Today, what to do with your capital?

[PloutosNX]

Good morning,

This is a very naive question…
The obvious and prudent answer would be to say stay out of the markets and be patient, because there is nothing with decent prices.

The historical answer is that one loses more by staying out of the market than by staying in it…

I must admit that the further I go, the more lost I am.
I have been learning about markets, asset valuation and related stuff for some time now. But I don't feel like I can fly away...

Swiss and European bonds have negative rates, so they are not interesting, especially since the euro rate is falling against the Swiss franc.
US bonds, through the TLT tracker, have a yield of around 2%, with a bullish USD/CHF price, but if we look at the price of the TLT ETF it has increased sharply recently, so is it still interesting to buy some currently?

Gold is a way to beat inflation and should go up when markets fall. I am looking into what is possible to buy physical gold and keep it in your securities account (the bank keeps it in its vault in your name), but you always have the option to withdraw it.

There are no stocks with an attractive price to put in a portfolio.
Should we go into an ETF to do as the market does? What would be the best indicator to choose a region/sector to invest in this case?

What are the avenues to explore at the moment? Do you have any experiences to share?

Thanks for your advice.
Xavier

[Jerome]

This is not a naive question, on the contrary, it is the crux of the matter.

Indeed, there is not much worthwhile at the right price at the moment. I am also less and less prolific in terms of analyses, and it is precisely because there is nothing to say, except that almost everything is too expensive.

In such cases, it is better to refrain from buying, keeping the stocks that are still at fairly reasonable prices, especially if they are defensive in nature.

Gold is indeed in this kind of situation rather an ally, especially since despite its rise in recent months, it remains cheap compared to stocks. You can buy it simply with the AUCHAH ETF.

Bonds are as you say irrelevant at the moment, except perhaps a few US treasury bonds at +20 years via TLT. They have risen a lot, I have sold a few, but their yield is not so bad and above all it brings diversification to the portfolio.

If you want to invest in stocks via an ETF in a market, the best currently is Japan (SJPA). Just behind there is Australia or Canada, but a little expensive all the same.

And of course, it's always better to buy stocks directly.

Look at my asset allocation (under tools), that's what it's for.

[PloutosNX]

Hello Jerome,

Thank you for your reply.

In the meantime, I saw that you were interested in the "Momentum" effect, this has been something I've been thinking about for some time, because when there is nothing to do in the value, perhaps it's better to follow the herd by choosing a pool of 10-12 ETFs covering representative geographic and industrial sectors and buying every month the 2 (finally to be defined the number) with the best momentum over 1-3-6 months for example (also to be defined and including the weighting and whether or not we take volatility into account).
There are many possibilities and I haven't been able to look into it well enough yet.

I will look at the gold ETF to see if it is of interest.

I think US bonds at +20 years (via TLT) are really high, even if they provide 2% or so. The calculation with the PE should not be valid in this case. Is there a way to evaluate if the price relative to the yield is correct?

Is the PER of an ETF also a value to take into account or is it very uncertain due to the fact that there are a large number of actions included in it, therefore each with different characteristics.

I look at your asset allocation often, but I can't see the subtleties and reasoning behind it... I must lack experience unfortunately and so for the moment I'm staying on the sidelines.

I tried to make a "screen" using your method. By the way I have many other questions that have appeared, will it be for a next post or would drinking a beer be more pleasant?

Have a nice weekend.
Xavier

[Jerome]

Momentum effect: be careful, I am only interested in this effect for three reasons:

1. the stock dropped 20% or more, which makes me want to sell
2. the market is below its xxx day moving average (eg 200) and I am not buying anything in this market
3. A stock has excellent fundamentals and is not expensive, if it has good momentum it is the icing on the cake

I would never bother buying stocks or ETFs just because they have the best momentum at the moment. I know this strategy, it's true that it has proven itself in certain circumstances, but it is very volatile. And it is pure technique, which I hate. In my eyes, momentum is only of interest to avoid volatility (in the event of a fall) or to gain time on a cheap stock (and not have to wait 3 years for the market to realize it).

The PE ratio on stocks often doesn't mean much. On a stock ETF, it's even worse, since companies with negative PE ratios are excluded from the calculation, which totally distorts the data. As for the case you cite (TLT PE ratio), it actually means absolutely nothing. I think you saw it on a site like Yahoo Finance, but fortunately it's not indicated on iShares.

To assess whether the market value of an ETF is correct, we must compare it to its NAV (Net Asset Value), which is the sum of all the assets of the fund, minus the liabilities (and divide by the number of shares in circulation). iShares makes it easy for you by directly indicating the premium or discount of each ETF. Generally on large, very liquid ETFs, the difference is minimal and there is no need to ask yourself too much if the ETF is correctly valued. The market takes care of it all by itself!

So the question of whether the price to yield is correct is not about the ETF, but rather simply about whether US long-term bonds are expensive or not. In other words, whether long-term rates are historically low or not. And the answer is: they are miserable! (but still better than here…)

https://www.macrotrends.net/2521/30-year-treasury-bond-rate-yield-chart

That being said, if you have read my series on diversification, you understand the important role of long bonds in a portfolio. They are the only asset class that is inversely correlated to stocks. And it is impossible to know how long these low rates will last. Maybe they can even go down further (and bonds will therefore increase in value as they have in recent months). For this reason I have decided to take a small line of around 10%, mainly for diversification purposes. But I would not venture higher as long as rates are at this level.

Just ask your questions online, my liver is already saturated by the Valais Fair 🙂

 

[PloutosNX]

Hello Jerome,

Momentum effect: be careful, I am only interested in this effect for three reasons:

    the stock dropped 20% or more, which makes me want to sell
    the market is below its xxx day moving average (eg 200) and I am not buying anything in this market
    A stock has excellent fundamentals and is not expensive, if it has good momentum it is the icing on the cake

I would never bother buying stocks or ETFs just because they have the best momentum at the moment. I know this strategy, it's true that it has proven itself in certain circumstances, but it is very volatile. And it is pure technique, which I hate. In my eyes, momentum is only of interest to avoid volatility (in the event of a fall) or to gain time on a cheap stock (and not have to wait 3 years for the market to realize it).

I must have misread and misunderstood what you wrote. But how and what momentum do you use to (in addition to the value aspect) find an interesting and cheap asset?

The PE ratio on stocks often doesn't mean much. On a stock ETF, it's even worse, since companies with negative PE ratios are excluded from the calculation, which totally distorts the data. As for the case you cite (TLT PE ratio), it actually means absolutely nothing. I think you saw it on a site like Yahoo Finance, but fortunately it's not indicated on iShares.

I haven't seen it anywhere, it was a question that came to me like that.

To assess whether the market value of an ETF is correct, we must compare it to its NAV (Net Asset Value), which is the sum of all the assets of the fund, minus the liabilities (and divide by the number of shares in circulation). iShares makes it easy for you by directly indicating the premium or discount of each ETF. Generally on large, very liquid ETFs, the difference is minimal and there is no need to ask yourself too much if the ETF is correctly valued. The market takes care of it all by itself!

Thanks, I didn't know this, so if the value is negative, it means that the ETF is cheap, all things considered of course.

So the question of whether the price to yield is correct is not about the ETF, but rather simply about whether US long-term bonds are expensive or not. In other words, whether long-term rates are historically low or not. And the answer is: they are miserable! (but still better than here…)

https://www.macrotrends.net/2521/30-year-treasury-bond-rate-yield-chart

I just understand that if they are miserable, the day they increase, their price will follow?

That being said, if you have read my series on diversification, you understand the important role of long bonds in a portfolio. They are the only asset class that is inversely correlated to stocks. And it is impossible to know how long these low rates will last. Maybe they can even go down further (and bonds will therefore increase in value as they have in recent months). For this reason I have decided to take a small line of around 10%, mainly for diversification purposes. But I would not venture higher as long as rates are at this level.

I have already read the various articles on your site several times, as well as other reference works, but it is not so easy to understand and I try to prevent very big mistakes.

Just ask your questions online, my liver is already saturated by the Valais Fair 🙂

I will not fail to do so. First, I need to further deepen my understanding of corporate balance sheets and the correlation with useful ratios.

Sincerely
Xavier

PS: I noticed some display issues on your site. It does not display on the full width of the screen, but on a tiny portion, it makes me think of an error between the "mobile" and "desktop" mode.

[Jerome]

1) Momentum: I simply look at the current value compared to that of 6 months ago, or even 12 months ago. I do not buy a stock if a stock has fallen for example from 20% or more in the last 6 or 12 months, because it is a knife falling, even if it has excellent fundamentals and is very cheap. Conversely, I can be more tolerant if a stock has a very strong momentum, even if it is a little more expensive than my usual criteria, because that means that the market is understanding its mistake.

2) Premium/discount: yes if the value is negative the ETF is very slightly cheap… but I don't think it's a strategy worth pursuing…

3) Bonds and rates. No, it's the opposite, when rates go up, bonds go down and vice versa. So right now, since rates are very low, there's a greater chance that they'll eventually go up again, and that bonds will go down. The only question is when, because these rates have been falling for a while now, despite the fact that in many places they're already negative. The ideal time to invest in bonds is when rates are historically high, not only do you get a good return, but you also have every chance that the price will go up when rates go down.

4) display: thanks, I saw and fixed the bug a few days ago, it's possible that your cache still shows you the old "view", try emptying it perhaps?

[PloutosNX]

Hello Jerome,

Regarding the display problem I noticed at the beginning of the week and as it was not always reproducible I had a doubt if you had already corrected it or not.

So it is not very convenient to have to come home with obligations at the moment.

So I'll just keep reading and wait for some titles to become more affordable. I'm a few months away from that.

I will enjoy continuing to ask questions!

See you soon,
Xavier

[Jerome]

So it is not very convenient to have to come home with obligations at the moment.

If we think only about bonds, it is indeed not appropriate. On the other hand, in terms of asset allocation, a little bonds does not hurt. The great B. Graham even recommended 50/50 with a weighting that can vary depending on market conditions. Investment is an art that is never all black or all white. Sometimes it is even contradictory. I made 10% on my US bonds in 4 months without counting the yield (which is monthly moreover) and I have already taken part of these gains.

[PloutosNX]

Hello Jerome,

Yes, I am finishing reading B. Graham's works... I think a second reading will be necessary!

A question comes to mind regarding your answer on ETF evaluation.
I remember reading that you have a top-down approach to indices (therefore indirectly to ETFs), how do you evaluate this?

Have a nice end of the day,
Xavier

[Jerome]

I simply look at the valuation (price to book) and the trend (moving average) for the key indices. This gives me a macro idea of where to be… or not to be…

[PloutosNX]

Hello Jerome,

I'm coming back to you regarding the "Price to Book" for an ETF.
What would be a correct value? I can't seem to find what to pay attention to. I think this may also be different depending on the region.
If I take a P/B ratio lower than 1, I think we can say that the market is undervalued and on the contrary higher than 3 that it is overvalued?
Is this correct? These values (<1 and >3) are usable for both an ETF and single stocks in my opinion.

Good day,
Xavier

[Jerome]

for an ETF I would say that below 1.3 it is undervalued and above 2.3 it is overvalued

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