Views on detecting trends etc. for medium/long term investments

[FlyingFox]

To many what ifs when trying to do anything approaching macro style long term investing. I could never satisfactorily position myself in any sort of macro position with a decent margin of safety. At the start of 2007, I thought that the Norweigan Krona would do the best of any currency because of Norway's rock solid economy, but I lacked the conviction to actually stump up the cash. That about sums up any sort of macro forecast I make.

The only macro theme I continue to believe in is that the world will not come crashing down and good companies will keep making money. If I ever needed proof of that, the GFC provided it.

As long as that constant remains constant, then it's far more rewarding (and easier) to pick individual investments bottom up, than top down.

fair enough.

 

[So_Cynical]

.
The only macro theme I continue to believe in is that the world will not come crashing down and good companies will keep making money. If I ever needed proof of that, the GFC provided it.

As long as that constant remains constant, then it's far more rewarding (and easier) to pick individual investments bottom up, than top down.

Agree..and well said.

--------

I was actually thinking about a similar theme today...the world wont end, the GFC was a one in 25 > 75 year event, the vast overwhelming bulk of the worlds stock markets average higher and higher over the long term...its a constant, its inevitable, and its ridiculously easy to take advantage of that.

Imagine profiting from the ordinary, the incredibly predictable.

 

[qldfrog]

Agree..and well said.
the vast overwhelming bulk of the worlds stock markets average higher and higher over the long term...its a constant, its inevitable, and its ridiculously easy to take advantage of that.

as long as you do not confuse stock market and stocks: I agree with you if you for example invest in an asx200 index, but not in the 200 individual stocks:
on a long term companies disappear and others raise; the stock market reflects the current selection of the successful ones (very broadly speaking)
It is also easy to find periods where decades went without any market improvement so factoring inflation, you can be a great looser, and many decades is too much for me as i only have one generic life:70 years investment max
my 2 c

 

[FlyingFox]

......overwhelming bulk of the worlds stock markets average higher and higher over the long term...

Agreed. One of the reasons for starting this thread is to think about the situations where this doesn't hold and why. Stock markets, in their current form have only been around for ~100 yrs. I for one am hesitant to make such generalisations. This doesn't mean I am hesitant to make money from them.

The Japanese stock market is one such market. From Wikipedia:

"The Nikkei average has deviated sharply from the textbook model of stock averages which grow at a steady exponential rate" from wikipedia.

If some of the theories for this are to be believed, this may happen to many more countries.

Edit: Grammar

 

[So_Cynical]

as long as you do not confuse stock market and stocks: I agree with you if you for example invest in an asx200 index, but not in the 200 individual stocks:
on a long term companies disappear and others raise; the stock market reflects the current selection of the successful ones (very broadly speaking)

You could do it with stocks if you had a portfolio management system that acted a bit like an index, culling the losers and replacing them with the up and comers, a portfolio that reflected the diversity of the index though perhaps not the weighting...a portfolio management system with a simple set of rules that took advantage of others fear and need to protect capital at all costs.

Not that hard to do...50 well picked stocks would provide a pretty good representation of the All Ords 500.

 

[So_Cynical]

Agreed. One of the reasons for starting this thread is to think about the situations where this doesn't hold and why. Stock markets, in their current form have only been around for ~100 yrs. I for one am hesitant to make such generalisations. This doesn't mean I am hesitant to make money from them.

The Japanese stock market is one such market. From Wikipedia:

Ok im not much for the finer points of English but this much i do know.

Stock markets going up is not a generalisation...its a fact, normality, a statistical certainty...its capitalism.

Japan is an Outlier.

 

[FlyingFox]

....
Japan is an Outlier.

Why do you think it is an outlier?

 

[McLovin]

Agreed. One of the reasons for starting this thread is to think about the situations where this doesn't hold and why. Stock markets, in their current form have only been around for ~100 yrs. I for one am hesitant to make such generalisations. This doesn't mean I am hesitant to make money from them.

The stock market is a product of the industrial revolution. Before that there weren't the large corporations to sustain a market for equity. If you think about it, the dominant theory of world trade pre-20th century was state or quasi-state owned mercantilism. The whole concept of limited liability, as we know it today, is a relatively new idea. The stock market is really just a function of GDP (if you adjust the All Ords for inflation it hasn't really moved in 40+ years). As long as the economies keep bopping along, the stock market will continue.

The Japanese stock market is one such market. From Wikipedia:

"The Nikkei average has deviated sharply from the textbook model of stock averages which grow at a steady exponential rate" from wikipedia.

If some of the theories for this are to be believed, this may happen to many more countries.

Edit: Grammar

Have a read about Japan. It's an outlier in more than just it's market performance, the inbred nature of the Keiretsus of which the Japanese banks sat at the top, crushed their economy when property prices crashed. Corporations were so in debt that they couldn't use their profits for anything but servicing debt. When you apply this across an economy, well you know, it's sort of like the paradox of thrift. And their property crash was of historic proportions. At its peak, the square kilometre that the Imperial Palace occupies in Tokyo was worth more than all the land in California.

 

[FlyingFox]

The stock market is a product of the industrial revolution. Before that there weren't the large corporations to sustain a market for equity. If you think about it, the dominant theory of world trade pre-20th century was state or quasi-state owned mercantilism. The whole concept of limited liability, as we know it today, is a relatively new idea. The stock market is really just a function of GDP (if you adjust the All Ords for inflation it hasn't really moved in 40+ years). As long as the economies keep bopping along, the stock market will continue.



Have a read about Japan. It's an outlier in more than just it's market performance, the inbred nature of the Keiretsus of which the Japanese banks sat at the top, crushed their economy when property prices crashed. The banks had to use healthy companies to prop up the bad loans they had written. And their property crash was of historic proportions. At its peak, the square kilometre that the Imperial Palace occupies in Tokyo was worth more than all the land in California.

Agreed.

Would like to add a few points for discussion:

GDP in the general form is the function of productivity/person x times number of working people + effects such as natural resources and their exploitation for profit; correct?

Now GDP ( Growth and inflation are linked ) has been going up and providing growth due to the increasing number of people entering working age (the baby boom), this causes demand for resources. In Japan at the time their asset bubble deflated, the proportion/number of people in the working age group starting dropping.

Recently this has been recognised as an ageing problem in Japan but this started circa 1990. I had a graph of japans population vs nikkei/house prices somewhere, I'll upload if I can find it.

 

[McLovin]

Now GDP ( Growth and inflation are linked ) has been going up and providing growth due to the increasing number of people entering working age (the baby boom), this causes demand for resources. In Japan at the time their asset bubble deflated, the proportion/number of people in the working age group starting dropping.

Recently this has been recognised as an ageing problem in Japan but this started circa 1990. I had a graph of japans population vs nikkei/house prices somewhere, I'll upload if I can find it.

If you're going where I think you are (house prices/baby boomer link) then I do agree with you. That's my theory on house prices too.

 

[FlyingFox]

If you're going where I think you are (house prices/baby boomer link) then I do agree with you. That's my theory on house prices too.

well housing is just one asset class. However its the most important one in Australia due to cultural reasons. Personally I think housing is over-valued even above the baby boom factor, but that's for another thread.

Basically the theory is, an I am not claiming any of this as original thought, that due to the boom generation growing older and entering productive life stages, there has been a large demand placed on resources as well more productivity. With this demand, prices go up. As more people enter this life stage of productivity and accumulation, more demand for resources.

Obviously if the population kept increasing as it has for most of human history. you get continued growth in markets and asset classes, what we perceive as inflation. Hence "a statistical certainty...its capitalism" that markets will go up.

I don't know for what reasons, but Japan hit the "wall" sooner (probably due to inflation in the first place) than other countries and the number of productive people decreased. This meant less demand but also more supply as people in retirement spent their savings. Less demand but all of a sudden you have pent up supply as well in anticipation of the demand. Hence the big initial drop.

Not claiming anything by this...just discussion. BTW there are countries still where peak working population will not be reached for another couple of decades.

 

[CanOz]

You think the population will actually start to decline once the boomers all start passing away??

Could it be possible?

 

[FlyingFox]

You think the population will actually start to decline once the boomers all start passing away??

Could it be possible?

Are you specifically talking about Australia? Probably not because we are a small country with liberal immigration policies. However other countries may not be able to keep increasing populations e.g Japan, Russia, many European countries.

It is worth noting here that many developed countries including Oz have below replacement birth rates. Inflation serves as a form of natural competition.

You don't necessarily need a decrease in population for this. Just a change in demographics along with a lower growth rate in population. Basically less demand from the next generation. Also the boomer generation have been storing wealth (compulsory super for example) that they will spend.

Obviously this will be cyclical and countries like China are already advocating for the reversal of one child policy. However it will be another 20 years before that generation comes to a productive age.

Edit : Changed negative birth rate to below replacement birth rate

 

[FlyingFox]

Pretty good, layman's terms article on demographic decline I hadn't seen before. Presents the US view.

http://www.thedailybeast.com/articles/2012/12/04/our-demographic-decline.html

 

[So_Cynical]

Agreed.

Would like to add a few points for discussion:

GDP in the general form is the function of productivity/person x times number of working people + effects such as natural resources and their exploitation for profit; correct?

Now GDP ( Growth and inflation are linked ) has been going up and providing growth due to the increasing number of people entering working age (the baby boom), this causes demand for resources. In Japan at the time their asset bubble deflated, the proportion/number of people in the working age group starting dropping.

Recently this has been recognised as an ageing problem in Japan but this started circa 1990. I had a graph of japans population vs nikkei/house prices somewhere, I'll upload if I can find it.

Immigration to Japan is severely limited as well (as far as i know) only people who can prove some Japanese ancestry are allowed to immigrate...so with a falling birth rate and little to no immigration there is very restricted domestic growth etc.

 

[FlyingFox]

Immigration to Japan is severely limited as well (as far as i know) only people who can prove some Japanese ancestry are allowed to immigrate...so with a falling birth rate and little to no immigration there is very restricted domestic growth etc.

That's true. Probably why they started having this problem sooner than most.

Immigration is a valid policy for reversing or subsiding this trend in countries with a small population (Oz,Nz, UK and perhaps even USA) but for example when large parts of Europe start experiencing this, it will be hard to change.