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8/9/2019 2015 World Economic Conference
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Understanding The Bear Case
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Much, but not all of the shortfall in investor returns are due to psychological factors
such as Loss Aversion, Narrow Framing, Herding or Optimism.
There are actually three primary causes for the chronic shortfall for both equity and
fixed income investors:
Capital NotAvail able, 25.00%
Capital NeededFor Other Things,
25.00%
PsychologicalMistakes, 50.00%
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0
51015202530
35404550
64.00
128.00
256.00
512.00
1,024.00
2,048.00
Jan-1871 Jan-1886 Jan-1901 Jan-1916 Jan-1931 Jan-1946 Jan-1961 Jan-1976 Jan-1991 Jan-2006
Real S&P 500 Index With Recessions(Robert Shiller Real Price Data)
Recessions S&P 500 (Real Price) Expon. (S&P 500 (Real Pr ice))
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35
2126
19 1723 20
32
1811
43
9
2126
20
49
79
3644
38
23
105
35
57
11
91
119
7263
M
ar-
1879
M
ay-1
885
Apr-
1888
M
ay-1
891
J
un-1
894
J
un-1
897
D
ec-1
900
A
ug-1
904
J
un-1
908
J
an-1
912
D
ec-1
914
M
ar-
1919
Ju
l-1921
Ju
l-1924
N
ov-1
927
M
ar-
1933
J
un-1
938
Oc
t-1945
Oc
t-1949
M
ay-1
954
Apr-
1958
Oc
t-1960
N
ov-1
970
M
ar-
1975
Ju
l-1980
N
ov-1
982
M
ar-
1991
S
ep-2
001
J
un-2
009
Historical Economic Recoveries Average 39 Months
Recovery Length - No Of Months
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-
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
180.00
200.00
1936 1943 1950 1957 1964 1971 1978 1985 1992 1999 2006 2013 2020
S&P 500 Earnings as of 06/01/14 EPS Growth Rate Lower Bound (5% Trough to Trough)
EPS Growth Rate (6% Peak To Peak) Earnings Growth Trend Line
2014 Estim ates
Anal ys ts NEVER saw
the earnings reversions
in advance.
2015 Estimates
2020 Estimates
The current slope of
estimated earnings growth
has never occurred in history.
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64.00
128.00
256.00
512.00
1,024.00
2,048.00
1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2009
Real S&P 500 Index With Record Highs(Robert Shiller Real Price Data)
Real S&P 500 Index
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The funny thing is there is a disconnect between what investors are saying
and what they are doing.
No one thinks all the problems the global financial crisis revealed have been
healed. But when you have an equity rally like you've seen for the past fouror five years, then everybody has had to participate to some extent.
What you've had are fully invested bears."
Gerard MinackFormer Morgan Stanley Strategist
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-
10
20
30
40
50
60
6.00
9.00
12.00
15.00
18.00
21.00
1998 2001 2004 2007 2010 2013
VIX
S&P500(ScaledBy1
00)
S&P 500 vs. VIX (6-Mo Avg.)
VIX/S&P 500 Ratio S&P 500 (Scaled By 100) VIX - 6 Mo Avg.
Irrational Exuberance
InvestorComplacency
InvestorCapitulation
STREETTALKLIVE.COM
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5.0
7.0
9.0
11.0
13.0
15.0
17.0
19.0
21.0
23.0700
900
1,100
1,300
1,500
1,700
1,900
2,100
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Yields-InverseS
cale
S&P500
Falling "Junk Bond Yields"
S&P 500 BofA Merrill Lynch US High Yield Master II Effective Yield
STREETTALKLIVE.COM
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256.00
512.00
1024.00
2048.00
32768
65536
131072
262144
524288
1995 2000 2005 2010
S&P500
MarginDebt
Margin Debt vs. S&P 500
S&P 500 Margin Balances
STREETTALKLIVE.COM
457,106
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-60%
-40%
-20%
0%
20%
40%
60%
0.0
500.0
1000.0
1500.0
2000.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Deviation Of Markets From Long-Term Moving Average
% Deviation From 36-Mth MA S&P 500 Index 36-Mth Moving Avg.
STREETTALKLIVE.COM
S&P500&36-M
thMov.
Avg.
%D
e
viationFrom3
6-M
thMA
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200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
1990 1994 1998 2002 2006 2010 2014
S&P 500 Stock Price Index
Time To GoTime To Go
Does This
ReallyLookRational?
Not HereEither...
Absolutely
Not Here...
Liquidity Bubble
Credit/Real EstateBubble
Nope...NoBubble Here.
I Don't Need AnAdvisor - I'm AGenius
Tech Bubble
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If analyzing the risk that will potentially lead to large losses of capital is bearishthen you can
call me a bear, just make sure you call me an almost fully allocated bear.
However, here are the main points to successful long-term investing:
No great investor in history EVER used buy and hold as a strategy. They may have
held positions for a long time, but they were willing to sell when necessary.
Understand and manage risk. Buy low and sell high is not a philosophy, it is a strategyto minimize portfolio risk over time.
In rising markets you can only be long or neutral. In falling markets you can only be short or
neutral. Betting against the trend has never been pro fitable.
Understand that ALL markets eventually mean revert. While irrationality can existlonger than one would deem logical, it will end. Painfully.
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