon sealed the deal. Let’s enjoy that cartoon before I clarify all that boring stuff in the last paragraph:

I used to think Teen Titans Go! was just really weird. Now I realize it is awesomely weird. In around 90 seconds, someone could learn more about real estate investing than 90% of the population.

If you didn’t get it from the title or from the cartoon: I’m starting to get excited about real estate investing again.

What I was Reading

I’ve been following Rental Mindset from its very first post. As you can tell from the website, Brian thinks a little differently than many people about their path to financial freedom. Most seem to take the path of acquiring stocks and mutual funds to build a nest egg over time. Brian may be doing that as well, but Rental Mindset shows that much greater returns are possible.

Many people don’t like the idea of being a landlord (including me). However, he shows that with turnkey properties and property managers, it doesn’t have to be a ton of work. Specifically, he’s been writing about how we finds a turnkey rental property and how he recently bought another one.

The following thought crept into my mind… what if I streamline the management of these rental properties? If, and this is a big if, that were true, adding another rental property would be much more feasible.

The Discussion with the Wife

I get the feeling that my wife is getting frustrated with work. Well, it’s more than “getting the feeling”, but I’m trying to be diplomatic. All careers have their ups and downs, right? About 6 weeks ago, my wife had a down around the same time that we were taking a vacation at a beach.

It’s not to hard to figure out which way the work/life scale tipped. It’s natural for people to plan their escape from their cubical in such situations. It’s probably 10x more natural when your spouse has more or less done that.

It is worth exploring whether adding to our rental properties would speed that escape along. My initial thought is that it would not. While we might have a a lot of passive income in 10 years, I can’t see how adding more properties now would speed that up. I’m not giving up on the idea though.

Before you think I’m evil for not taking the corporate job, I’d love to switch places. However, my wife is 90% of the way to a sizable military pension. The golden handcuffs don’t get looser for a couple of years.

I Thought I Might Get a Windfall

There were some rustlings that a windfall might be headed our way. That fell through almost as quickly as it came. For a few days though, it was fun to imagine how I might invest the money. Adding a rental property wouldn’t be the worst plan. However, since this hypothetical thing didn’t happen, I have to move on. I feel like I had already “mentally” acquired the money, so to a degree, it is difficult to imagine it never happened.

The Pattern of My Alternative Income

Each month, I look at how much income my investments should give me. If you are looking to get $25,000 a year from dividend stocks paying 2.5%, you are going to need to have one million in that brokerage account. My wife and I have been diligently saving in our Roths/401Ks/TSPs for nearly a decade now. We usually max out our contributions. The markets have been doing quite well. We aren’t at a million and we really aren’t all that close.

That’s not to say it is “a million or bust.” I’m just picking nice round numbers. I can see the amount of money we’d make from those hypothetical 2.5% dividend stocks grow each month the market grows. However, it only grows a relatively small amount.

I also calculate the percentage of profit we’d get based on the equity we have in our properties. The mathematical explanation is too long here, but the link a couple of paragraphs up, explains it well. I’ve been seeing this number jump a lot more throughout the year. It feels like real estate is actually beating stocks. My guess for why this is happening is that our properties are getting more valuable while the tenants are paying down the debt. We also have the benefit of leverage.

I think our investment in rental properties has been quite a bit lower than what we’ve poured into our retirement accounts. That small fraction of an investment has slightly surpassed what I expect to make from stock investing. Again, it’s not nearly as passive, but it definitely seems to be a plus

Conclusion

While I’m getting excited about buying another rental property, it won’t likely happen. If that windfall did come through (again, it didn’t), we’d think about investing it in a way that got my wife to retirement faster. Adding another 15 year mortgage is probably not going to get it done.

Get Free Stock From Robinhood

July 21, 2017 by Lazy Man Leave a Comment

About a year ago, I wrote about why I made a ridiculous investment.

The investment was so bad that I had to quote Benzinga:

“Greece ETF Needs A Shot Of Confidence… There are problems aplenty for Greek banks, too, and that is problematic for GREK because the ETF allocates nearly 39 percent of its weight to bank stocks… The ratings agency’s standalone viability rating on Greek banks is ‘F.’… “

I’m investing my kids’ money, ages 2 and 3, who were too young to know to complain to their dad. (A year later, they are still too young to know to complain.)

Free Stock Trading Changes Everything

The idea behind the article was that if a stock broker gives you free trades, you can (and probably should) do some silly things. In this case, I had bought as many shares of Vanguard Total Stock Index ETF (NYSE: VTI) as I could, but I had ~$85 left of uninvested money. It wasn’t enough to buy another share.

With free trades, there is little reason to hold cash. Greece had been doing pretty bad for a number of years and I figured they’d probably see brighter economic days sometimes in the next 70 years. It’s also a somewhat diversified investment as it wasn’t dependent on a single company.

I pulled the trigger and bought 12 shares at around $7. Today GREK trades at $10.68. I turned their $85 into more than $125. I am Super-Dad!!! (Yes, I know it’s only $40.)

Overall, I’ve made them nearly 20% more money in year by investing. The VTI threw off some dividends and again, because there was no cost to invest, I used the $28 to buy a 2 shares of Twitter. Yes, literally 2 shares. Those shares are worth $40.

The only catch is that I have to remember not to sell and realize gains. This is the only non-retirement account I have so it is tempting to think that capital gains don’t exist.

So What is this Brokerage with Free Trades?

I guess I gave that away in the title, right? The brokerage is Robinhood. And they are sweetening the pot with some free stock when you sign-up. In order to get the bonus you need to:

Sign up for a new account through this link
Verify your email address and install the phone app (it works mostly through your phone)
Link your bank account to fund your account

If all goes well (and it should), you can then share your referral link with friends to get more shares! And for people who don’t realize it, I’m sharing my referral link here, so my kids will get more shares too. (Isn’t it great that we’ll all win?!?!)

What share will you get? Well that’s a mystery. They say in my app that there’s a 1 in 200 chance of getting Facebook, Apple, or Microsoft. There’s a 1 in 250 of getting Ford, Sprint, or GoPro. So, strangely you have better odds at getting the better companies. They simply say that you’ll get one share of stock. Maybe every month, I should update this point with the shares of stock I’ve gotten from people who sign up? Then we’ll have an idea of what’s out there.

I realize that sounds a little pyramid scheme-y, but Robinhood is free. It costs nothing to open an account and the trades are free. Maybe you are wondering how Robinhood makes money with all this free stuff? According to their website they are hoping you sign up for a Robinhood Gold account. I decided not to do that as it isn’t a match for the purpose of my kids’ money. They also make money by investing the uninvested cash in the accounts. Sorry Robinhood, I think my GREK trick foiled you by leaving you with very little uninvested cash in my account.

What I like best about Robinhood is that it is perfect for getting started with investing. My kids didn’t have a large amount of money to get started with, but it’s growing a lot more than it would in a bank account. (Keeping my finger’s crossed.)

What Do I Do About My Oil Investment?

June 15, 2017 by Lazy Man 4 Comments

Sorry for the short hiatus. I went on a vacation where I thought I’d have some time to write. It was one of those vacations that was supposed to be relaxing. Unfortunately, every little thing went wrong and just seemed to cause more stress. Even if I had the time, the hotel’s wifi didn’t reach my room.

I’m chalking the experience up to learning an important travel lesson, but that’s an article for tomorrow.

Today, I want to write about oil. (I write about oil every every couple of years).

When I got back, I decided to check in on my stocks. I noticed that my oil ETF (NYSE: USO) was hitting a new 52-week low of $9.24. I have been buying USO for awhile. In fact, I have dollar cost averaged it down from an initial purchase a little under 20 in December 2014 (if memory serves).

TD Ameritrade now lists my cost-basis (i.e. my break-even price) at $13.82. I need USO to rise 33% just to break-even. That’s bad… very bad.

I made a fundamental mistake of investing. I didn’t know what I didn’t know.

I knew that oil markets trade very differently than stocks. It’s a supply and demand commodity. I had figured that demand for oil would keep rising in the short term. What I didn’t know is that the U.S. was producing so much shale oil that there’s more oil than people need. There almost seems to be no limit to how much supply we can produce. OPEC can’t control prices if the US can supply so much of its own oil.

As I was going through my mail, I found a related article in my inbox: This is How Big Oil Will Die. (It’s a few weeks old now, so it wasn’t a trigger for this collapse.)

The article is a great read. It essentially makes the same case I did last year with my Uber gPod article. Autonomous, on-demand, electric cars are coming and they’ll be so efficient that oil may not power cars as soon as 2025. (I was predicting 2030 in my article.) I took it a step further and suggested that the electric cars would charge from solar panels. While oil will still be necessary for other things, the economics seem to dictate that the demand for oil is going to drop significantly. That’s not going to do my investment in oil any favors.

The only question seems to be when this “oilmageddon” will happen. Of course, those estimates are nearly 10 to 15 years away. Many people consider those estimates extremely aggressive.

I’m considering dollar cost averaging some more at these low $9.20-ish prices. I’m fighting some psychological investing issues:

They say never fall in love with a stock. Since oil is a commodity, I don’t whether this applies.
The other thing I’m wondering is “Where else does a value investor put his/her money nowadays?” As I recently wrote, stocks are really expensive now. This is perhaps the only thing that seems “cheap.”

What do you think? Anyone know where oil is going? Let me know in the comments.

Time to Rebalance the Portfolio

June 5, 2017 by Lazy Man 5 Comments

It’s no secret that the US stock market has been going up for years. It’s had a couple of short dips, but the sharp upward trend since 2009 has been unmistakable.

The higher it climbs, the more I get worried. As a value investor, I like to buy stocks when they are cheap.

Cheap is a relative term, but the best indicator I’ve found is Shiller PE or CAPE number. Here’s a graph going back to 1880 from Multpl.com:

Do you notice anything about what happens when the number gets high? I’ll give you a hint, look at the only two times the number passed 30. We had the stock market crashes of 1929 and 1999. It got up to around 27 before the crash in 2008.

Today the number sits at 29.87.

In the immortal words of Captain Malcolm Reynolds, “So here is us, on the raggedy edge.”

Now the number could go up to 45 like it did in 1999. It could even go higher. However, just looking at the graph, it seems like anytime it is above 25 there’s a coming in a year or two. We’ve been above 25 for awhile and spiking to 30 is giving me cause for concern.

I know what you are thinking. Didn’t I ask if it was Time to Sell Your Stocks? almost 3 years ago to the day? Didn’t I again ask if it was Time to Pull Out of the Market? about 2 years ago. Even this January I suggested there was gloom and doom coming, because we KNOW where the stock market will go.

So what makes this time different? Other than the Shiller PE number reach 30, I don’t have a great answer.

I’m not pulling out of the US stock market. Instead, I’m looking more at my asset allocation. I’ve always been a fan of international investing as you can tell from this 2007 article. A lot of experts would cringe at the idea of putting so much of a portfolio in overseas funds.

I think there’s no better time to embrace international investing.

The Shiller PE numbers in many countries are a lot lower than the United States. There may be obvious political or economic reasons for that. However, in general, they represent the kind of value that I’m looking for when I invest.

I’m going to adjust my portfolio so that I’m invested in more of the lower Shiller PE countries. I’m willing to put even more than 50% of my stock allocation abroad. (Not much more, but technically a little more.)

I’m making two other changes that I didn’t think I’d make at this stage in my life (early 40s). I’ve always been a very aggressive investor who believes that 100% stocks is always the way to go. (Notice how sure I have been in the past.)

For the first time, I’m putting money in bonds and REITs. Specifically, I’m buying Vanguards’ BND and VNQ ETF funds. I’m putting about 10% of my portfolio in BND and another 5% in VNQ. Perhaps I should have done this before now. I’m thinking about upping those percentages as well.

I would sum up my thinking as, “Let’s play more defense than I normally would given what appears to be an overpriced market.”*