I’ve recently posted Entry #197 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called It’s Critical to Distinguish Short-Term Bulls and Bears from Secular Bulls and Bears.
Juicy Excerpt: Shiller’s finding that long-term timing always works, combined with Fama’s finding that short-term timing never works, should change how we think about stock investing in a fundamental way. Our natural inclination is to focus on the short-term. We live in the short term and we possess a natural skepticism about efforts to predict long-term results. But the research is showing us that the short term just doesn’t matter, that the predictable long term always dominates in the end. So we need to make an effort to shift our focus.
We are living through the opposite of the 1975-1982 experience today. Many investors have concluded that we are in a bull market because prices have been headed upward for several years. No. There has never been a secular bear market that ended without us touching a P/E10 level of 8 and remaining in that general neighborhood for a number of years. In this secular bear, we haven’t yet gone anywhere near 8 and we were at fair-value price levels for only a few months in early 2009. Today’s bull market gains are a temporary phenomena that will be washed away into insignificance by the power of the long-term bear in which this short-term bull has asserted itself.
It’s when we have experienced the next crash that we will be at the price levels at which real bulls, secular bulls, are born. Don’t be fooled if we spend several years with the P/E10 value well below fair-value levels. It doesn’t matter. So long as the P/E10 value remains stable, stocks offer a strong long-term value proposition. You always want to be thinking about where prices are headed. When prices are at rock-bottom lows, there’s only one direction in which they can be headed!