Staring you square in the face is the best buying opportunity in stocks in 18 years - since the market lows in 1990. Even with the recent dramatic decline in stocks, the Dow Jones Industrial Average and S&P 500 are up more than four-fold from those 1990 lows, and the Russell 2000 is up by more than five-fold.
Such buying opportunities are exceedingly rare. That is because they require a huge of amount of negativity - enough negativity to cause scores of investors to panic and throw away their stocks at any price.
Bear markets typically result in declines of 20-30 per cent. Been there, done that - in just four months, from top to bottom, the Russell 2000 decline has been 25 per cent. The Dow and the S&P 500 have declined by 20 per cent.
Over the past 100 years, significant declines almost always look like a "V" on a price chart. Going back a century, from the so-called "Panic of 1907" until today, a full retracement (of the entire decline) takes anywhere from two to eight quarters. The notable exceptions: the Nasdaq bubble of 2000 and the Great Depression.
The present difficulty is nothing like the Nasdaq bubble, when companies with no revenue and, in some cases, no product, sold for hundreds of millions, even billions of dollars. Going into the recent turbulence, stocks were generally undervalued, not grossly overvalued, as in 2000.
The current difficulty is also nothing like the 1929 market, when investors speculated in stocks, buying $10 worth of stock with only $1 of cash, and borrowing the rest. Prices pre-crash were far too high, similar to days before the Nasdaq bubble burst. The Federal Reserve tightened money in the face of the 1929 decline and barriers to trade were imposed.
Present circumstances most closely resemble the aftermath of the Savings and Loan credit crisis, when the market declined precipitously for four consecutive months going into 1990. After treading water for two months, the next four months resulted in a complete retracement of the entire decline. After that, the market headed even higher.
The next five to 10 years look exceptionally bright for equities. The data I monitor indicate that the market is at or near a deep trough, similar to the major lows of 1974, 1982 and 1990. Panic is pervasive, stocks are extremely undervalued and pessimism permeates the marketplace. Based on history, a full retracement of the recent decline is likely to occur within a matter of months.
A takeaway from the recent market sell-off is this: stock prices do not mirror business values. Investors look at a stock quote and think that it equals value. But it doesn't. Check the quotes for the stocks that you own and what you see is the current bid - what some investor is willing to pay for your property. It is not based on a careful appraisal of your property's value.
The lack of linkage between price and value is evidenced by the enormous spread between the 52-week high and low stock prices for otherwise stable businesses. Day to day, month to month, even year over year, most businesses that have publicly traded shares on the exchanges don't change in a big way. The underlying value of most companies does not oscillate anything like their stock prices.
It is fair to say that the value of businesses with publicly traded shares changes by less than 1 per cent a month, on average. The growth ceiling for most companies is 12 per cent a year. Of the companies that are losing business value, it is also fair to say that a majority of these lose less than 12 per cent a year.
A maximum 1 per cent change in business value each month, or, a plus or minus 12 per cent change in value over one year - how does this correlate to stock prices? The short answer is: not at all.
Here is one example (I do not own this stock, by the way). If you carefully compare the change in the business value at AutoNation, a leading auto retailer, to the change in the price of its stock, you almost have to laugh out loud. It is loony. Revenue is steadier than steady, at $18bn and change each and every year for the past five years. Deviation in the operating income is virtually non-existent, surprising for a company of this size. Operating income has ranged from a low of $720m to a high of $804m over the past five years. But the stock, in just the past 52 weeks, has traded at a low of $11.72 and a high of $23 a share.
Don't tell me that AutoNation's business value is suddenly lower because of a looming recession. That's nonsense. Any reasonably astute analyst has already factored cyclical operating pressures into the valuation calculation. The rational analyst is left with this, after comparing AutoNation's 100 per cent stock price fluctuation with operating fluctuation that is nearly nil: it is loony.
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