Whenever there is a noteworthy stock market decline, a parade of headlines (like this) loudly proclaiming that stocks are on sale are never far behind.
They equate investing to retail “door-buster” sales – “Buy now – our prices are so low that they are INSANE!”.
But the reality is we really have no clue where stock prices are going to go from here. Even after the recent market declines of ~10%, the cyclically adjusted price-earnings (CAPE, or Shiller PE ratio) still sits at a lofty 31.69. That is almost 2X the historical mean (16.83) and median (16.15) valuations.
Aside from Black Tuesday (which kicked off the Great Depression) in 1929 and the .com bubble in 1999, we’re still a tick under the highest valuation in the history of the stock market. Maybe this is the new normal. Or, maybe we revert.
So are stocks on sale? Everything is relative. Stocks are cheaper than they were 2 weeks ago, sure. But they are still more expensive than they were 3 months, 1 year, 5 years, or historically on all but 2 blips in history. And until we’re 20, 30, or even 50 years out from here, we won’t really know if this dip was a good buying opportunity or not.
Back to the door-buster analogy. If I’m a retailer selling a one-of-a-kind mattress and I raise my prices far higher than inflation and almost continually over the last 8 years, but then lower prices a shade right before a holiday, are you getting a good sale? It depends on how I price the item moving forward – and you can’t predict that.
While we’re at it, let’s look at the price of Bitcoin. I suggest readers avoid Bitcoin recently. Back then, the price was at its height of nearly $20,000 per coin. More recently, it’s been hanging out in the $7,000-$8,000 range, and dropping. Bitcoin is cheaper today than it was 2 months ago (yet still higher than 6 and 12 months ago), but does that mean it’s on sale? The 2 legit economists who just gave a valid analysis of why Bitcoin should be valued at $20 per coin would probably tell you “no”, but we’ll see what the herd is willing to pay for it from here.
The other thing that really bothers me about these limited-time sale assertions is that they fully embrace the dangerous practice of market timing. In order to “get in on the sale”, the implication is that you’ve been building up cash on the sideline, just waiting for a significant buying opportunity, aka “timing the market”. If you had applied this same “buy on 10% dips” logic over the last ten years, you wouldn’t have invested at any time outside of late 2008 and August, 2015. And you would have missed out on significant market gains and dividends on new income that could have been invested the entire ride up.
Where do stocks go from here? Nobody really knows. We could fall much further if valuations revert to the median/mean. Or, we could be at the beginning of a period of valuations that remain in the 30+ range. The inability to predict the future is why it’s so important to look at these dips as completely irrelevant to a methodically consistent continued accumulation investment strategy (preferably with passive index investments). They aren’t “sales that you should hold out for”. Rather, they are “just another day”.
Totally agreed re: market timing. Over pretty much any ten-plus year span, the market always goes up. So just invest today in passive index funds. Yes, it might go down right after you invest and you’ll kick yourself that you didn’t buy at the optimal time. However, when you’re looking back twenty years from now, you won’t notice the difference, rather you’ll just be happy you invested all that time ago.
Also, the stock market is up almost 25% YoY – why is everyone acting like a 5% dip is the end of the world?
It was certainly a welcome relief but then 5 days later and we’ve had the best week since 2011! I believe in long-term investing but the high valuations have me looking at building up new long-term investments I’ve been meaning to get into (like real-estate).
Great post! I think there is something to be said though about initiating a position that when a dip occurs. For instance, AAPL stock has been buzzing for sometime now and continues to rise (in the long term I’m talking about) but I never was able to initiate a position. During the our little 10% decline AAPL dropped to levels it hasn’t seen since October 2017. Nothing changed fundamentally for the stock to cause a decline simply a little panic was all it took. Now 21 days later from opening that position I am up 13.5% + a dividend payout, on what most would consider a relatively safe stock.