Anatomy of the Bear: Lessons From Wall Street's Four Great Bottoms by Russell Napier is a very detailed and well researched review of four of Wall Street's greatest bear markets over the last 100 years (1921, 1932, 1949 and 1982). The author is a consultant with CLSA Asia-Pacific Markets.
Anatomy of the Bear looks at the causes of each of the four market bottoms and what tools investors could have used to try and identify when the market bottom had occured. The authour also compares the factors that may have lead investors to identify each market bottom and whether the same indicators would have worked in all four bear markets. The author's conclusion was that the most reliable measure of a market bottoming was the q ratio which reached a low of about 0.3x near the bottom of each of the four bear markets reviewed. (The q ratio is a measure of the stock market's valuation of a company relative to the replacement cost of its assets.) One reservation or query which I have with the potential usefulness of this measure going forward is that the markets now include many more companies that have fewer tangible assets on their balance sheets than during the times under review. Does this affect the usefullness of the measure of cheapness?
Other useful indicators appear to have been cyclically adjusted PE ratios and a recovery in the bond market.
It seems evident from the wealth of data contained in the book that identifying the exact bottom of a bear market is something of an exercise in futility. Economic reports appear to have been mixed during each of the four bear markets. Relying on sentiment would not be a useful approach.
Another important point was that equities became cheap slowly, in some cases very slowly taking several years to reach bottom.
The conclusion I took from the book (and I am not sure if this was the author's intention or not) was that investing when equities become cheap following a contraction in valuation multiples will ultimately produce excellent returns, but will require both patience and the courage of conviction to carry a position through what could be an extended bear market.
Two small negatives. The wealth of data at times made for rather dry reading. Also, the book would have benefitted from both a glossary and an index.
Sunday, January 07, 2007
Saturday, January 06, 2007
2007 - Reading the Tea Leaves
I am not a fan of trying to make annual predictions of where various asset classes are headed. Financial industry professionals who make such predictions for a living seem to get things wrong as often as they get them right and I have no reasonable basis for assuming that my ability to guess the future is any better than average.
That said, it is impossible to make any investment decisions without making some assessment or assumption as to what may happen in the future. Whether I buy equities, bonds, property or put my money in the bank, I am making decisions on what I expect the future to hold for each of those asset classes.
Rather than make predictions, here is a look at some investments I am currently considering.
1. Russia: the Russian stock market has had a very good run but still looks reasonably priced on fundamentals. A significant portion of the country's massive oil and gas (and other commodity) revenues are being spent developing other sectors of the economy. Consumer spending is growing as a middle class emerges and the negative demographic trend is showing signs of reversing. Russia has also accelerated repayments of foreign debt. Political instability and environmental problems remain of concern. Overall, it looks promising.
2. Vietnam: the next emerging Asian tiger? With a large and very young population Vietnam is beginning to grow as economic and social liberalisation gathers pace. Potentially it is still at a much earlier stage of development than other emerging Asian economies.
3. The Japanese Yen: for no better reason than it has showed significant weakness and I am struggling to find many "experts" who rate it a buy compared with other major currencies.
4. The Chinese Yuan: with economic growth and an improving banking sector, the prospects for upwards revaluations of the Yuan in the years ahead look very strong. The issue is whether those upwards movements will be sufficiently large to justify an investment.
5. Hong Kong Property: this remains my largest asset class (by a long way). However, I still need to make further acquisitions to achieve my goal of having half my retirement income derived from rental income. I am moderately bullish on Hong Kong property and would like to make a further acquisition in 2007 if, and only if, I can find a good deal.
That said, it is impossible to make any investment decisions without making some assessment or assumption as to what may happen in the future. Whether I buy equities, bonds, property or put my money in the bank, I am making decisions on what I expect the future to hold for each of those asset classes.
Rather than make predictions, here is a look at some investments I am currently considering.
1. Russia: the Russian stock market has had a very good run but still looks reasonably priced on fundamentals. A significant portion of the country's massive oil and gas (and other commodity) revenues are being spent developing other sectors of the economy. Consumer spending is growing as a middle class emerges and the negative demographic trend is showing signs of reversing. Russia has also accelerated repayments of foreign debt. Political instability and environmental problems remain of concern. Overall, it looks promising.
2. Vietnam: the next emerging Asian tiger? With a large and very young population Vietnam is beginning to grow as economic and social liberalisation gathers pace. Potentially it is still at a much earlier stage of development than other emerging Asian economies.
3. The Japanese Yen: for no better reason than it has showed significant weakness and I am struggling to find many "experts" who rate it a buy compared with other major currencies.
4. The Chinese Yuan: with economic growth and an improving banking sector, the prospects for upwards revaluations of the Yuan in the years ahead look very strong. The issue is whether those upwards movements will be sufficiently large to justify an investment.
5. Hong Kong Property: this remains my largest asset class (by a long way). However, I still need to make further acquisitions to achieve my goal of having half my retirement income derived from rental income. I am moderately bullish on Hong Kong property and would like to make a further acquisition in 2007 if, and only if, I can find a good deal.
Friday, January 05, 2007
2006 - A quick (and slightly late) review
My review of 2006 is slightly late - I had to wait for some statements to arrive by snail mail to update the balance sheet and to recover from holiday.
In short, 2006 was a great year from a financial perspective.
The strongest financial performance came from my job. The working hours were insane (and I paid a price for them in other areas of my life) but I was appropriately compensated. Savings were strong (close to 40% of pretax income) in spite of some blow outs on the expenditure front (some expensive wine which I occasionally pretend is an investment, a nice painting which I do not delude myself has any investment value and a couple of great holidays with the family).
The property portfolio (which is ultimately intended to provide about half of my retirement income) was expanded. Rental incomes grew in line with expectations. The negative was that vacancy rates were higher than both expectations and previous experience. This may have been partly due to leases expiring close to major public holidays (when the leasing market is traditionally soft). In any event, I have decided that it would be prudent to increase the final size of the property portfolio from my previous target (but only by one property).
My investments in equities (mostly unit trusts) did well on the back of boyant global equity markets (especially emerging markets). The only negative was a thankfully small investment in a Thai equity fund which currently shows a loss of about 7%.
My investment in silver was, in percentage terms, my best performing investment with a return of about 42% over the year.
All in all a great year. I am already having fantasies about bringing forward my target retirement date - a good contrary indicator.
In short, 2006 was a great year from a financial perspective.
The strongest financial performance came from my job. The working hours were insane (and I paid a price for them in other areas of my life) but I was appropriately compensated. Savings were strong (close to 40% of pretax income) in spite of some blow outs on the expenditure front (some expensive wine which I occasionally pretend is an investment, a nice painting which I do not delude myself has any investment value and a couple of great holidays with the family).
The property portfolio (which is ultimately intended to provide about half of my retirement income) was expanded. Rental incomes grew in line with expectations. The negative was that vacancy rates were higher than both expectations and previous experience. This may have been partly due to leases expiring close to major public holidays (when the leasing market is traditionally soft). In any event, I have decided that it would be prudent to increase the final size of the property portfolio from my previous target (but only by one property).
My investments in equities (mostly unit trusts) did well on the back of boyant global equity markets (especially emerging markets). The only negative was a thankfully small investment in a Thai equity fund which currently shows a loss of about 7%.
My investment in silver was, in percentage terms, my best performing investment with a return of about 42% over the year.
All in all a great year. I am already having fantasies about bringing forward my target retirement date - a good contrary indicator.
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