I agree that it is difficult to put in practice.
I think that for times like this, it should be "buy" and not just hold. I personally plan to hold what I bought, until prices get too high again. Then I will start selling. And, by the way, I am underwater on most things that I bought over the last few months, with the exception of Wells Fargo. That concerns me, but not too much.
Last November's valuations were last seen in 1984, current valuations go back to
1982.Not really. The Big Kahuna to-date (in terms of value/price deviations) was the bottom of 1932, followed by the bottom of 1857. The current valuation cycle began in 1982, when the market traveled from -2 to +2SD in the space of two decades, and subsequently returned back to near -2SD in less than a decade.
The important thing to keep in mind is that just because the market is overvalued doesn't mean it cannot become even more overvalued, and vice versa. Value is a rational, invisible anchor; Price is an emotional, visible expression which is tied to value via a leash. Thus, Price is free to run in either direction until it exhausts the leash's limit, at which point it's yanked back in the opposite direction. Therefore, value is a long-term potential, not a short-term promise.
Of course, if all you see is a dog (without noticing the anchor or knowing the length of the leash), the whole thing looks like a confusing spectacle.
Of course, not many current investors were around to exploit those dips! We only really care about the Big Kahunas that happen during our investing lifetimes.
-Tad
It is short-sighted to make an arbitrary assumption about the need to move goalposts in order to be relevant, but to address your specific concern ... stock prices in 1982 traded at a price/value discount 20% deeper than last November and 10% deeper than current levels, thereby easily taking the "Big Kahuna" trophy for the "our investing lifetime" competition. Thus, the only "hindsight" necessary is historical perspective -- the longer the better.
"There's nothing new under the sun ... that which is has been before."
The problem is that some of us, like me, who bought somewhere in the "middle," as it turned out, now have no more money to invest when the opportunity looks good. Then, when things get better I will probably swear that prices are too high at some point and then find that they keep on going still higher. Deciding when the top and bottom have arrived is harder than predicting which company or which fund will perform well.
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