Tuesday, December 22, 2009, 7:11PM ET - U.S. Markets Closed.

Range-Bound at Best: The Long View on Stocks Isn't Much Better, Says Value Investor

Posted Feb 10, 2009 04:01pm EST by Aaron Task in Investing, Recession

On days like Tuesday, after a year like 2008 it's easy to get caught up in the market's short-term moves. But when you step back and look at the market from a very long-term perspective, the historic pattern is a steady climb interspersed with very long periods of sideways activity where major averages do very little.

Such was the case from 1996-1982 when the Dow experienced some big up and down moves but was effectively pinned to the 1000 level. Similarly, the Dow was effectively unchanged from 1906-1921.

Vitaliy Katsenelson, a portfolio manager at Investment Management Associates, believes another such period of range-bound activity began in 2000, as detailed in his book Active Value Investing.

The good news, for those long, is Katsenelson does not believe the S&P and Dow are destined to plunge another 30% to 50% as many believe - provided the economy doesn't totally collapse, dragging earnings down further still.

But the value investor refutes the notion the market is cheap - or at least fairly valued - as a number of pundits and some legendary investors have claimed in the wake of the Dow and S&P's roughly 40% fall from their all-time highs.

The market is only "cheap" if profit margins are going to return to normal values, which is highly unlikely given the economic environment, Katsenelson says. While 2008 earnings were hit by bank write-downs, the money manger believes 2009 results will be hampered by disappointments from the basic materials sector as the global economy cools.

Furthermore, he notes that periods of abnormally high valuations - as occurred in the 1990s and early 2000s - are typically followed by periods where P/E ratios fall below "average" to around 10 vs. today's 17-20, based on expected 2009 results.

Against this backdrop, Katsenelson says investors should avoid index funds but he does believe there are opportunities in individual stocks, as we'll detail in a forthcoming segment.

41 Comments

frankmargel.com
frankmargel.com - Tuesday February 10, 2009 04:05PM EST

WOW!!! I LOVE THIS HYPE!!! The markets will begin to now reflect true value. The bad debts are being sold as talking heads begin to cheer. Short term money managers and traders who rely on hype will jump from one story windows. The real value in watching all this unfold comes from long term guidance and value investing. In the future the price of a financial security will be closer to fair valuation. This is great for long term investors who need real guidance to base buy/sell decisions. It's a refresher course in basic buy/sell psychology. Future market movers are those who survive the next five to ten years, vs. market traders who survive the next couple of weeks. Go long on good performance and large cap stocks or lose your butt playing short term spreads. Good luck to all who invest in America. My view bucks recent trends and suggests investors should go long, and BUY BUY BUY...! Eat some beans and call your financial planners. SMILES...

__A_YAHOO_USER__
__A_YAHOO_USER__ - Tuesday February 10, 2009 04:16PM EST

"Value Investing" works best in a high-inflation environment, and lags horribly in a deflationary, range-bound environment. I'd expect a chubby guy with a mis-shapen head and a funny accent to know that.

Yahoo! Finance User
Yahoo! Finance User - Tuesday February 10, 2009 04:16PM EST

So history does matter?

__A_YAHOO_USER__
__A_YAHOO_USER__ - Tuesday February 10, 2009 04:20PM EST

It's clear now that the SOB Bush gave us each a measly 300 dollars ($150 Billion), and gave (without any regulation or oversight) his rich highly connected bank buddies $700,000,000,000....knowing that there would soon be these strict regulation put on the banking crooks and other super rich he helped create and encourage with favorable legislation, and neglected oversight.....I say hold him criminally accountable, and open an investigation of his entire time in office, including the war he illegally started (which basically destroyed World economies), and the DEATHS that unnecessarily resulted from his reckless invasion.

GgC
GgC - Tuesday February 10, 2009 04:22PM EST

geithner miss the whole point of transperancy today by not giving details to hi's plan and living a gaping hole for the market to bear. itshows ignorance and irisposible behavior. hope for the sake of all of us investors that he comes back tommorrow and gives details and puts some direction and confidence to investors.

KenW
KenW - Tuesday February 10, 2009 04:28PM EST

I wonder what John Bogle's recommendations are considering the current state of the market. He of course was of the opinion one should just dollar cost average into a total stock market index fund such as fidelity or vanguard total stock market index. He said in the long run you will beet 80% of mutual fund active managers doing just that. For the average cautious investor like myself, I'm hopeful that someone out there, who knows a lot more than m,e can explain whether or not this is still good investment advice. Money market funds are paying 1% to 2.5% interest. Isn't this a good time to buy?

CBW
CBW - Tuesday February 10, 2009 05:04PM EST

Investors shouldn't be concerned with values all the time. Short term trader and guys with infinite wisdom talk about it a lot but who cares! They key is building an dependable and diversified income stream. When you retire, you want income right. Does it matter if your account shows a value of 500K or 800K? Yeah the bigger number looks good, but it's a point in time value and will change many times. Buffet has compounded his cash flows many times over in the past 20-30 years. He doesn't even pay a dividend because he is better at putting the cash to work at appropriate times, which in turn increase cash flow. If you have land, stocks, bonds, Cd's and it meets the income requirement, than the rest is history. If it doesn't work, you have poor investments or didn't save enough!

BenH
BenH - Tuesday February 10, 2009 05:11PM EST

RICHARD DENNIS- aside from his flaming liberal political posturing...is my hero.

- Tuesday February 10, 2009 05:19PM EST

"Buy on the rumour and sell on the news" happened once again. Last Thursday and Friday, that 600k job loss report did not scare investors which were optimist on the bank plan. Once the plan is finally announced, everyone panicked. How is the "value driven investing" applied here?

BrettC
BrettC - Tuesday February 10, 2009 05:34PM EST

WOW this is such an informative article!!!!! PFFFFFFFFFFFFFFFTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT

- Tuesday February 10, 2009 05:34PM EST

My money is on the Squirrels in the Park

STORMSTOCKER1
STORMSTOCKER1 - Tuesday February 10, 2009 05:50PM EST

SING4BEER-You are drunk!! Yes. Bush (and Clinton!),is one piece of this financial mess and puzzle, ..remember CLINTON signed NAFTA into Law, not Bush)..DID you vote for your (11% approval rating) congressmen back into office?? Congress is THE MAJOR REASON, we have this mess is because CONGRESS PASSES THE LAWS!! They approved this TARP first! They approved PAULSON, now GEITHNER (all goldman sachs investment house guys)....and OBAMA is acting alot like BUSH and CLINTON. THEY ARE ALL LOOKING FOR WAYS TO INCREASE GOVERENT SPENDING BY TAXATION ON YOU AND ME BUDDY!!...SO go ahead buy another beer and be sure to add that Sales tax to the total it!! (it all helps this bailout...... remember??)

Yahoo! Finance User
Yahoo! Finance User - Tuesday February 10, 2009 05:52PM EST

Y'all got to read this: "Implications of Growth in Credit Derivatives for Financial Stability" by Timothy F. Geithner, President and Chief Executive Officer http://www.newyorkfed.org/newsevents/speeches/2006/gei060516.html He concluded "Let me conclude by reiterating the fundamental view that the wave of innovation underway in credit derivatives offers substantial benefits to both the efficiency and stability of our financial system." Now you know why we are in this situation and why Timothy hasn't yet had details on how to reverse engineering what he engineered!

puneet s
puneet s - Tuesday February 10, 2009 06:01PM EST

buy beaten down stocks with good return on equity,positive cash flow,no or very low debt,with enough cash in hand atleast equal the long term debt.and with positive working capital.and atleast 20% next year growth forecast.keeping all these things in mind u r gonna be fine.

puneet s
puneet s - Tuesday February 10, 2009 06:01PM EST

buy beaten down stocks with good return on equity,positive cash flow,no or very low debt,with enough cash in hand atleast equal the long term debt.and with positive working capital.and atleast 20% next year growth forecast.keeping all these things in mind u r gonna be fine.

puneet s
puneet s - Tuesday February 10, 2009 06:02PM EST

buy beaten down stocks with good return on equity,positive cash flow,no or very low debt,with enough cash in hand atleast equal the long term debt.and with positive working capital.and atleast 20% next year growth forecast.keeping all these things in mind u r gonna be fine.

Barry
Barry - Tuesday February 10, 2009 06:22PM EST

For those of you who don’t know (or who have forgotten - which apparently seems to be just about everyone), Henry Blodget is no longer a Wall Street analyst. You see as it turns out, a while back, he was banned from the securities industry for life. In 2003, he was charged with securities fraud and instead of defending the indefensible, decided to pay millions of dollars without admitting or denying the charges. As part of the plea deal, he was banned from the securities industry for life. Mr Blodget is one of the genuine poster boys for the Wall Street crap-fest that lead to the .com bubble. That bubble, of course, led to billions of dollars in investor losses; most suffered by his rank and file investors of course.

Barry
Barry - Tuesday February 10, 2009 06:23PM EST

Does anyone other than me notice a remarkable resemblence between Blodget and Geithner??? No, not so much physical, although they're certainly both world class smirkers... I mean a moral, an ethical, and a character resemblence. Do you see it?

Kevin
Kevin - Tuesday February 10, 2009 06:23PM EST

Does anyone else find it odd that the market is said to have done this from "1996 to 1982," which was a 14 year bull market? Of course, stocks did go down during that period if you take the 14 years in reverse. Also I was not aware that time went backward for those 14 years.

westbendbear
westbendbear - Tuesday February 10, 2009 07:17PM EST

cincottk - Tuesday February 10, 2009 06:23PM EST Does anyone else find it odd that the market is said to have done this from "1996 to 1982," which was a 14 year bull market? Of course, stocks did go down during that period if you take the 14 years in reverse. Also I was not aware that time went backward for those 14 years................................................................................................................... Typical media reporting. Accuracy does not matter anymore. Exmple: Local newspaper did an article on my business. They got nearly all the facts wrong. Another one is a Wal*Mart ad several years ago for a 300 Mega watt hand held FRS walkie-talkie (the batteries could not even put out 5 watts). And if you could transmit at that power level, the poor user would vaporize in seconds........................Remember: big media reporting is FOR ENTERTAINMENT PURPOSES ONLY!

Yahoo! reserves the right to refuse, or remove any comment that does not comply with the Yahoo! Terms of Service. The submission of spam, hateful, or obscene messages may result in the termination of your Yahoo! ID.
About Tech Ticker - Send FeedbackDisclaimer. Copyright © 2007 Yahoo! Inc. All rights reserved.
Copyright/IP Policy - Terms of Service - Privacy Policy - Help
Quotes delayed, except where indicated otherwise. Delay times are 15 mins for NASDAQ, NYSE and Amex. See also delay times for other exchanges.

Quotes and other information supplied by independent providers identified on the Yahoo! Finance partner page. Quotes are updated automatically, but will be turned off after 25 minutes of inactivity. Quotes are delayed at least 15 minutes for NASDAQ, NYSE and Amex. See also delay times for other exchanges. Real-Time continuous streaming quotes are available through our premium service. You may turn streaming quotes on or off. Fundamental company data provided by Capital IQ. Financials data provided by Edgar Online. Historical chart data and daily updates provided by Commodity Systems, Inc. (CSI). International historical chart data, daily updates, fund summary, fund performance, dividend data and Morningstar Index data provided by Morningstar, Inc. Analyst estimates data provided by Thomson Financial Network. All data provided by Thomson Financial Network is based solely upon research information provided by third party analysts. Yahoo! has not reviewed, and in no way endorses the validity of such data. Yahoo! and ThomsonFN shall not be liable for any actions taken in reliance thereon. All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.