Groundhogs & Fear Investing

by | Feb 2, 2016 | Archives

Even when value investing there is always something to fear.  There is always something we do not know.  That’s why multi currency diversification is good.  Fear investing though, is bad.

Isn’t that what the groundhog analogy is all about?  The groundhog loses a good day because he fears a shadow.

We have always had something to fear.  In the 50s, 60, 70s, we feared nuclear annihilation. Our schools used to have air raid exercises that sent us scooting  under our desks.  People purchased nuclear shelters.  Most of us remember the fear generated by Y2K.  More recently there was a lot of fear that the world’s economic structure would come unraveled because oil production would reach maximum production, fall behind demand and the world would run out of oil.

groundhog day again

Image from Groundhog Day Again.

Now based on studies and reports by the likes of ESAI Energy and Exxon, to name a few, the fear is the global economy will be ruined by too much oil.  The ESAI report projects that China’s oil-demand growth rate between now and 2030 would be less than half that of the previous 15-year period. This is important because from 2000 to 2010, China accounted for more than 40% of the growth in demand for crude oil.

The prices of oil reached records in 2008, up to $147 a barrel.  Now the price has fallen as low as $26.65 a barrel.

For the 50 years I have been involved in the investing industry, investors have been jumping at shadows while the sun has always been shining somewhere.

This fear creates a “Behavior Gap”.

Let’s use Groundhog Day as a reminder that when we reduce investing stress, we reduce losses from the Behavior Gap. 

The first lesson of the Purposeful investment Course (Pi) looks at numerous steps that can be taken to overcome this Behavior Gap.  (Below is three of them.)

Step One is to reduce stress by decreasing the amount of economic data we have to process.

Overwhelming amounts of data increase stress.  One of the analysts we use, Keppler Asset Management, analyses all the stocks in 46 equity markets (23 developed and 23 emerging), nearly 7,000 shares in total.  Many of these markets have well over 1000 shares. 

Trying to keep up with that data load is enormously expensive and stressful so letting Keppler do this is a huge comfort.

Step Two is to know that equities have always risen and that a global weighted index of shares is highly likely to return a profit in the next four years.  A 49 year review of global stock market activity we just sent the subscribers of our Personal investing Course (Pi) shows that the longest losing streak of  an Equally-Weighted World Index of equities was eight months.

Keppler Asset Management chart

Keppler Asset Management’s January 2016 four year growth projections for an equally weighted  global equity index.  (Click on image to enlarge.)

The study above shows the rise and fall of an equally-weighted world index of shares since 1994.  The blue line is Keppler Asset Management’s total return projection for the last four years.

Keppler’s implicit three-to-five-year projection indicates that the equally-weighted world index by December 31, 2019 is expected to rise to a compound annual total return estimate of 9.3 % in local currencies — down from 10.7 % last quarter.

The upper band estimate implies a compound annual total return of 14.4 % (down from 15.8 % three months ago).

The lower band estimate corresponds to a compound annual total return of 3.4 % (down from 4.7 % three months ago). Given the current low interest and inflation environment, even the lower-band estimate is appealing.

Step Three is to invest in value markets.   The January 2016 market valuations below by Keppler show that the Price-to-Book-Value of the equally-weighted world-index of shares is 1.62, the Price-to Earnings ratio 17 and average yield 3.20.  The  ten top developed market have much better value.   The top value markets combined Price-to-Book-Value of the equally-weighted-world-index of shares is 1.35, (vs. 1.62) the Price-to Earnings ratio 15.4 (vs. 17) and average yield 3.34 (vs. 3.20).

keppler valuations

Click on image to enlarge.

According to Keppler’s analyses, an equally-weighted combination of these most attractively valued markets offers the highest expectation of long-term risk-adjusted performance.  The odds favor that the compound annual total return of the top ten value developed markets will perform even better than the equally weighted-world-index over the next three to five years.

Index investing allows us to gain easy, low stress diversification.  By investing in indices instead of trying to find any one specific share within a market or sector, we gain a great deal of additional safety.   Sticking with diversified good value portfolios in specific markets or sectors helps make the investing process much easier and less stressful.  Investing in ten good value indices diversifies investments into hundreds of shares.

The groundhogs tell us, if there are shadows, there is fear!  Our world has plenty of shadows. but we can reduce the fear and the risk of the Behavior Gap by focusing on value and indices.

We wish you a bright sunny day and by the way, don’t worry about the shadows.


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