This post was published on March 18, 2020 when the stock market was falling apart. My goal was to help people feel more calm by going through a logical analysis of predicting when the bleeding would stop. I also provide an update on what my views are on stocks at the end of this post.
Are you wondering when the stock market will bottom? So am I!
When there is stock market pandemonium, there tend to be a lot of worst-case scenarios thrown around e.g. zombie apocalypse with no food, electricity, or running water. Because of the hysteria, the stock market tends to both overshoot on the upside and on the downside.
As rational investors, we acknowledge that nobody can with certitude predict a stock market bottom. However, it's worthwhile to at least think about various entry points to put additional capital to work if you are a long-term investor.
As long as we have excess cash flow, we can either hoard cash or make an investment. I tend to consistently do the latter since my cash allocation is generally at capacity.
A Simple Exercise On Predicting A Stock Market Bottom
To be able to predict the next stock market bottom, we must first look at history. For example, from history, we know that the average bear market lasts about 17 months and corrects about 35% from the peak (2,200 on the S&P 500 if so). Therefore, although no two bear markets are exactly alike, we can reasonably assume the next or current bear market will do something similar.
The second thing we need to do is understand valuation. The S&P 500 has an annual earnings number and a P/E ratio. The P/E ratio moves up and down depending on the stage of the market. When there is euphoria about earnings growth, valuations (P/E and other ratios) tend to go up. When there is massive pessimism, valuations tend to go down.
Using the current P/E ratio as an example, when the S&P 500 was at 2,530, its P/E was at 19. With the historical median P/E at 15X, we could see the S&P 500 at 2,000 if we revert to the median.
Finally, we can make educated estimates on quarterly earnings percentage declines in a bear market to guess the total earnings change for the year. After all, the S&P 500's value is made up of its annual earnings times a multiple.
With the coronavirus really starting to scare folks in America since early March 2020, we can make an extreme guess that March earnings will decline by 100%. Therefore, 1Q earnings will decline by 33% for the S&P 500.
Let's make another extreme guess that 2Q2020 earnings will again decline by 100% due to absolute paralysis. Nobody spends a dime on anything, not even on toilet paper online because the world ran out!
Let us then make another guess that 3Q2020 earnings will decline by 30% as the economy recovers, but not to its original expectation. At last, hand sanitizer supply becomes more readily available in stores and hoarders who tried to price gouge get banned for life.
Finally, we can guess that 4Q2020 earnings are flat. We're back to our original spending amounts, which could prove to be conservative given the phenomena of “revenge spending.”
What is the total earnings decline for the year?
The baseline assumption is Quarterly earnings = 1 where 1 is the market assumption of earnings. It does not matter what the actual earnings numbers are. The other assumption is that the market trades based on expected earnings.
1Q: -33% = 0.67
2Q: – 100% = 0
3Q: -30% = 0.7
4Q: 0% = 1
Total: 2.37 out of 4 = -40.75% earnings decline.
We can now forecast that if valuations stay the same, the S&P 500 will decline by roughly 40.75% from its peak level of 3,386. In other words, under this earnings scenario, the S&P 500 will bottom at about 2,000.
The question you have to ask yourself is whether the above earnings assumptions are conservative, optimistic, or realistic.
When Will The Coronavirus Stock Market Bottom Be?
In my opinion, the above earnings assumptions are a little too dire, even for the DIRE Movement founder. There is no way 2Q earnings will decline by 100%. Therefore, let's make some further, better-educated guesses about quarterly estimates.
We know that the sectors hardest hit from the coronavirus are travel, hospitality, food and entertainment. Earnings in those sectors will probably go down 80%+. However, the Consumer Discretionary sector only accounts for about 10% of the S&P 500 in 2020.
The largest sector weightings in the S&P 500 are Technology (24%), Health Care (14%), Financials (12%) and Communication Services (11%), accounting for more than 50% of the S&P 500.
Therefore, instead of forecasting a 100% decline in S&P 500 earnings for the month of March, let's forecast a 50% decline. As a result, 1Q2020 earnings will decline by 15%.
Now let's forecast a realistic 70% decline in 2Q2020 earnings as citizens realize how serious the coronavirus really is. Although consumer spending will shift online and the Utilities and Health Care sectors may see flat earnings, let's stay conservative.
For 3Q2020, let's forecast a 30% earnings decline as people gradually start spending again as the number of coronavirus cases and deaths decline. But some industries like the cruise industry will likely see a permanent structural decline in demand. People will still be on edge and save more than they normally do.
For 4Q2020, let's forecast no decline in earnings as consumers start spending more to “catch up” for the prior three quarters. It's the holiday season, consumers are thankful to have made it through a scary time period and a bear market. Some might think there could be a YoY earnings increase. However, let's stay conservative to account for job losses.
Here are the numbers where 1 equals previous quarterly earnings expectations by the market.
1Q: 0.85 = 15% decline
2Q: 0.3 = 70% decline
3Q: 0.7 = 30% decline
4Q: 1 = 0% change
Total: 2.85 = 29% decline in earnings.
If valuations stay the same, the S&P 500 will decline by roughly 29% from its peak level of 3,386. In other words, under this earnings scenario, the S&P 500 will bottom at around 2,400.
Given the S&P 500 has already declined past 2,400, a believer of this earnings model can either think the bottom is already in or will be buying the S&P 500 index under 2,400 again.
A V-Shaped Recovery Most Likely
Personally, I believe there will be closer to a V-shaped recovery in demand at some time during the second half of 2020. Once the fear of the pandemic passes, American consumers will start to spend like there's no tomorrow again. Therefore, I think my 3Q and 4Q earnings estimates could prove conservative.
One of the silver linings to emerge from the coronavirus pandemic may be that those people who had full-time jobs and keep their full-time jobs throughout the crisis will have more money in their savings account due to the lack of spending opportunities.
With more savings, they should have more financial security and be better prepared to weather the next black swan event. They might even start practicing more sound personal finance habits.
Tremendous Government Support
Another potential reason for optimism is that the federal government could start sending households $1,000+/monthly checks as a form of Universal Basic Income until the pandemic is under control. UBI is probably the most effective ways to support Americans immediately and directly.
Then there will be corporate bailouts to save potentially hundreds of thousands of jobs. Let's just ensure there aren't any mega-million bonus packages for executives this time around.
Admittedly, with the whole world shutting down, it's hard for me to believe that 2,400 or a 29% decline in the S&P 500 marks the bottom of this bear market, especially since the average decline is closer to 35%.
Everything feels hopeless, like it did in 2000 and 2008-2009. We also know that the market tends to overshoot on the way down. Therefore, it wouldn't surprise me if we see closer to 2,000 – 2,200, bottom mostly due to extreme fear.
However, I do believe we will flatten the curve with social distancing and come out of this crisis stronger than before. Further, the S&P 500 yield is now higher than the 10-year bond yield.
Predict The Stock Market Bottom By Analyzing Earnings
Wherever the S&P 500 is when you read this article, I encourage you to calculate backwards the implied earnings estimates and see if they make sense. If they don’t make sense, then you should take action at your own risk. In finance, we call this a back-of-the-envelope calculation.
When the S&P 500 is below 2,400, I will hold my nose and buy some more. Then I'll assess the latest information and run my earnings model again.
My plan is to continue buying on the way down and on the way up to get neutral equities and build a larger dividend income portfolio. I presume dividend payouts will be cut to preserve capital, but will eventually come back. It's been a painful process so far, but I'm going to keep going like I always do.
Stock Market Updates Since Predicting The Bottom
Update Jan 5, 2021: The S&P 500 and NASDAQ rebounded quickly, closing the year up 16% and 43%, respectively. With so much equity profits, I'm now very focused on searching for lagging real estate deals now. I’m also happy to stack cash.
Update March 30, 2022: After buying the dip after the war began, I've stopped. At 4,600, the S&P 500 is fairly valued. There should now be more real estate investment opportunities with higher mortgage rates.
Update September 14, 2022: The Fed isn't relenting in its rate hikes to 4% on the Fed Funds rate. As a result, I'm not buying stocks until the S&P 500 is below 3,700 again. Instead, I'm activity building cash so I can buy a move-up property in 2023 or 2024.
Update May 9, 2023: The S&P 500 is at about 4,120 and the Fed has hopefully finished raising rates to 5% – 5.25%. I'm not very optimistic about the S&P 500 here at about 18.5X P/E and low single-digit growth. As a result, I'm not putting new money to work. Here's how I'd invest $1 million today. I also wrote a post about how I'd invest $250,000 today.
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In 2018 I was able to invest a lot of money in the stock market and I did. Now, I am thinking I should have sat on that cash and waited for the next decline or bear market as we have now to join in. Of course, I have reaped in dividend income and I have bought what I can now, but the majority of my assets are in the red as I seem to be adamant to not ever selling at a loss. Maybe I should just accumulate cash for the next few years and invest it at the next bear market which I understand will be in 5 or 6 years.
How do you think the inevitable second wave of outbreaks and possible resulting quarantine will effect your spending predictions? What do you think unemployment will be at by year’s end?
I think a second outbreak is expected and we will be much more prepared after going through current measures. As a result, I think we will deal with the second outbreak better and feel less shock if we have to quarantine again.
I think unemployment surpasses 40 million, and ends the year at around 20-25 million. The government enhanced unemployment benefits, stimulus checks, and PPP loans have really been solid so far. The most decisive and proactive I’ve ever seen.
As of April 30, 2020, I sold all my stock I bought below 2,500, and also took some profits on stocks that rebounded, like Tesla.
See this post: Freedom Is Much More Valuable Than Money
Just took out a $100k heloc on our house. We have another $250k in equity still even if I spent all the heloc. What I plan on doing is leveraging it in the stock market, a little at a time. Especially if we dive down another 20-30% from current levels. I see little risk in this move if we keep our jobs. Which is why I’m being cautious with leveraging this money. What’s a good entry point in your prediction?
Did you decide your entry point? I basically looked at Sam’s data (17 months for average bull market) and decided to DCA across 17-20 months, a combo of index funds mostly.
Sam, thanks for all you do. What sector of stock market will be good to invest moving forward in 2020 for the next 1-3 years? Because of this coronavirus, will people now hear more about what Bill Gates says to invest in healthcare? What brought stock equity up from 2009 to 2019? Technology? What will it be now?
Thanks!!!!
The stock market is not a market. Now it is a federal reserve manipulated investment. Why would anyone even think about any investment at this time
when the Federal Reserve at anytime on any day with there unlimited funds can move the market up or down. Get out and let them have it. Free market no more when your investment has no impact.
Agreed. If Covid were a blip, and if the Fed just offered *some* intervention rather than the current extreme intervention, fair value for the S&P500 would be 1800 +/-200. In the first round of SBA loans, 1.6 million applications were accepted, but there are 30 million small businesses. Given that info, I’m betting this will be a train wreck rather than a blip. I’m getting ready to sell the investments I purchased @ the late March bottom I believe the real economy is ultimately more powerful than Fed intervention, although I may be proven wrong since the Fed has lost all sense of responsible levels of support.
I sold a condo in October 2018 and have been sitting on 400k in cash and was really bummed when it wasnt in the market in all of 2019. I was itching to get in but just couldn’t do it because valuations were so high and it just seemed like prices just couldn’t keep going up. Today I feel very relieved as now I can start buying much more comfortably knowing I didnt buy at the top. Should I go all in on a diversified oil fund considering it’s gotten so hammered on multiple fronts?
As an oil industry person, I’d advise against oil investing unless you take time to understand the debt risk on a per company basis. There will be bankruptcies that may hurt portfolio type funds.
Thanks Tim. What big players in oil do you think are in the strongest position to make it through this storm?
Some of your more solid players that will make it through are
PE (parsley Energy) – good rock, good neighbourhood
MGY (among the best) why : lives within cash flow, low debt.
DVN (large cash pile on balance sheet) dislike Mgmt. good company though.
speculative
SM (high debt), good rock
AR (high debt), good mutl-year hedges
Sam – great analysis. I believe there needs to be an adjustment to earnings on a go forward basis to account for the debt service that companies that get bailed out must pay. For example, if Boeing gets a $50B loan @ 0% interest that is payable over 10 years they will be paying ~ $500M annually back to the government. The $500M will be a reduction in earnings. In 2019, Boeing had a net loss of $636M (-$1.12 EPS). This would increase their loss to $1.14B (-$2.01 EPS). That is an almost 80% decrease in EPS. This concept will have a material impact on the aggregate PE ratio across the market.
Once the bailout package is announced it will be easier to calculate the potential impact, but I suspect we would want to incorporate this into the analysis to better understand the potential downside. This will be a long lasting impact on earnings until the debt is repaid.
Jordan,
Quick question on your math. If Boeing were to get a $50b loan with a 10 year term. The annual principal would be $5b no? Also debt would not be calculated in EPS, as the debt would be a balance sheet issue. Now I would agree that FCF would be impacted, but not exactly sure on your EPS calulations.
Seems reasonable.
The market seems to assume the worst at this point.
-We assume gloom due to our borders and tourism being shut down.
-We assume nationwide unemployment upticks because of social distancing.
-We assume the number of people ill to increase.
The only thing in my opinion that could drive it down/up drastically are the numbers after the dust clears:
-Unemployment numbers
-Earning reports for major market movers (FAANG, etc.)
-Approval/rejection of key bills (bailouts, UBI, etc.)
-Random events (Top 10 politician getting COVID, major natural disaster hitting while the country is basically shut down.)
I am personally going to increase my Roth/401K contributions since this could be a good entry point.
The market is tainted. Keep it tangible, real estate works. Also lets give all the big corporations a big fat bailout and a trophy for last place. One rental house can replace the income from 300,000 in a 401k.
The market is tainted for sure.
If a bailout happens I hope they are HEAVILY regulated and held accountable.
I want to do Real Estate but it’s kind of early.
1. I am 2 years out of college. Within a year I may have enough for a down payment.
2. I still want to take advantage of the employee match for the 401K (Free money.)
3. I am in Texas now, but I don’t know how long I will stay. My concern is that If I ended up moving say to Colorado, it would be 10x harder to manage my rentals.
Having said that, I am interested in Real Estate.
Depending on different factors, I have considered investing in RE in Mexico since my dad works in the industry as an architect and we are close with the company owner. The combination of knowing people who KNOW the market and my relative buying power make it interesting.
Gold, Silver,real estate and toilet paper. Best investments
True that, best bet so far.
Yes, Gold if you already had it, an income source.
Be careful when investing in real estate at the moment. I own my properties outright. Because of that, I stand no chance of losing them if tenants fail to pay rent. Even then I could still get myself in trouble if I fail to keep enough cash on hand to pay for taxes and repairs. I’m not at all trying to dissuade you from buying real estate. But please do your homework. No over- leverage right now. Make sure you buy in an area that people are moving to, and unless you’re extremely handy and have oodles of extra time and cash on your hands, avoid anything needing too much work. Then once you’re in, screen, screen, and screen some more. Empty units are far preferable to bad tenants. When I first got into rental properties twenty years ago a family friend who owned and still owns a ton of rental property said to me that there’s nothing a property management company can do for me that I can’t do for myself and do better. I have lived by that ever since. Therefore it is not exactly a passive game.
I’m a big fan of this advice, Sarge54.
Leverage can magnify your investment gains–or it can totally ruin you. People seem to frequently underestimate the risk involved in owning a rental property.
Two cents:
1) Valuations are not based on past earnings… they are only used as a proxy for future earnings. If your future is bright and your past is not, your valuation will still be great (if not ask Uber, Skype, and the likes).
2) cero activity does not equal cero earnings… it equals big loses!
Best!
Great Stuff. Wish I had heard about you sooner. WIll now always look forward to read your analysis.
Hello Sam. Very timely article. I agree with your assessment that S&P could go as low as 2000 due to over-correction. We are at 2300 today.
One question for you….when equities are significantly down, what is the reasoning behind your plan to only upping your allocation to 30%. I am at roughly 40 percent in equities (down $300k and it hurts!) and recently FIRE. I deployed 5% cash on the way down and am still holding cash about 5% which I will deploy once S&P goes in the range of 2200.
If the market continues to fall even further, i.e. below 2000, I am considering converting all bonds in my 401k to Equity.
Beyond this, I also have cash reserves for 1 & 1/2 year expenses so I could wait for the market to come back up. I own my primary residence (fully paid) and a couple of investment properties overseas in my native country. Real estate allocation is roughly 40%
After all this, I would have roughly 50-55% in equities and enough cash to cover living expenses for 1-2 years. My side hustle, which was covering 50% of my living expenses is affected due to social distancing. Hope this gives you enough context for my question
You were very prescient in reducing your equity exposure some months back and I wish I had done the same.
I would like to know your thoughts on what risks you forsee which prevents you from increasing allocation to equities beyond 30% as this could be a good chance to increase wealth. I may be missing something crucial.
Thanks for your work. I did not get a chance to thank you but I read your book and negotiated a severance by engineering my layoff. I would have never thought it possible until I read your book and even then I was only partly confident it would work. But it did! So thank you, much respect for your work ethic, commitment and hunger.
Just some cold water…
What if the multiple reverts to the mean at 15X and we go to S&P500 earnings down 30%? My back of the envelope puts the bottom around 1400.
Is my math wrong? I’ve been at the thunderdome grocery store so may have a concussion.
Could happen! However, a valuations should hold maybe even go up with the 10 year bond yield collapsing to 1%. There is definitely a valuation relationship between bond yields and S&P 500 yields since everything is relative in finance.
Sam, thanks for demystifying the S&P calculations in a straight forward way. I’ve been buying in 10% of allocated cash since 2700 and am 50% invested right now. How do you structure your cash reserves as you scale into the market? As some point you’re going to be fully invested.
Keep up the great work and best to your family. You’re creating an enormously valuable set of resources for your kids (and mine, lol) to learn from.
Sam, love your thinking.
What happens to your model if Q2 & Q3 are negative quarters (loss making).
I worry certain sectors (travel, retail, real estate, energy) may have fixed cost and revenue will not even cover part of the cost.
Hey Sam,
Very logical approach to coming up with an estimate. I personally have no opinion on a downside target. All I know from observation and reading is that we always overshoot to both the upside and downside.
My household has worked very hard to de-risk over the last five years. We took advantage of making hay when the hay was good. We then eliminated all debt and accumulated a net worth of ~$1.8M as of 2/28/20 from a starting position of $181K on 1/1/2015.
Before a week ago, only 2.5% of our net worth was in equities and about 50% was in cash. We have put about $150K of that to work near the lows of this current down move into various index ETFs and individual names.
We are prepared to put more to work with each additional drop of 10%. My next trigger is when S&P 500 is 40% below it’s all time high.
We find ourselves with very minimal fixed expenses without a mortgage or other consumer debt. That said, we have made a commitment to reduce our monthly spending significantly and are targeting less than $5,000 per month vs. the $10,000 to $15,000 we had been spending last year.
This is pretty easy to do when you’re on lock down. This will also allow us to continue building our cash war chest.
I remain OPTIMISTIC for the future although the next 18-36 month could potentially be painful for the world. I believe we will be RESILIENT and PERSEVERE as we band together in an effort to get past this COVID-19 virus.
Dom
Hi,
Can you please share your approach of increasing your network 10 fold in 5 years.
Thanks.
*net worth
Agarl,
It’s nothing fancy. My wife and I worked very hard to grow our income aggressively. Of the $1.6M gain over that time frame, about 50% came from pure savings alone. We then strategically put that to work.
The secrete if that is what you want to call it can be boiled down to a few things:
(1) Aggressively focus on growing household income. In that same time, we grew our income from about $200K to $750K.
(2) We made sure we had a high savings rate. Our goal was 50% of after-tax.
(3) We made investments and de-risked by paying down all debt.
Don’t get me wrong, our income and net worth will be impacted from this crisis we find ourselves in.
thank you for the info. Now as things changed in CA with the Governor saying not to go out at all and the reports on hospital availability etc. Where do you think things will be going as far as the market? Also we are 5 years from retirement and lost 32% already. I am so freaked out.
Hi Karen, it doesn’t change my earnings forecast. The quicker we can flatten the curve, the quicker we can resume normal life.
Run through the quarterly earnings model exercise yourself and see what comes up.
Right now, I think the risk reward ratio is 15% downside / 40% upside.
The Coronavirus will come and go. When the coast will be clear and when equity markets will recover no one knows. But what if another Black Swan events occurs in the next 12 months. An armed conflict with North Korea, Iran, China or Russia? Iran attacks Israel? Another CAT 5 hurricane this summer/fall? That long anticipated earthquake in LA or SF? Potential impacts from the election should there be a change in control in the White House and/or Senate?
I am 69, married, own 2 homes, 2 cars, and no debt. Since retiring at 65, I have had 90% of my non-real estate net worth(millions$)in short term treasuries. With 2 SS and 1 pension checks and full Medicare coverage, I’m pretty well set for life. I’m in good health and exercise regularly but a nasty Coronavirus infection could do me and or my wife in.
My beef is that the drop in treasury yields to zero has robbed me of income to adjust my net worth for inflation.
I see that both American Express and Goldman Sachs (Marcus) have FDIC covered bank CD accounts offering almost 2%. Think it’s safe to invest $250k in each? Also the Vanguard dividend & real estate funds look tempting.
Your thoughts?
Congratulations for your success! Another great example of why I think so many people are not being as hurt as badly as the media makes it out to seem. People are investigating rationally based on their risk tolerance and financial situation.
My advice is to enjoy life and don’t bother watching the news or reading this site. You’re all good and set up. Enjoy life to the max!
I only had 12% in stocks, rest in real estate and fixed income. Learned my lesson on 2008. Keep in mind, the more the federal reserve thinks it needs to do the further the market will drop. I have seen predictions of 6 to 12 thousand. The middle class was completely caught off guard as to what has happened with the virus and all fiscal and economic activity. Alot of government activity and changes have taken place in a very short time frame, almost like the play book was already written.
Thanks for sharing your perspective on the bottom of the market, Sam. Your insight and breakdown of your estimate is helpful. Like you, I am planning to do some buying around these levels. I am in the accumulation phase and still have a long time frame for my investments.
Hi Sam good luck to you and your family
I got lucky and sold off 80’000 worth of my portfolio to help with paying off my car and putting a down payment on a triplex that im closing on tomorrow.
I still have 15’000 in cash right now after buy up shares in the trade desk. Don’t have the stomach to buy anything besides companies that will be lest hurt by the downturn. Im thinking amazon costco and adobe would be good companies to incest in if things get really bad. Any suggestions on stocks to buy and what to do if my new tenants can’t pay their rent due to the corona virus?
Sam thanks for the analysis. I think the market will bottom when the rates of those infected peak out, and it will be time to jump.in with panic at its highest. Dont think we are quite there yet, but will.be in a few weeks. When it feels like the world is falling apart, it will.be the bottom and signal going in. The market will over correct due to fear and will recover rapidly with 2 weeks of good news. I am buying now with every 20% plus drop and will go in heaveier when it feels the rates of infection have peaked.. .maybe 8 to 10 x what we have now. Waiting too long can cause a lot of missed opportunities. My investment horizon is long.
I don’t think so b/c the stock market anticipates the future. I believe the stock market will already have rallied a lot before the rates slow down. Let’s see what happens!
Sam,
Thank you for this post. It is fantastic. Very timely, logical, and easy to understand. I love it.
One question though. You said, “If valuations stay the same, the S&P 500 will decline by roughly 29% from its peak level of 3,386.”
What if valuations don’t stay the same? Is it possible that we could have both a PE reversion to the mean along with a decline in earnings?
Could we see earnings decline by 29% as you predicted in method 2, along with a PE reversion from 19 to 15 as you predicted in method 1? In that case, I’m calculating a potential bottom of $1,382-$1,439.
What am I missing?
Yes, the valuations derate than the downside is even greater.
The counterbalance is a drastic drop in the risk-free rate of return, were conventional finance would dictate a higher valuation, not a lower valuation for Stocks.
Incredibly helpful analysis Sam in this time of chaos.
I am curious which is a better indicator, the PE ratio you mentioned or the one I had been following which is the Schiller CAPE number and why one is preferred over the other.
I have personally been shifting some money out of my bond allocation (which is a overweighted now) and putting it into depressed sectors such as energy (VDE) and real estate (VNQ and O). I feel it was a perfect storm that hit and these sectors in particular should rebound strong when it passes.
I have some colleagues that have been buying up depressed stocks in the cruise line industry but that worries me a bit because recovery in that segment is not guaranteed as it will take a long time before people trust that type of vacation and some if not all of the major players are quite leveraged and not sure what will happen during this time when there is no money coming in.
I don’t think it matters which valuation metric to use in my analysis because the valuation of the time is reflected by the price at the time. In other words, everything is baked into whatever valuation you want to use.
Analysts have a way of over complicating things in finance. And if you cannot communicate properly your ideas to your clients or to the people reading your stuff, then you fail.
Sam, thanks for the link.
I think between Stock, Ereits and Public reits. I was having trouble deciding how to group this in my NW. Ive been following your philosophy of keeping max 30% of my NW in the market. Including now eReits, REITS (o,vnq, stor, ohi) IM there, whereas ive been grouping this along with my own real estate properties. etc.
How much of O are you buying? Also have you look into STOR?
I’ve been buying both.
Why vnq over vgslx?
This was the first time I was buying O, so I just put $10k in. I just so happened to already have VNQ in my ROTH IRA so I just added to it. But I have VGSLX in my 401k so I did put money into that well.
STOR is now at a 9% dividend and owned 10% by Berkshire Hathaway. Been buying this along with O, which is now yielding 6.5%.im buying both for a high 7 Ish yield between the two. It’s volatile at the moment but I’m long on real estate as Sam has mentioned. 7ish yield is close to return these e reits are offering (fund rose, realty mogul) but I don’t have to lock up my money for years and has liquidity if needed ( plus O pays monthly)
Did you end up buying more O and Vnq?
I think since I wrote the original comment, the price went down on VNQ a bit, and altogether added $15k to my position. And increased O to 30k total.
Keeping fingers crossed that a few years from now this is looked on as a great move on my part.
It’s a solid bet. Both are returning 6%.
Do you consider these as real estate investment or equity investments in your net worth? I try to consider it as part of real estate portfolio Your take?
Hi guys question for you?
VNQ and VGSLX are ETF vs mutual fund but the same fund. The difference i noticed is the dividend yield.
VNQ as of today is 5.5% vs 3.6%, why would there be a difference between the two? This makes me want to buy VNQ even though its the same and cheaper per share.
Ive been buying O realty as well, it’s dividend is at 6%, the main benefit is the monthly dividend vs quarterly. With VNQ at 5.5% its diversified vs O is one company but rock solid 50 year track record. Is there any reason you would chose O vs VNQ?
im a growth investor but im adding in income producing stocks to go along with my index funds (vtsax).
It wouldn’t let me reply to your follow up question so I will answer here. I have broken my investing portfolios into two major divisions: The Market Portfolio and the Real Estate portfolio.
In the market portfolio I have it broken down into equities, bonds, and alternative (REITs and commodities such as gold in here so vnq and O are in this section.
My real estate portfolio consists of tangible real estate (mainly investments I have had with syndications in multi family apartments).
Great feedback. I appreciate that I asked SAM the same (sees it as R.E). I was having a hard time looking at VNQ, etc as real estate even though i quantify it in my N.W. as Real Estate.
I think im leaning towards REIT’s as part of the equities as well, they are just too similar and not actually something i can physically go a touch if i wanted to.
Real Estate is tangible.
Thank you
Hi Mark,
Publicly traded REITS act closer to stocks. So they are not proper hedges for stock market downturns as all.
Please see: https://www.financialsamurai.com/how-does-real-estate-get-impacted-by-a-decline-in-stock-prices/
one key question is the impact of short to medium term unemployment. with hundreds of thousands laid of or put on leave without pay every day, what will be the impact on the economy long term. How many of these laid off will be taken back on and for how long. With States clamping down on temporary workers, available employment will not be easy to come by for those at the bottom of the “food chain”. Have we ever experienced such a sharp decline in employment?
Great analysis. I was using the DJI below 20,000 as my yardstick, but S&P 500 index is a bit better. I was also waiting for the VIX to break it’s previous record and it did at 82 on 3/16/2020. So yesterday (3/18), I did the same, held my nose and bought a little. I’m not in a hurry… This is by far the most strange violent market drop I’ve ever encountered!
Thanks, Sam. Appreciate the thoughtful analysis.
In a recession scenario, I could see earnings falling 30-40% AND NTM multiples falling 20-30% from their peak. Obviously there’s going to be huge variance depending on what sector you’re looking at but I’m not sure the valuation piece has been priced in yet.
I don’t think things bottom until we get through the slew of Q1 earnings revisions… guessing that’s closer to 2000 but I’m starting to rebalance back towards equities now as we get towards 2300 (and with a 10+ year time horizon). I’m also opportunistically buying into sectors that have been the most impacted but admittedly that’s more speculative.
I like your advice about buying some stocks on the way down and buying some on the way up. I didn’t get to buy any stocks during the 2008-2009 financial crisis. This bull market is my chance to buy stocks now. And I agree with you that the recovery will be similar to a V shape.
“Everyone has a plan ’till they get punched in the mouth.” So many wonderful and creative detailed plans out there. Which industries will bankrupt first with out income? Will it be the airlines, hotels, or restaurants? But I’m not worried because the government will save them all.
Hi Sam,
Thanks for another great article.
I thought the S&P500 wouldn’t reach 2,600 but it did. So I don’t know how valid my guesses are anymore.
My main concern is for HOW LONG will this last. Your analysis seems very rational, but I guess the difficult thing is to make the right assumptions. If we don’t start recovering by 3Q then the consequences might be worse (bankruptcies, massive layoffs, etc etc).
My portfolio was initially not being too affected but now even my bonds are going down. I’m also exposed to other currencies (GBP, EUR, MXN) and all of them are going down drastically versus the USD. At least I can tell myself I don’t need the money now so hopefully time will heal everything.
I am buying 10kEUR in the next 3 weeks, and regretting I didn’t keep some additional cash to use in case a good opportunity came up. I have a big chunk in cash to use for a deposit of a property. Lesson learnt for the future me. Always keep some extra bullets readily available.
Good luck to us all!
Max
I am bummed that my bonds are going down as well. When that started happening, that was when the pain indicator started ticking up, But also the hope indicator because the treasury bond selloff was a little too irrational while the stock market was selling off by 10%.
Only time will tell. But I think the recovery this time will be faster than the recovery during 2008 and 2009.
The panic in the market next week is probably going to make the past two weeks seem tame by comparison. How is the market going to react to scenes of overwhelmed hospitals in NYC (national media capital) with continuing rises in confirmed cases?
The math is simple, most infections that will require hospitalization by mid next week have already occurred. In NYC the total number of confirmed infections has grown by 60-65% per day over the past week. Even if over the next 7 days confirmed case growth decreases to 50% per day, NYC alone will have 24,000 confirmed cases by next Wednesday. Hospitalization rate is currently around 23% in NY state. That means the city will have to come up with over 5,000 hospital beds by Wednesday and probably 2,000 of them will have to be ICU beds. NYC currently has under 2,000 total ICU beds with 80% of them occupied in normal times. There is very little ability to increase numbers of beds (especially ICU) by that much in one week.
That is going to cause panic in the markets anyway you look at it.
PS considering that the Tuesday to Wednesday (3/18) new case increase was 105% and the Wednesday to Thursday (3/19) increase is on pace for another 100%, my average 50% daily increase is very conservative to say the least! With its huge density NYC should have shut down much earlier than it did.
Maybe. Or maybe people just get used to what they are hearing and seeing after a while. May be the shelter at homes and lockdowns help flatten the curve tremendously. Maybe over the next 3 Months, we collectively find a way to help others and make it through. I will do my best to do my part to help my community. I won’t stop.
My thought: don’t commit new funds for 18-36 months. Lots more surprises to come, this pain has been spring-loaded for 20 years. Dr. Remoulack above mentioned political activist and hedge-fund billionaire Bill Ackman begging “the government” to pay for all workers to stay home for 30 days. The guy is a billionaire! Let him pay. Boeing spent $100 billion in cash position to buy back shares, and used up their $13 billion credit line to do the same; now Boeing wants a $50 billion bailout? Because their share price went from $100/share to $20/share, and retiring execs cashed out? Nah…:-) Sell it on the block to Raytheon or some such.
Zero Interest Rate Policy hasn’t ever really gone away, went into effect in 2008 and never cured. The P/E valuations are nice, but based on a 0.25% Fed Funds rate. Nah…:-) Sad to see the U.S. govt try to print their way out of this, the TARP bailout saved investment bankers and hedge funds (and their bonuses) in 2008, and the concept of moral hazard also never cured.
S&P 500 ended 1999 at 1,469 and didn’t recover that nominal number (that means ‘not adjusted for inflation, kids!) until 13 years later in 2013. Japan’s Nikkei over 36,000 in 1990 and 30 years later it never came close to that again and is now under 17,000. Bear markets are real, and the US Stock Market has had a 50% drop and a 57% drop within the last 20 year.
It isn’t coming back anytime soon. Think about the layoffs (you will read about them next week, in hospitality, retail and finance). Bulk employment replacement with automation, now is the time to do it. UBI and $15/hr minimum wage? Weigh if those low/no skill workers are worth replacing.
As long as we are guessing, I’ll put my nickel down and say S&P500 goes to 1,600 in late 2021. We’ll see.
Good points, but I think the outcome largely depends how long this coronavirus “lockdown” continues, which is mainly determined by government policy. If everyone was back to business as usual in two weeks, I think things would rebound. But if it takes 2-3 months for that to happen, there may not be much of an economy to come back to.
It is frustrating how the Fed started dropping rates after Dec 2018 when it should have instead kept increasing them to get us to a reasonable 4-5%. Now they’re SOL, but probably still won’t learn their lesson for the future.
I don’t know if our markets will go into Japan mode, but I don’t think things will spring right back up to where they left off, as the highly-leveraged hedge funds who got rocked (did you hear Ackman?, lololol) and companies which may be prohibited from performing share buybacks will result in less participants.
In my opinion, the coronavirus policy from the get-go should have been to continue life as usual, except for the small percentage at risk, who should have self-isolated for 3-6 months until it mostly filters through the country and everyone gets it and recovers. It just seems very unfair and plain stupid to stop the economy in attempt to protect the 1-2% or (probably) less of people who have severe reaction to the virus. It’s good that the market bubble has been popped, but when you freeze certain parts of the economic food-chain (e.g. hospitality/travel/services), it’s like jamming a gear of a machine in that the whole thing will stop. Later jump-starting the economy after it’s in tatters will be a very costly and ultimately wasteful process (e.g. letting go and then re-hiring, under-utilizing resources like commercial real-estate).
Great thoughts as always Sam! I’m currently self quarantining from my family (I was traveling last week when things really started to heat up, and my company recommended quarantining), and I’m watching the stock market swing each day. I think you’ll start to see a lot of non essential businesses suffer over the coming weeks and quarters and its even more clear to me with the big automotive manufactures starting to shutdown. I do however think that once we get past this the market will rapidly climb back up (of course I’m not an expert!). I also plan on continuing to buy (at least through my 401K) throughout the downward and upward trends.
Bought some airline and cruise line stocks last week and got at least temporarily burned! Put toe back in water today and bought small amount of SPY. Will continue buying SPY in small quantities following down days. No way to know where the knife will fall, but the market will come back. In the words of Dr. Smith, “Oh the pain, the pain!”
Airlines and cruises are going bankrupt. They are worthless in my opinion as they are no generating revenue and even after a recovery they will generate much less for a prolonged period of time. I would go for technology stocks myself.
Not sure airlines are worthless. Travel is a key component of our economy and the airlines employee hundreds of thousands of people.
Although I do believe the technology sector should I perform because technology is what will help us get through this mess.
Airline industry is too important to fail. Bailout will be corporate socialism at its finest.
I agree Tom, do we really need cruise lines. Money we dont have would be well spent elsewhere. Bailed out many airlines in the past.
Thank you Sam. Seven months ago, I didn’t know what an IRA or mutual fund were, and had never filed taxes or even applied for a credit card because I’ve lived in latin america for the last 15 years and don’t earn a whole lot. On a recent visit to my mom’s in California, the hopes that her cognitive decline could be explained by anything other than dementia finally gave way, and I found myself trying to do her taxes and taking over management of her bills, finances and investments.
One of your posts here about moving away from the stock market to buy on the way down, in addition to things I’d read about overvaluation, buffet’s cash and michael burry’s comments about etf bubbles, convinced me my 75 year old mother shouldn’t have 60% in the stock market, and I got her out between Feb 24 – Feb 27. THANK YOU!
If anybody here has any insights into the following two questions I’d be very grateful. When I pulled her out of stocks, it got moved into money market mutual funds offered at the places she’d had her stocks. I saw a short youtube video where warren buffet mentions briefly, as an aside almost, that this was dangerous back in 2008 because money mkt mutual funds, thought of as cash, aren’t fdic insured. But it looks to me like they’re protected at least against firm failure by the sipc? Why was Buffet worried? Would cash be safer, for example, getting moved into a schwab/fidelity brokerage account where it could be held as cash using a ‘bank sweep’ and fdic insured?
I’ve called the places where she has her bonds. They tell me it’s vanilla, conservative, excellent rated municipal bonds with good characteristics locked in. I’ve been reading about volatility related to bonds, including municipal bonds, over the last couple days. I don’t understand enough to know how much risk is involved with these. I suppose the question is at what point would someone want to sell these if not losing wealth is more important than increasing wealth? Is this the type of thing where one should wait to see if certain warning signs appear? What would they be? Sorry if these questions sound stupid or are really out of place.
Bond funds are different from money market funds. Money market funds are typically very low risk/low return, though they can “break the buck” in extreme conditions as you are referring to. Bond funds are holding assets that beyond having yield can fluctuate in price, and therefore are more risky; though they also can have a higher yield.
Brokerages like Fidelity are not banks, but some accounts (e.g. certain retirement accounts) do have an FDIC-insured sweep option, which I believe distributes the money to banks behind the scenes for holding. However, note that FCASH of Fidelity is not FDIC insured. However, I have found for some of my Fidelity accounts (e.g. BrokerageLink, Individual/taxable), there is no-such FDIC option. Therefore, the next best thing is to buy a short-term treasury money market (e.g. FDLXX of Fidelity). Do verify that the composition is only short term (e.g. <3-6mo) Treasury bills and coupons. The US govt will back Treasuries like it does FDIC bank accounts, so you have the same "guarantee" of not failing essentially (though technically it could fail if the govt goes bankrupt). Beyond short term treasuries, I think I recently read that now the US govt is backing municipal bonds, so you could also look into a short-term muni bond money market (not bond fund). I'm not an expert, but this is to my best knowledge.
Thank you so much for taking the time to answer. It does indeed look like the IRAs at Fidelity allow for FDIC-insured cash in their bank sweep up to $2m, so I’m going to get that transfer started to try to be on the safe side. I feel like getting her out of the stock market early and trying to get her cash safe is a strategy I can live with for now. If things fall to the more pessimistic levels of 1400-1600 some people here are talking about, I’d reconsider. I spent all weekend researching municipal bonds, getting myself acquainted with emma, trying to learn as much as possible. I dug that portfolio out of all the other paperwork and found she had a third in two high-yield nuveen muni bond funds that have been bleeding for the last two weeks. Both were long-term, filled with bbb, and lower, or unrated. I feel disheartened, because I’d called two weeks ago to that financial advisor’s office and asked about risk, how to make things more conservative, specifically asked about ‘junk’ or anything rated lower than aaa/aa; and they told me nothing could be more conservative or safer, and that I shouldn’t change anything because I’d lose the rates my mom had locked in on her quality munis. They never mentioned a significant holding in those nuveen funds. Will be getting out tomorrow, after they surely take another hit, and move it to fdic insured cash. Talk about getting an education. At least this way I’ll have a couple months to read up and devise some better informed strategies for the future. Thanks again.
Wow – This is very clear thinking in a time of panic. Thank you for the wisdom. I’m half considering selling my car to plow into index funds after reading this.
Earnings decline by more than 100% if firms make losses.
Dec. 31, 2008 -23.25 S&P earnings for that quarter.
Plus the acceptable multiple over the year could drop from even further.
This is a nice disciplined approach – way better the lots of people’s random guessing based on one random data point or approach.
To practice Sam’s approach:
S&P PE: Dec 2019 approx 24, Oct 2011 15 (low after 2008)
This drop alone is 32% giving an S&P of 2200 from 3230 – so just the mental risk/reward recalc from a bear market gives us pretty much the current price.
Add in an earnings drop of 40% per the first case above with the modifier that people know there is a recovery time so prices don’t drop to match earnings (stocks with short term negative earnings aren’t free)
Based on the approx 90% drop in 2009 that caused a 50% drop in valuation, may estimate then a 40% drop causes an additional drop of 20% for a while until earnings are proven to return say. This puts the S&P at 1550. Subtract 5-9% for over shoot/general craziness and 1400 isn’t far.
Spot check this against the last two bear markets and a 50% total drop seems probable.
On the upside, nearly destroying the world in total nuclear war during the Bay of Pigs / Cuban Missile Crisis only caused a 28% drop – so at least this isn’t that! ;)
Curious your thoughts on QE5, QE6, QE7 and QE8 all in the past week along with the trillion dollar stimulus package that is about to pass.
Is there some point here where we break the bond market for good?
Great analysis Sam! I hope you are spot on with this, but I’m guessing it is going to be a bit lower because things were a little/lot juiced going into this. My bottom call is 1675 in the S&P. I will have nervously purchased a huge chunk at 1850 about a day or two before the bottom. The further drop will have me worried and I’ll beat myself up for not waiting longer. News will be horrific, the outcome uncertain. That’s basically slightly worse that the % of the ‘08 drop. I hope I never get the chance to buy that low though!
As far as the Tesla stock, I hear you on it being a long term play, but a cash hungry business building EV’s when gas is $1.50/gallon is beyond my appetite for risk, but admittedly i don’t fully understand the play on the battery side of their business.
1,675 will be impressive! How did you come up with that figure and what percentage of your net worth is exposed to stocks?
Roughy that’s a 50% decline from the high. I am a lot like you in my asset allocation, I was 20% stocks going into this mess. I too am going to use this to adjust my stock holdings up. I held more cash than stocks, so I have several purchase points the first was S&P at 2500, the next is below 2000 as I stated, then pushing all my chips including in if the end of the world happens and we drop down to the 1000 level. At that point bullets might be more valuable than gold though. I do think that 18-24 months from now we could have “another” real estate purchasing opportunity of a lifetime. Keeping some powder dry for that as well.
What’s incredible is that a 20% allocation to stock still hurts like crazy. But down 30%, the pain has basically gone numb.
Of course I wish 0% of my net worth was in stocks starting this year. Just gotta make do.
Pretty funny. You think this is going to be buy the dip.
In 1929 the market fell 2 times, first time 66%, then another 66% the second time. The result was for ever dollar invested 11 cents remained. The VIX hit 80. The VIX hit 80 only twice before 2008 and 1987 Don’t think they had a vix in 1929 but I’m sure it hit 80. 80 is bout 5 standard deviation from the normal of 15. So we are operating in a risk environment 5 standard deviations from reality, but wait there is more! Oil is a proxy for commodities. The oil vix OVX was 25 in Dec 19 today it closed at 167 it spiked to over 300 several times today’s intra day high was 312. That’s a SD change of between 6 and 12. So tell me when the vol is 300 what is the correct price? But wait MORE. There is an index called the MOVE which tracks bond vol a sub for ths index is TYVX the TYXV in Dec was 4 Today it closed at 15 and spiked to 19 that’s a 4 – 5 SD change in vol on super stables bonds! Oh ya what about GOLD? GVZ is gold vol and gold is a good proxy for currency The GVX is Dec was 10 today it closed at 48 and peaked at 51 a 5 SD route
Those assets generally have very good diversity with each other. Their correlations tend to be near zero with each other but now they are ALL correlated through this massive market volatility and ever volatility is blown out to around 5 SD 5 SD certainly qualifies for black swan territory, so anybody that buys this market with this much risk running in every dimension is running on clueless. If you want to know when to dip back in I would wait till ALL volatilities are not more than 100% over their normal long term means, maybe only 50%
This market is so out of control that I went flat last week. I lost 5% from the peak but I’m damn happy to be in cash. I’ll buy back when vols normalize and I have a good assessment of who is running the country and the national and worldwide disruption caused by the Virus. For the virus to normalize if there is no vaccine will be 2 years sooner if there is wide spread vaccination. I will also need some assessment of supply chain damage. The Hong Kong experience is 20-30% of recovered from infection have permanent respiratory disability, meaning they get winded walking and that’s young as well as old. If 30% of the population is that sick it’s a major game changer from a productivity perspective. In Italy the MEDIAN ICU age in 63. That means half the patients are above 63. It also means half are below 63. If the disease kills 4% it means 2% below 63 get killed. I wonder how many of the C suite will be in that 2%? A jr engineer can design a bridge but senior project manager can actually build a profitable bridge. The 2 are not equivalent. No senior manager no profitable bridge.
411 This is a major world wide disruption. I don’t expect to be putting any money back in for several years if Trump is elected. I may never put any in if Biden gets in. My tax bill is going to be a bitch but I preserved 12 years of profits so what the hell. The nice thing about loss is you can offset cap gain. The nice thing about gain is you can use it to buy hamburgers
I’m glad I made you laugh! I’ve always tried to educate and make people laugh during this entire journey.
One thing that gives me a lot of hope is that most people are invested exactly the way they think they should be. If you retired, you have a conservative portfolio and you should be fine. If you’re still building wealth and on the path to financial independence, you’re fine to because you have time and fire power to buy.
I’m assuming you have also retired as well and are conservative? I’d love to see your earnings estimates and analysis with numbers as well.
“That means half the patients are above 63. It also means half are below 63. If the disease kills 4% it means 2% below 63 get killed”
This alone tells me all I need to know about your analytic skills.
If we’re all going to die, can I have your money? It’s not like its worth anything now, right?
Very helpful article!
I just started a Robinhood account a few weeks ago and just started learning about stocks. Since I’m more of a buy-and-hold type of investor, I was buying a few shares here and there on the way down, but everyone keeps telling me that I don’t want to “catch a falling knife” and to wait until all this blows over before I start investing. I see that you’re buying on the way down and on the way up. I’m still new to all this and I think you may have addressed it a little in this post, but what’s your take on the whole “don’t catch a falling knife” saying?
(By the way, I have excess cash saved and have more work from my profession because of the current market, so cash flow isn’t an issue.)
Thanks Sam – Great post!
What are your (or others) thoughts on selling Gold ETF to buy equities?
– I’m low on cash to buy the dip
– I have 8-10% of a portfolio in gold – it’s up 10%.
– Moving from Gold to Equity would leave me 80% in equities!
I understand that is very high % in one asset class, but I’m thinking there is more potential upside of investing the Gold $ at a 2200 S&P level.
I’m 37, have my home paid off (don’t even count that in net worth) – so have time on my side for the equity to grow before I need it.
Thanks
The S&P sector weighting gave some great perspective.
One of the simple things I like to do when the market is nose diving (besides keeping the course) is to just dump more money buying Berkshire Hathway stocks. Buffett’s been hoarding cash for quite some time now because he thought nothing was worth purchasing. Although projections will be severely tilted in the near-future, I’m sure he’ll do his DD to acquire good companies at or below BV.
Why not just rely on someone who’s been through pretty much everything in the market instead of handpicking stocks that may be “discounted”? E.g., UAL, DIS, XOM, etc.
Warren Buffet has been waiting for this to happen. He will end up with big positions for a fraction of the cost. Overvalued market to buy anything. Estimating we have a long way to go. Market will keep dropping to set real value. One more bubble to go.
It’s too bad he’s staying so quiet. But it’s smart of him to buy up asset quietly, and THEN announce to the world what he’s bought to help boost his asset prices.
Your estimates assume that the impact of this will only be felt for 3 quarters at most. Its beginning to look like we have a deep global recession. Jobs will be lost, people will default on their rent and their mortgages. It could take several years for earnings to make a full recovery from such a situation. Having said that, I went into the market today at 2,400. As a long term investor I think this is a level I can be confident in. Not so bothered about catching the bottom as ensuring that I can make a decent long term return.
Your assessment assumes that S&P being at 3400 was a fair price. We all know it was waaay over-inflated and decline in spending will likely be long term because this virus will cause debt spiral effect and it can be a long and painful recession.
What’s the difference between hoarding hand sanitizer and what Warren Buffett does?
Probably the fact that the cash Warren hoards is his. When you hoard hand sanitizer, you take away the supply of what other people can buy.
Hi Sam, hope you and your family are healthy in these crazy times.
I think the problem is we don’t know what the financial impact is yet and have to wait until 1Q numbers start coming in to be able to determine PE ratios etc. We also don’t know how long this situation is going to last. Weeks months year(s). With potential 20%+ unemployment and businesses shuttered left and right nobody knows.
And also how many things permanently change from here? Will cruises and airlines and casinos ever rebound?
Uncertainty is never a good thing for markets.
I hope for a quick bottom and recovery and have not changed my retirement accounts (rebalanced more to bonds earlier this year) but sold off my investment account to cash on 3/3 with the obvious dead cat bounce and will be staying there until I start seeing 1Q numbers and some sort of signs of stability.
For sure that nobody knows what the real numbers will be. But by the time you know the real numbers, the markets will have already shifted on you. Hence, it’s worth thinking things through.
Read these posts and read the many of the comments who said I was basically a fool for being too conservative. You have to practice trying to predict the future to outperform the masses.
* It Feels A Lot Like 2007 Again: Reflecting On The Previous Peak
* Lessons Learned From The Financial Crisis
* Financial SEER: A Way To Quantify Your Risk Tolerance
Nobody gets investing right all the time. But we need to practice coming up with an analytical framework for the future. Otherwise, folks will wake up 10 years later and wonder where all their money went.
Even if your valuations work out exactly, the market tends to over react both ways to a degree. Not sure where this ends but i also think its lower than here projected to be honest.
My buy signal will be around the time vix starts trending down, but even then it will be a fairly risky play. The good part is… it always bounces back. Which is good if you have the luxury of time.
Excellent, thoughtful work! Thank you.
Hi Sam,
Just wanted to drop a personal note to let you know that the articles on your blog are awesome. Packed with value but easy to follow.
Keep up the good work :-)
Cheers,
M
Well done, Professor Sam! Reading this brought back memories of sitting in econ class, except I wasn’t bored!
It’ll be interesting to see where the S&P bottoms out. I’m basing my stock purchases on something more simplistic. I plan to purchase stocks when the media starts reporting that infection rates are flattening out. Fear is dragging the markets down, so I’m looking to optimism to bring it back up.
It sure would be fun to teach a class once in a while. I’ve had fun being a HS tennis coach. Alas, looks like everything is shut down and being a professor online isn’t as much fun.
If we’re not having fun, we’re not doing it right. Hoping for the best!
I think we started 2020 from an artificially, fed-induced peak on 2/19 which to me means the drop will be steeper than Q4 2018 or 2008. My peak low (guess) is 15000 on the Dow and 1700 on the S&P. I consider this worst-case but who knows. My best realistic guess is 18000 on the Dow and 1900 on the S&P.
I will be legging back into the market once it feels like we are bouncing around a bottom range. I would probably start putting some money back into equities when the Dow breaks below 19000 and the S&P breaks below 2000.
If Russia and Saudi Arabia keep playing chicken with oil prices, my worst-case scenario definitely comes into play. If they would come to their senses and limit production so prices could rise, we could potentially avoid the worst.
I like it! How do you come up with those numbers on a valuation and earnings growth perspective?
The mutual self-destruction between Russia and OPEC is interesting to watch.
Did you see that little word in parenthesis called “guess”? ;) This is really all anecdotal so no real valuation or earnings growth projections. I just think we will see a stronger decline than in 2008-2009 due to the inflated peak we started with so my low range is a 40% drop from the peak and my high range is a 50% drop. We touched just below 19000 today on the Dow at its low so I am concerned that if the virus curve doesn’t flatten as much as we would like, and the subsequent earnings forecasts come in worse than expected, I believe a 50% drop really comes into play before we see things turn around.
I’m also concerned about the bond market and hope the damage being done there with all of the fiscal stimulus doesn’t create its own set of headaches for us. If people lose faith in bonds and hoard cash it will only extend the pain because they will be even slower to come off the sidelines and begin spending again out of fear.
That was one of the simplest and straight forward analysis I’ve seen bye anyone. Absolutely brilliant!! I’m using the pain gauge to figure out the bottom. I started buying when the S@P was down 10 percent and it felt great. I’ve bought every down day since and even though I’m losing my ass it still felt like I was doing the right thing. I can tell you the last few days have really started to hurt. I am now looking for reasons not to buy. Why buy now when the market is gonna drop another 20 percent says the voice in my head. I hold my breath and buy more.
When this started I put some buy orders in for companies I always wanted to be in. Most of those orders have hit and the stocks keep declining. I hold my breath and buy more.
All of us brilliant internet investors always said we welcome a big downturn. That way we get to buy at a discount. I’m among those who was thinking the same thing. It is now time to put up or shut up. My pain gauge is at an 8 right now so I’m gonna hold my breath and keep buying. I’ve saved a large chunk of money for when my pain is a 10 out of 10. I’ll know i hit that when I do everything possible in my head to talk myself out of buying. When I convince myself that this time is different, that life as we know it is changing forever, when I want to hold onto every dollar I have that’s when I’ll know I’m making the best investment of my life. Until then I’m gonna hold my breath and keep buying.
Thanks, Bill
This is exactly what I’m feeling right now. My portfolio is down almost 6 figures, and I’ve been “buying the bigger dips” since this all started. The last two days I haven’t been able to buy due to the same reasoning, what if it keeps dropping? What if I lose my job? I can’t sell under any circumstances now that I’m down, I need to hold through the pain, but buying more is becoming increasing difficult as my available cash for purchases diminishes and there doesn’t seem to be a bottom near by…
Bill and Al, Thank you very much for the perspective. When I look at the numbers my pain gauge is at a 9. When I look at reality it sinks back to a 4 or 5 for the time being. I have holdings (oil, energy – both stock and preferred shares) that are down 80% and feel like an idiot for holding, but….. as long as the companies stay afloat it is the buying opportunity of a lifetime. I just need to overcome my fear and act, but am waiting for something to show some kind of positive sign. Fear is driving this market, I don’t want it to drive my decisions.
“My portfolio is down almost 6 figures”
Haha, must be nice. I’m down about $700,000. That’s a wee bit more than “almost 6 figures”.
I feel your pain. On the bright side, it means you’ve got a lot of wealth! Just hope equities is not too big of a percentage of your net worth.
Yep, my pain gauge is probably around a 8-9 as well. I have HIT and probably surpassed my Financial SEER pain limit of losing 6 months worth of gross income now. Probably closer to 8-9 months.
But the cash is still coming in, so I’m just going to keep buying.
GL to us all!
I have a similar system but started at 20%. I put 10% to work at 20% down. 10% at 30% down.
I’m using the “co-worker anxiety index”. At a 10% drop my new to the market junior partner was talking all about what a buying opportunity this was. Next he was silent. Today finally there he was looking at a computer and contemplating stocks as an investment. I don’t think he’s sold yet. I’m gonna keep averaging in but I may throw a little bit extra in when he admits to selling.
We know markets crash from time to time. Have a system that works for you AND keeps you financially stable (don’t invest money you need in the next 5 years). If you do this there are 2 options.
1. You come out ahead when things recover.
2. Were all screwed anyway.
Option 2 you have no control over.
I am reading this while I’m listening to Bill Ackman on CNBC babble incoherently about the end of days. Whether the bottom for the S&P is 2400, 400, or something in between, it’s no nice to have places like this to get thoughts from rational people like Sam and many of the thoughtful readers who comment here. Keep calm, hug (or elbow bump) you family, and buy the dips!
The (spy) could bottom put at 1,000.
The P/E is overinflated by trillions of stock buybacks and a lack capital expenditures.
Good Luck fishing for the bottom.
Good luck with people holding a 401k, IRA Roth and traditional IRA!
Good luck investing $100k and doubling it, whereas Accredited and sophisticated investors put there money into a 506 (b) or 506 (c)!
I will hunt for commercial real estate and capitalize on the countless benefits! Perform your due diligence!
Man, what a gift that would be for those still early in their FI journey.
For those already at FI, it will be tough, BUT, I’m assuming most people who are FI have a very conservative asset allocation.
Yep Robert, as I said, could bottom at 2400 (ironically where it closed today), 1000, or lower. If you have conviction on your prediction, hope you’re shorting! But regardless of where the bottom is, I’d humbly suggest that 5 years from now investors will be happy with entering now.
And as an owner of both residential and commercial real estate investments, couldn’t agree more – perform your due diligence!
Financial—Samurai—
Did you factor in the trillions of dollars of stock buybacks that inflated the P/E ratios? The debt situation today is much worse than 2008.
I would be curious what the new rules, restrictions and regulations for the 2020 corporate bailouts. Boeing is experiencing death spiral financing and the federal reserve poured trillions into the repo market.
Good Luck
Sure. Feel free to share your analysis. I’d love to see some numbers as well. I think sharing is one of the best ways to learn. Thanks
I too am waiting on some of my buys until I hear the new rules, restrictions and regulations for the 2020 corporate bailouts.
After 9/11 I went all in on airlines, hotels, entertainment and did well once sanity and the rebound kicked in. This time airlines will be risky as I think they will be held accountable for not taking the tax rebates handed to them and put toward investments or an emergency fund. Vast majority went to stock buybacks which will be viewed poorly (was stupid to allow that practice again as here we are).
I’ve only put in 5% of what I expect to purchase in 2020 which tells you I expect more downward movement. I don’t use metrics other than measuring fear and I think it will rise as the death count goes up.
I believe airlines will be rescued.
Unfortunately, our economy would be crippled if they fell since it would bring down tourism and business travel.
However, they should be broken up.
Furthermore, I was reading an article where Mark Cuban suggested that any company that receives bailout money should be PERMANENTLY from doing stock buybacks.
I couldn’t agree more.
Board of Directors and C-Suite should also be disqualified from ANY bonuses until the bailout loan is paid back.
Sam, great analysis but your estimates are more bullish than mine. Hoping your scenario comes true. I’ll post my thoughts as well this week. Been busy trying to organize my garage into a gym this week. Glad I ordered early cause now some equipment is out of stock.
I keep pouring money into CPLP, which has been a nice dividend stock (11%). But now it is dropping like crazy (5.XX today) , and I’m worried, since what I put in at was a much higher ($10, $11).
Wow I love how your brain works! I couldn’t have figured out how to make those type of predictions on my own. I put capital to work a bit early compared to where the market is now but I’m fine with it. I was going to invest it last year and held on to it, so I came out ahead in that sense. If I get some more cash in the next few months I’d like to leg in again but for now I’m just sitting and waiting out the storm. Thanks for putting together such in depth and complex analysis!
Totally unrelated but hospitals are running out of masks. Bellevue hospital in NYC needs them, even construction ones. Please send them if you have access. My relative is an ER physician there
Will do. And if you have access to masks and ventilators, please send some to the SF Bay Area as well. We’re on lock down and prepping for the worst.
Weird – lots of N95 masks on ebay
1800-2000. CV and absurd valuations at the peak.
Sam
Your fan base is growing.
I just love your thought process and the simple style you use to explain your assumptions and conclusions.
Looking forward to reading more.
Cheers
Kavya
Thanks Kavya. In times like theses, it’s worth thinking things through as rationally as possible.
Great, thoughtful post as always. I’ve been eyeing a few individual stocks for days now including TSLA (curious to know whether you are still legging in here), DAL (big 3 legacy airline not going anywhere long term), MAR (slammed and price is down 3x), and DIS (long term they will be around).
I think the S&P still has a number of days of heavy volatility and room for more decline.
I sold about 30% of TSLA at around $730 (not $980), and am basically roundtripping the rest of my holdings unfortunately. But I bought some today below $400 and will expect the Fremont factory to be forced to shut. TSLA is my 5-10 year moonshot hold. GL!
Thank you for sharing your expertise with us. Rich people pay good money for this kind of expert forecasting.
I’m pretty sure the S&P 500 hasn’t hit the bottom yet. It’s under 2,400 today.
The number of cases is exploding in the US and we haven’t reached the peak. We only started social distancing a week ago and a lot of people still don’t follow the guideline.
Schools are closed, but I heard our school playground was packed. Parents took their kids to play and socialize. That’s not going to work. Anyway, I hope the case count peak in a few weeks.
Previously, I thought the stock market would bottom out around 30%, but now I think it’ll dive right under 40%.
Yep, my earnings model as of now says S&P 500 under 2,400 looks attractive. But realistically, 2,000 – 2,200 is certainly in the cards as panic builds. But I will keep on buying on the way down with my cash flow. I’m at 25% of my net worth in equities now. Maybe I’ll bump it to 30% by selling some bonds, which are now also losing unfortunately.
My hope is that everybody runs the numbers as well to see what’s realistic, wherever the S&P 500 is.
Sam, what is the best way to invest in Bonds? Can you share some resources?
Any online brokerage e.g. E*Trade, Fidelity, Schwab. They all have a fixed income tab where you can buy stuff.
Here’s a post that shows a bond yield table you would find on Fidelity.