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Anthony Bolton calls the bottom
Posted on January 7, 2009 by Richard Beddard
Filed Under Markets |
We’re OK, it’s just a normal bear market
Notice how, in this article on identifying market bottoms, Anthony Bolton rigorously sticks to what he knows as opposed to what he doesn’t know. Second-guessing the economy is not for Britain’s most lauded fund manager. Instead, he’s thumbing the history and chart books:
The first of the three factors I do look at is how the current situation compares with the historical pattern of bull and bear markets. That is, how long and far we have risen in a bull market and fallen in a bear market. When the time and scale of the rise or fall are both high relative to historical averages, the odds of a change of trend increase.
The second factor is indicators of investment sentiment and behaviour. These include: put/call ratios, the sentiment of advisers, market breadth, volatility, mutual fund cash positions and the exposures of hedge funds. When these indicate extreme pessimism or optimism, it normally pays to bet against them. For example, high volatility often precedes a change of trend.
The third factor is long-term (30-40 year) market valuations, particularly measures such as price-to-book value or free cash flow. Again, when these move outside their normal range, it can signal risk or opportunity.
Since, according to Mr Bolton, all three factors confirmed each other in the last quarter of 2008 and in his experience:
…when all three factors confirm each other, the odds are that you are near a turning point.
He’s optimistic about 2009.
The thing that concerns me about observations like this, long though his experience is, it presupposes that the future will be the same as the last thirty or forty years.
Normally that’s a good rule to follow in investment and the opposite view, that it’s different this time, ends up making fools of us. But, what’s normal depends on the time-scale you’re considering. Once in Mr Bolton’s experience (1982) and at least three times before that (1921, 1932 and 1939) stock markets moved far outside their normal valuation ranges, which would require much bigger falls in the stockmarket than we’ve experienced in the last year*1.
Fortunately, like Mr Bolton, I’m not a market timer, preferring to put my energy into analysing individual companies. So I don’t have to worry too much about it.
Footnotes:
- See: The great value divide.
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6 Responses to “Anthony Bolton calls the bottom”
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So how many times has he called bottom now?
Hi Richard,
Both Warren Buffet and Anthony Bolton have called the bottom of the stock market. You cannot really argue with them because the stock market and the economy do not really coincide in the same universe at present. Therefore you need to respect the views of someone who understands stock markets and not someone who understands economics.
I have noticed on Bloomberg that a lot of people have said that the markets are currently anticipating an economic recovery 6 months before it actually happens. However I suspect history would tell us that every fake rally was supposed to anticipate an economic recovery 6 months before it actually happens.
By the law of averages, one rally is bound to hit the mark eventually.
I do wonder if generating huge amounts of fake cash is actually the answer to all our problems however, and it struck me today when I heard this news story.
The UK government has today (15th Jan 2008) decided not invest in the new Trident nuclear deterrent because the price tag of £20 billion is too high. What I do not understand is if it is acceptable to generate £400 billion of stimulus, why can they not just purchase this system at the same time. It would be a great stimulus. Perhaps it is because the system will probably be purchased from the US and the US government is now extremely familiar with what kind of cash is actually be used to purchase the system!
Hi Robin. I agree - respect the stockmarket gurus, not the economists although I have sympathy with BrianSJ above too, which brings us to fake rallies. The thing is it does depend on the economy, and whether this is a recession or a depression but there is no consensus on that and never will be! Re fake cash. Unfortunately, like AB my confidence in analysing these things decreases as you go from company to market to economy. But it does seem to me at least possible that, far from minimising the economic cycle as government policy is alleged to have done, it’s lengthening it and making it more wild.
Bloomberg reports today that the Bank of America posts its first quarterly loss since 1991. Now any company which can carry on without quarterly loss for 20 years is surely astronomically well managed (or do I sniff another Madoff).
Regarding debt, I have been thinking recently that debt is a bit like a proxy for inflation. If prices hardly rise at all (which seems to have been the case for years) then companies need to generate growth in another way. They need to sell more goods at the same price. If people cannot afford more goods then this has to be purchased through debt.
Therefore, it we think of debt as a replacement for inflation then we have actually been suffering massive inflation for years. This may eventually translate into real inflation of course. Good for stocks apparently.
Not so sure about good for stocks (inflation), just less bad than for the major alternatives - bonds and cash. And it depends how bad the inflation is.
I like the debt/inflation proxy.
Yes, well, giving low cost loans to sub-prime borrows, was with hindsight…
Absolute Frikking Insanity!!!!
Now I know why so many people seemed to be driving around in Mercedes, BMW’s ands Mini Coopers’s all these years and I have had to make do with a Ford Mondeo. I really need to learn how to play the system a bit better so I can benefit from the new wave of money when it arrives.