Henry Blodget on Equities

From David Stockman, Henry Blodget talks the current overvaluation of the stock market, with awesome references to Shiller, Doug Short, and Hussman.  But the part that is really valuable is his current asset allocation:

In February, I changed the “dividend reinvestment” policy on my S&P 500 fund. (I’m an indexer — I think stock-picking is generally a lousy strategy for individuals.) Specifically, I stopped reinvesting dividends.

I’m a long-term investor, so I don’t really care what stocks do next. This dividend change was a bet that, at some point in the future, I will be able to reinvest the cash from these dividends in stocks at lower prices than today. If stock prices never fall below today’s level, this will cost me money. It will also make me feel dumb for (sort of) trying to time the market.

But at some point you’ve got to put some money behind what your analysis is telling you.

What my analysis is telling me is:

1) stocks are extremely expensive and will eventually revert toward historical means, probably via a sharp correction of 30% to 50%

2) long-term stock returns from today’s level will be about 2% per year — nothing to write home about

So if I think there’s risk of a crash, why don’t I just sell everything? For the reasons outlined below. Again, I don’t care if the stocks I own tank, as long as they don’t tank permanently. A crash will just give me a chance to buy more at lower prices.

Why I think long-term stock returns will be lousy from here

I have no idea what the market will do over the near term. But there are two reasons I think long-term stock performance will be lousy:

  • Stocks are very expensive on almost all historically predictive measures
  • The Fed is tightening (or will be soon)

Below, I’ll discuss those concerns one at a time.

Before I do, though, a quick note: Sometimes people are confused by me still owning stocks while getting increasingly worried about a sharp price decline. So here’s why I don’t sell:

  1. I’m a long-term investor (horizon of 10-plus years);
  2. I’m a taxable investor, which means that if I sell now, I have to pay taxes on gains;
  3. I don’t know for sure what the market will do (no one knows for sure, and the bulls might be right);
  4. I think timing the market is a dumb strategy;
  5. I’m mentally prepared for a sharp decline (I won’t get spooked into selling if stocks crash — on the contrary, I’ll buy more);
  6. I think stocks will eventually recover from a crash; and
  7. There’s nothing else that looks cheap to invest in (every other major asset class is also priced so high that they’ll all most likely deliver lousy returns)

Yes, if stocks drop 50%, and then we enter a Japan-like scenario in which they continue to drop for two decades, I’ll feel like an idiot (and poor). But otherwise, I’m OK with sharp price declines. I’m a long-term bull on capitalism and the USA. And crashes create the opportunity to buy stocks with much higher likely future returns.



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