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Welcome to Another Lost Decade

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How to play this one a little smarter.

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Keeping this in mind, note that stocks are still not cheap, and thus range-bound markets still lie ahead of us.

I should mention the role interest rates and inflation play in market cycles. They're secondary to psychological drivers, but important. They don't cause the cycles but help to shape their duration and the valuation extremes stocks achieve. For instance, if at the end of the 1966-1982 range-bound market interest rates and inflation had not been in the mid-teens, the range-bound market would have ended sooner, at higher P/Es. On the other hand, if in the late 1990s interest rates and inflation had not been scraping low single digits, the bull market would have ended sooner and at lower P/Es. The higher inflation and interest rates that are around the corner will take their toll on the duration and final P/E of this market as well.

In range-bound markets, as P/Es compress they turn against investors; thus investment strategy in this very different and difficult environment needs to be adjusted for the new investment reality:

  • Become an active value investor. Traditional buy-and-forget-to-sell (hold) strategy isn't dead but is in a coma waiting for the next secular bull market to return; and it's still far, far away. Sell isn't just another four-letter word; sell discipline needs to be kicked into higher gear.

  • Margin of safety needs to be increased. Typically, value investors seek for margin of safety to protect them from overestimating the "E". In this environment it needs to be beefed up to accommodate the impact of constantly declining P/Es.

  • Don't fall into the relative valuation trap. Many stocks will appear cheap based on past valuations, but past secular bull market valuations won't be in vogue for a long time, thus absolute valuation tools such as discounted cash-flow analysis should carry more weight.

  • Though timing the market is alluring, don't -- it's very difficult to do it consistently. Value individual stocks instead. Buy them when they're undervalued and sell them when they become fairly valued.

  • Increased margin of safety and stricter sell discipline will lead one to have a higher cash position at times. Don't invest for the sake of being invested because this will force you to own stocks of marginal quality or ones that don't meet your heightened required margin of safety. Secular bull markets taught investors not to hold cash, as the opportunity cost of doing so was very high. However, the opportunity cost of cash is a lot lower during a range-bound market.


And what if a range-bound market isn't in the cards? If a bull market develops, active value investing should do at least as well as buy-and-hold investing or passive indexing. In the case of a bear market, your portfolio should decline a lot less.

No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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