Value in Falling Markets


Here’s why it make sense to invest in some stock markets when prices fall.

Last week we sent out Purposeful Investing subscribers the August edition of ENR Asset Management’s “Market Outlook”.

Now is a time, more than normal, to exercise caution in stock markets and maintain one’s value investing disciplines.

Good Value discipline includes the courage to buy when markets fall, as well as sell when markets rise so far they become a poor value.

Volatility have been rising in the US market once again.

In fact we can see from the chart below that, as of last Friday August 8th, the Dow Jones Industrial Index has actually dropped over the past two years, falling from 26,584 to 26,025.

DJI

Stock markets rise and fall.  This is the nature of all markets short term as they are fueled by human emotion.

Long term, all markets are driven by value.

As markets become overheated, emotion continues to push prices up until shares are such a poor value, they correct and prices fall.

Usually the correction is swift.

When overheated markets crash, the fall is due to overpricing.  Poor value is the real reason for a stock market correction.

However some other reason is normally attributed to the crash.  Value is the force but some event that triggers the emotion of fear or uncertainty is cited as the reason.  Value is the entire load.  The trigger is only the final straw that breaks the camel’s back.

This issue of ENR’s Market Outlook shows that the US China trade war could be the trigger now.  This is a battle of the titans… the number one and number two economies on a clash.

The Outlook says: Following a 20% YTD advance heading into August, the S&P 500 Index and the rest of the world suffered big declines following President Trump’s plans for new tariffs on China. The new tariffs, announced on August 1st, would take effect September 1stand cover $300 billion in Chinese goods –including smartphones, apparel, toys and other consumer products. China retaliated this week by letting the yuan or RMB break the psychologically important 7.00 level to the dollar, triggering the biggest single-day global sell-off since last December.

The risk of more damage done to the global economy by escalating trade tensions and tariffs might derail the bull market, as evidenced on August 5th. This week, investors were once again reminded how essential China is to the world economy following its mini devaluation. Despite a relatively strong U.S. economy, the Dow is lower now than it was in January 2018 when President Trump began threatening tariffs –despite strong corporate results in 2018. Business capital spending is declining, and global manufacturing is almost in recession.

Why Buy in Falling Markets?

The US market is a poor value (sell) market in the Keppler Asset Management analysis of 42 stock markets. This makes the US market more vulnerable to a correction, but looking globally Keppler’s projections show that an equally weighted global market index is likely to rise at a compound rate of 6.2% per annum over the next four years.

The chart below shows the entire real-time forecasting history for the KAM Equally Weighted World Index, starting at the end of 1993.

Keppler’s numbers are based on relationships between price and value over the previous fifteen years moving forward in monthly increments and thus adjusting steadily to an ever-changing norm.

keppler

The chart includes two remarkable episodes: The five-year period (1997-2001) during which the KAM Equally Weighted World Index stayed above the upper forecast band, and the period starting in October 2008 when it fell below the lower forecast band, where it stayed through April 2014 (5 years and 7 months).

Since then, the Index (green line) fell slightly below the lower forecast band again twice in the first half of 2016.

In the past, index levels below or slightly above the lower forecast band subsequently turned out to be attractive entry points for long-term investors.

The Keppler World Market Index is at this attractive level now.

Keppler’s projections correspond to a compound annual total return estimate of 6.2 % in local currencies.

Keppler also projects an upper-band and lower-band estimate, 20% above and 20% below the projected return.

The upper band projection is for a compound annual total return of 11.1% while the lower-band estimate  indicates a compound annual total return of 0.4%.

The Keppler chart suggests that this period of volatility offers special buying opportunity in good value markets.

The ENR Market Outlook agrees.

A section of the Outlook entitled “Summer Swoon Raises Spectrum of Bargains” says:

At least once per year, stocks tumble. Though investors don’t like the volatility associated with corrections or steep market declines, they’re part of the investing process. If you invest and hold solid companies for the long haul, then there’s no reason to fear a market sell-off, unless you’re retiring this year and failed to make the appropriate asset allocation changes. For most investors, corrections offer an opportunity to buy bargains. As Warren Buffett likes to point out: ‘Be fearful when others are greedy, and greedy when others are fearful.’

Gary

ENR Asset Management is one of the few SEC registered advisors that can help US investors bank in Austria and Switzerland.  For details send a note with the words OVERSEAS in the subject line to me at gary@garyascott.com

The Only 3 Reasons to Invest

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The stock market has always been the best place of places to protect and increase wealth over the long haul.   Yet it’s also been the worst place to lose money, a lot of it, quickly.

There are only three reasons why we should invest.  We invest for income.  We invest to resell our investments for more than we had invested.  We invest to make our world a better place.

The goal of investing should be to stabilize our security, bring feelings of comfort and elimination of stress!

We should not invest for fun, excitement or to get rich quickly. We should not divest in a panic due to market corrections.

This is why my core stock portfolio consists of 19 shares and this position has hardly changed in three years.  During this time we have been steadily accumulating the same 19 shares and have traded only three times.

A model portfolio that dates back to 1969 has dramatically outperformed almost every stock market in the world.

keppler

A hundred US dollars invested in that portfolio in 1969 is now worth $44833 compared to $100 invested in an equity weighted world index being worth $11,548.

This portfolio is built around a strategy that’s taught in my Purposeful Investing Course (Pi).  I call these shares my Pifolio.

This portfolio more or less matched the S&P 500 until May 2018.  Then a stronger US dollar made the portfolio look like it was falling behind.   This currency illusion creates a special opportunity we’ll view in a moment.

This portfolio above is based on stock price to value analysis built around 91 years of stock market data.

The value analysis is used to create a portfolio of MSCI Country Benchmark Index ETFs that cover  stock markets that are undervalued.  I have combined my 50 years of investing experience with the study of the mathematical market value analysis of Michael Keppler, CEO of Keppler Asset Management.

In my opinion, Keppler is one of the best market statisticians in the world.  Numerous very large fund managers use his analysis to manage over $2.5 billion of funds.  However because Keppler’s roots are in Germany (though he lives and operates from New York) and most of his funds registered for the European Union, Americans cannot normally access his data.

I was lucky to have crossed paths with Michael about 25 years ago, so I am one of the few Americans who receive this data and you will not find his information readily available in the US.

In a moment you’ll see how to remedy this fact.

The Pifolio analysis begins with Keppler’s research that continually monitors 46 stock markets and compares their value based on current book to price, cash flow to price, earnings to price, average dividend yield, return on equity and cash flow return.  Then Keppler takes market’s history into account.

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Michael Kepler CEO Keppler Asset Management.

Michael’s analysis is rational, mathematical and does not cause worry about short term ups and downs.  Keppler’s strategy is to diversify into an equally weighted portfolio of the MSCI Indices of each good value (BUY) market.

This is an easy, simple and effective approach to zeroing in on value because little time, management and guesswork is required.  You are investing in a diversified portfolio of good value indices.

A BUY rating for an index does NOT imply that any one stock in that country is an attractive investment.  This eliminates the need for hours of research aimed at picking specific shares.  It is not appropriate or enough to instruct a stockbroker to simply select stocks in the BUY rated countries.  Investing in the index is like investing in all the shares in the index.  You save time because all you have to do is invest in the ETF to gain the profit potential of the entire market.

To achieve this goal of diversification the Pifolio consists of Country Index ETFs.

Country Index ETFs are similar to an index mutual fund but are shares normally traded on a major stock exchange that tracks an index of shares in a specific country.  ETFs do not try to beat the index they represent.  The management is passive and tries to emulate the performance of the index.

A country ETF provides diversification into a basket of equities in the country covered.  The expense ratios for most ETFs are lower than those of the average mutual fund as well so such ETFs provide diversification and cost efficiency.

Here is the Pifolio I personally held at the beginning of 2020.   There have been no changes since.

70% is diversified into Keppler’s good value (BUY rated) developed markets: China, Germany, Hong Kong, Italy, Japan, Norway, Singapore, Spain and the United Kingdom.

30% of the Pifolio is invested in Keppler’s good value (BUY rated) emerging markets: Brazil, Chile, Colombia, South Korea, Malaysia and Taiwan.

iShares Country ETFs make it easy to invest in each of the MSCI indicies of the good value BUY markets.

For example, the iShares MSCI Germany (symbol EWG) is a Country Index ETF  that tracks the investment results of the MSCI Germany Index. The fund is at all times invested at least 80% of its assets in the securities of its underlying index that primarily consists of all the large-and mid-capitalization companies traded on the Frankfurt Stock Exchange.

iShares is owned by Black Rock, Inc. the world’s largest asset manager with over $4 trillion in assets under management.

There is an iShares country ETF for every market in our Pifolio.

This year I celebrated my 52nd anniversary of writing about global investing. Our reports and seminars have helped readers have better lives, with less stress yet make fortunes during up and down markets for decades. This information is invaluable to investors large and small because even small amounts can easily be invested in the good value shares we cover in our seminar.

How you can create your own good value strategy.

I would like to send you, on a no risk basis, a 130 page basic training course that teaches the good value strategy I use.   I call this strategy Purposeful Investing (PI).  You learn all the Pi strategies, what they are, how to use them and what each can do for you, your lifestyle and investing.

You get this course when you enroll in our Purposeful Investing program (Pi) with a triple guarantee.

Triple Guarantee

Enroll in Pi.  Get the 130 page basic training, a 46 stock market value report, access to all the updates I have sent in the past three years, two more reports on investing (described below) and an online Value Investing Seminar right away. 

#1:  I guarantee you’ll learn ideas about investing that are unique and can reduce stress as they help you enhance your profits through slow, worry free, easy diversified investing.

If you are not totally happy, simply let me know.

#2:  I guarantee you can cancel your subscription within 60 days and I’ll refund your subscription fee in full, no questions asked.

#3:  You can keep the two reports and Value Investing Seminar as my thanks for trying.

You have nothing to lose except the fear.   You gain the ultimate form of financial security as you reduce risk and increase profit potential.

When you subscribe to Pi, you immediately receive a 120 page basic training course that teaches the Pi Strategy.   You learn all the Pi strategies, what they are, how to use them and what each can do for you, your lifestyle and investing.

You also begin receiving regular emailed Pifiolio updates and online access to all the Pifolio updates of the last two years.  Each update examines the current activity in a Pifolio, how it is changing, why and how the changes might help your investing or not.

Included in the basic training is an additional 120 page PDF value analysis of 46 stock markets (23 developed markets and 23 emerging stock markets).  This analysis looks at the price to book, price to earnings, average yield and much more.This year I celebrated my 51st anniversary of writing about global investing.  Our reports and seminars have helped readers have better lives, with less stress yet make fortunes during up and down markets for decades.  This information is invaluable to investors large and small because even small amounts can easily be invested in the good value shares we cover in our seminar.

Stock and currency markets are cyclical.  These cycles create extra profit for value investors who invest when everyone else has the markets wrong.  One special seminar session looks at how to spot value from cycles.  Stocks rise from the cycle of war, productivity and demographics.  Cycles create recurring profits.  Economies and stock markets cycle up and down around every 15 to 20 years as shown in this graph.

The effect of war cycles on the US Stock Market since 1906.

Bull and bear cycles are based on cycles of human interaction, war, technology and productivity.  Economic downturns can create war.

keppler

The chart above shows the war – stock market cycle.  Military struggles (like the Civil War, WWI, WWII and the Cold War: WW III) super charge inventiveness that creates new forms of productivity…the steam engine, the internal combustion engine,  production line processes, jet engines, TV, farming techniques, plastics, telephone, computer and lastly during the Cold War, the internet.  The military technology shifts to domestic use.  A boom is created that leads to excess.  Excess leads to correction. Correction creates an economic downturn and again to war.

Save $102 If You Act Now

Subscribe to the first year of The Personal investing Course (Pi).  The annual fee is $299, but to introduce you to this online, course that is based on real time investing, I am knocking $102 off the subscription.

Triple Guarantee

Enroll in Pi.  Get the basic training, the 46 market value report, access to all the updates of the past two years,  right away. 

#1:  I guarantee you’ll learn ideas about investing that are unique and can reduce stress as they help you enhance your profits through slow, worry free, easy diversified investing.

If you are not totally happy, simply let me know.

#2:  I guarantee you can cancel your subscription within 60 days and I’ll refund your subscription fee in full, no questions asked.

#3:  You can keep the reports as my thanks for trying.

You have nothing to lose except the fear.   You gain the ultimate form of financial security as you reduce risk and increase profit potential.

Subscribe to Pi now, get the 130 page basic training, the 120 page 46 market value analysis, access to over 100 previous Pifolio updates, plus begin receiving regular Pifolio updates throughout the year.

Subscribe to a Pi annual subscription for $197 and receive all the above.

Your subscription will be charged $99 a year from now, but you can cancel at any time.

Gary