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Are There More Undervalued Stocks In The Bull Market Or Bear Market?

I understand that earnings can grow faster or slower than prices in both bull and bear markets.

But I was just wondering do we see more undervalued stocks in bull market or bear market? Or it does not really matter as long as we can find the undervalued stocks in both market cycles.

Thank you!

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I’m not sure whether it is possible to give a definite answer to your question since if it is “confirmed” that a stock undervalued/overvalued, then by definition it won’t be for long. 

It ain't what you don't know that gets you in trouble. It's what you know for sure that just ain't so.

Bear market. Seems obvious or I don’t understand your question.

you basically need to come from a target school pedigree/work at prestigious firm in the US/have a really good connection.

- AF hivemind

Bear market? Markets tend to over react to bad news. Also this is an empirical question. If you define value as what the stock will be worth at some point in the future and have the data, then this is easy to test. 

Bear market, not even close.

#FreeCVM #FreeTurd #2007-2017

Paradoxical question.

It can’t more undervalued in either a bear or bull market because the market has already determined what a willing buyer/seller values it at.  Just because you believe something to be worth more in the future doesn’t make it true.

It can be relatively more undervalued in either scenario but to say that one is scenario has more undervaluation than the other means market pricing mechanics are very very flawed and you should always buy in bear markets which means they would never exist.

Galli wrote:

Paradoxical question.

It can’t more undervalued in either a bear or bull market because the market has already determined what a willing buyer/seller values it at.  Just because you believe something to be worth more in the future doesn’t make it true.

It can be relatively more undervalued in either scenario but to say that one is scenario has more undervaluation than the other means market pricing mechanics are very very flawed and you should always buy in bear markets which means they would never exist.

I’m not sure if this is completely correct. Even if bear markets have more under valuation, it would mean that you’d have to hold cash until they occur. So that drag on returns may even out the bear market buying opportunities  but it doesn’t mean they aren’t more undervalued 

Galli wrote:

Paradoxical question.

It can’t more undervalued in either a bear or bull market because the market has already determined what a willing buyer/seller values it at.  Just because you believe something to be worth more in the future doesn’t make it true.

It can be relatively more undervalued in either scenario but to say that one is scenario has more undervaluation than the other means market pricing mechanics are very very flawed and you should always buy in bear markets which means they would never exist.

Yeah, makes zero sense, in bear markets cash constraints and frankly optics often prevent buys.  It’s also moronic because your point is somehow that if you only bought in down markets you wouldn’t make more money, which is mathematically stupid since it’s obviously false.  Also, Warren Buffett.

#FreeCVM #FreeTurd #2007-2017

Black Swan wrote:

Galli wrote:

Paradoxical question.

It can’t more undervalued in either a bear or bull market because the market has already determined what a willing buyer/seller values it at.  Just because you believe something to be worth more in the future doesn’t make it true.

It can be relatively more undervalued in either scenario but to say that one is scenario has more undervaluation than the other means market pricing mechanics are very very flawed and you should always buy in bear markets which means they would never exist.

Yeah, makes zero sense, in bear markets cash constraints and frankly optics often prevent buys.  It’s also moronic because your point is somehow that if you only bought in down markets you wouldn’t make more money, which is mathematically stupid since it’s obviously false.  Also, Warren Buffett.

This is a theoretical question in which market condition typically experiences more undervaluation. Introducing new, very broad and unexplained variables such as optics, cash constraints and Warren Buffer is says something different but doesn’t provide any real distinction from the prior explanation. It’s a deviation from the root ask.

My answer, to reiterate and to simply for you, is neither market condition because the market has to realize the undervaluation in either a bull or a bear market for you to make a return.  If it’s not realized, it won’t ever exist, and there are plenty of bulls and bears which have exhibited undervaluation situations that lead to superior relative returns.  To say a P/E of 22 is more overvalued than a P/E of 15 ignores every other possible variable, such as future expected returns.

Are you buying right now or is this bear overvalued? Some further insight would make this a worthwhile conversation otherwise I’ll see myself out.

Gali, what if we define bear market based on valuation levels? Would you agree there are more undervalued stocks when the market CAPE is 5 vs 20?  

Bear market is when it’s on sale, the issue is that when bear markets occur, there is stringent financing, **** credit, high unemployment, **** earnings. Valuation multiples expand in **** markets so it really depends on the type of industry in.using the cape is prolly smarter since it sort of normalizes earnings.

I love my cheese. I got to have my cheddar.

Galli wrote:

Black Swan wrote:

Galli wrote:

Paradoxical question.

It can’t more undervalued in either a bear or bull market because the market has already determined what a willing buyer/seller values it at.  Just because you believe something to be worth more in the future doesn’t make it true.

It can be relatively more undervalued in either scenario but to say that one is scenario has more undervaluation than the other means market pricing mechanics are very very flawed and you should always buy in bear markets which means they would never exist.

Yeah, makes zero sense, in bear markets cash constraints and frankly optics often prevent buys.  It’s also moronic because your point is somehow that if you only bought in down markets you wouldn’t make more money, which is mathematically stupid since it’s obviously false.  Also, Warren Buffett.

This is a theoretical question in which market condition typically experiences more undervaluation. Introducing new, very broad and unexplained variables such as optics, cash constraints and Warren Buffer is says something different but doesn’t provide any real distinction from the prior explanation. It’s a deviation from the root ask.

My answer, to reiterate and to simply for you, is neither market condition because the market has to realize the undervaluation in either a bull or a bear market for you to make a return.  If it’s not realized, it won’t ever exist, and there are plenty of bulls and bears which have exhibited undervaluation situations that lead to superior relative returns.  To say a P/E of 22 is more overvalued than a P/E of 15 ignores every other possible variable, such as future expected returns.

Are you buying right now or is this bear overvalued? Some further insight would make this a worthwhile conversation otherwise I’ll see myself out.

It’s a “theoretical question” but it’s a dumb one.  Markets undeniably trend upwards, buying on down markets will mathematical beat buying on average across up markets by definition over time given that.  What you’re saying is just empty overthought mumbo jumbo that doesn’t make sense.  I pointed to many factors that make bear markets inefficient, trying to argue some efficient market hypothesis is silly to anyone with any real industry trading experience.  Buffett doesn’t offer any real distinction because it should be painfully obvious to anyone who hasn’t been beaten brain dead with freshman year economics material.  His track record and history of massive purchases in down markets followed by long periods of no buying and yuge cash builds in bull markets make the strategy pretty obvious.  The only reason this isn’t used broadly is because if you don’t have a captive insurance portfolio, building cash for 10 years is an impossible strategy for people with non-captive money that have to answer to impatient investors.  Similarly, my points about optics and cash positions are painfully obvious, to anyone with practical front office experience who isn’t arguing about markets like some sort of Flat Earther.  Market dislocations are very real.

You don’t even have to argue about it theoretically.  Just looking at equity market returns in rolling periods after major bear markets demonstrates higher return levels.  It’s like asking is it better to buy high, sell low or buy low, sell high?  Then arguing that we can’t possible have the theoretical understanding required to reach a conclusion.

#FreeCVM #FreeTurd #2007-2017

At the core of it, regarding value you seem to be overly focused on what other people pay (price) and when they realize it.  A good re-read of the Mr.Market analogy seems like a starting place.  If your return period is a quarter or even <1Y then I think it’s safe to say you can forget the pretense of talking about value and turn this into some sort of technical analysis discussion.  But over a long term, fishing around in a bear market is absolutely going to outperform randomly selecting stocks in a bull market.

#FreeCVM #FreeTurd #2007-2017

Black Swan wrote:

Galli wrote:

Black Swan wrote:

Galli wrote:

Paradoxical question.

It can’t more undervalued in either a bear or bull market because the market has already determined what a willing buyer/seller values it at.  Just because you believe something to be worth more in the future doesn’t make it true.

It can be relatively more undervalued in either scenario but to say that one is scenario has more undervaluation than the other means market pricing mechanics are very very flawed and you should always buy in bear markets which means they would never exist.

Yeah, makes zero sense, in bear markets cash constraints and frankly optics often prevent buys.  It’s also moronic because your point is somehow that if you only bought in down markets you wouldn’t make more money, which is mathematically stupid since it’s obviously false.  Also, Warren Buffett.

This is a theoretical question in which market condition typically experiences more undervaluation. Introducing new, very broad and unexplained variables such as optics, cash constraints and Warren Buffer is says something different but doesn’t provide any real distinction from the prior explanation. It’s a deviation from the root ask.

My answer, to reiterate and to simply for you, is neither market condition because the market has to realize the undervaluation in either a bull or a bear market for you to make a return.  If it’s not realized, it won’t ever exist, and there are plenty of bulls and bears which have exhibited undervaluation situations that lead to superior relative returns.  To say a P/E of 22 is more overvalued than a P/E of 15 ignores every other possible variable, such as future expected returns.

Are you buying right now or is this bear overvalued? Some further insight would make this a worthwhile conversation otherwise I’ll see myself out.

It’s a “theoretical question” but it’s a dumb oneMarkets undeniably trend upwards, buying on down markets will mathematical beat buying on average across up markets by definition over time given that.  What you’re saying is just empty overthought mumbo jumbo that doesn’t make sense.  I pointed to many factors that make bear markets inefficient, trying to argue some efficient market hypothesis is silly to anyone with any real industry trading experience.  Buffett doesn’t offer any real distinction because it should be painfully obvious to anyone who hasn’t been beaten brain dead with freshman year economics material.  His track record and history of massive purchases in down markets followed by long periods of no buying and yuge cash builds in bull markets make the strategy pretty obvious.  The only reason this isn’t used broadly is because if you don’t have a captive insurance portfolio, building cash for 10 years is an impossible strategy for people with non-captive money that have to answer to impatient investors.  Similarly, my points about optics and cash positions are painfully obvious, to anyone with practical front office experience who isn’t arguing about markets like some sort of Flat Earther.  Market dislocations are very real.

You don’t even have to argue about it theoretically.  Just looking at equity market returns in rolling periods after major bear markets demonstrates higher return levels.  It’s like asking is it better to buy high, sell low or buy low, sell high?  Then arguing that we can’t possible have the theoretical understanding required to reach a conclusion.

I struck out all of your noise so I can focus on what you are trying to say.  We’re now talking about returns and not valuations, I can pivot.

In your last point, I bolded something interesting.  You are saying that returns in bull markets are higher than those in bear markets?

I agree with that, obviously.  So what I think you are trying to say, which I know you intended from the start, is that you make superior returns at the TURN of a new bull market. Not during a bear market.  

So the turn of a bull market is where things are most relatively undervalued?  

rawraw wrote:

Gali, what if we define bear market based on valuation levels? Would you agree there are more undervalued stocks when the market CAPE is 5 vs 20?  

If I wanted to continue the argument, I would say that it depends if returning to the average CAPE is possible when it hits 5.

At the micro level, some companies never bounce off their CAPE lows and go into bankruptcy.  Is that possible at the macro level, sure. Even if it’s implausible to some.

True but if your competitor bankrupts, you actually benefit. Since now your market share is larger plus one less competitor. So overall **** is still a lot better for you and your investors

I love my cheese. I got to have my cheddar.

Galli wrote:

I struck out all of your noise so I can focus on what you are trying to say.  We’re now talking about returns and not valuations, I can pivot.

In your last point, I bolded something interesting.  You are saying that returns in bull markets are higher than those in bear markets?

I agree with that, obviously.  So what I think you are trying to say, which I know you intended from the start, is that you make superior returns at the TURN of a new bull market. Not during a bear market.  

So the turn of a bull market is where things are most relatively undervalued?  

First bold:  You can’t separate returns and valuation.  Asking when things are most undervalued is literally asking when the returns are higher for the price paid by definition.

For your last bold I’d point out that most people will define a bear market as one that’s already entered correction territory (down 10%).   Most will also not recognize a bull market until you’ve already seen some bounce.  As a result in practice you’re getting more value on average during an identified bear market than in an identified bull market.  There’s also more value in a bear market for the points I mentioned earlier on poor technicals (optics, cash, decompression) as the baby gets thrown out with the bathwater.  In most bull markets you also don’t have very even returns, returns are often strongest in the first rebound.  If you’re okay with the volatility, it’s easy to grab the value once in an identified bear market.

#FreeCVM #FreeTurd #2007-2017

Black Swan wrote:

Galli wrote:

I struck out all of your noise so I can focus on what you are trying to say.  We’re now talking about returns and not valuations, I can pivot.

In your last point, I bolded something interesting.  You are saying that returns in bull markets are higher than those in bear markets?

I agree with that, obviously.  So what I think you are trying to say, which I know you intended from the start, is that you make superior returns at the TURN of a new bull market. Not during a bear market.  

So the turn of a bull market is where things are most relatively undervalued?  

First bold:  You can’t separate returns and valuation.  Asking when things are most undervalued is literally asking when the returns are higher for the price paid by definition.

True if the return is a fixed currency amount, but why should that be true?  I know that CFA Institute likes to assume that a stock is going to appreciate $5 over the next year whatever its price is today, but that’s just silly.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

S2000magician wrote:

Black Swan wrote:

Galli wrote:

I struck out all of your noise so I can focus on what you are trying to say.  We’re now talking about returns and not valuations, I can pivot.

In your last point, I bolded something interesting.  You are saying that returns in bull markets are higher than those in bear markets?

I agree with that, obviously.  So what I think you are trying to say, which I know you intended from the start, is that you make superior returns at the TURN of a new bull market. Not during a bear market.  

So the turn of a bull market is where things are most relatively undervalued?  

First bold:  You can’t separate returns and valuation.  Asking when things are most undervalued is literally asking when the returns are higher for the price paid by definition.

True if the return is a fixed currency amount, but why should that be true?  I know that CFA Institute likes to assume that a stock is going to appreciate $5 over the next year whatever its price is today, but that’s just silly.

I’m assuming everything is home currency because if you’re layering in currency risk it’s a whole different question.  If you’re asking about the ability to identify the future returns, I’m not assuming anyone has perfect info in my points.  I’m just saying that if you’re asking questions about value then you’re inherently asking questions about returns.

#FreeCVM #FreeTurd #2007-2017

Black Swan wrote:
S2000magician wrote:
Black Swan wrote:
Galli wrote:
I struck out all of your noise so I can focus on what you are trying to say.  We’re now talking about returns and not valuations, I can pivot.

In your last point, I bolded something interesting.  You are saying that returns in bull markets are higher than those in bear markets?

I agree with that, obviously.  So what I think you are trying to say, which I know you intended from the start, is that you make superior returns at the TURN of a new bull market. Not during a bear market.  

So the turn of a bull market is where things are most relatively undervalued?

First bold:  You can’t separate returns and valuation.  Asking when things are most undervalued is literally asking when the returns are higher for the price paid by definition.

True if the return is a fixed currency amount, but why should that be true?  I know that CFA Institute likes to assume that a stock is going to appreciate $5 over the next year whatever its price is today, but that’s just silly

I’m assuming everything is home currency because if you’re layering in currency risk it’s a whole different question.  If you’re asking about the ability to identify the future returns, I’m not assuming anyone has perfect info in my points.

Who said anything about other currencies?

You’re definitely complicating things here.

Black Swan wrote:
I’m just saying that if you’re asking questions about value then you’re inherently asking questions about returns.

And I’m saying that that’s true only if you assume that the return (as an absolute number, say, $5, not as a percentage of today’s stock price, say, 10%) is constant irrespective of the spot price of the stock.  You’re making that assumption and it’s not necessarily warranted.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

1) You said fixed currency amount, I wasn’t sure if you were alluding to some unnecessary point about FX.

2) I’m not assuming any return is constant irrespective of stock price.  I’m assuming that most bear markets are driven by cyclical factors and deviations from trend.  It’s a very warranted assumption applied on average across the market (question is broad based valuations) that since earnings, cash flows and equity prices all trend upwards over time underpinned fundamentally by upward trending GDP you can be sure in any non-pedantic textbook sense that on an absolute dollar basis the broader market will break prior highs on all three metrics over a long holding period.  The only exceptions to this would be a regime shift in which GDP declined (population, deflation, loss of technology?).  This is a view echoed by practically by Buffett and academically by the CFA materials in economics (I wrote the practice questions) in which they point out the various sources of equity returns (P/E: temporary, margin shift: temporary, GDP: long term trend).  Since you’re going to regain those broadbased absolute levels of activity, you will regain those levels of return.

#FreeCVM #FreeTurd #2007-2017

Black Swan wrote:
This is a view echoed by practically by Buffett and academically by the CFA materials in economics (I wrote the practice questions) … .

You wrote the questions for CFA Institute?

Cool.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

S2000magician wrote:

Black Swan wrote:
This is a view echoed by practically by Buffett and academically by the CFA materials in economics (I wrote the practice questions) … .

You wrote the questions for CFA Institute?

Cool.

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#FreeCVM #FreeTurd #2007-2017

Black Swan wrote:
S2000magician wrote:
Black Swan wrote:
This is a view echoed by practically by Buffett and academically by the CFA materials in economics (I wrote the practice questions) … .

You wrote the questions for CFA Institute?

Cool.

BSAS Mock Exams

Gotcha.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

Black Swan wrote:
1) You said fixed currency amount, I wasn’t sure if you were alluding to some unnecessary point about FX.

I wrote “fixed currency amount” rather than “fixed dollar amount” because CFA Institute is trying to be more globally inclusive, or something like that.  Personally, I think that it simply gives more scope for misunderstanding, as it did here.

Black Swan wrote:
2) I’m not assuming any return is constant irrespective of stock price.  I’m assuming that most bear markets are driven by cyclical factors and deviations from trend.  It’s a very warranted assumption applied on average across the market (question is broad based valuations) that since earnings, cash flows and equity prices all trend upwards over time underpinned fundamentally by upward trending GDP you can be sure in any non-pedantic textbook sense that on an absolute dollar basis the broader market will break prior highs on all three metrics over a long holding period.  The only exceptions to this would be a regime shift in which GDP declined (population, deflation, loss of technology?).  This is a view echoed by practically by Buffett and academically by the CFA materials in economics (I wrote the practice questions) in which they point out the various sources of equity returns (P/E: temporary, margin shift: temporary, GDP: long term trend).  Since you’re going to regain those broadbased absolute levels of activity, you will regain those levels of return.

Perhaps I’m misinterpreting the original question.

When I read “undervalued stocks”, I took it to mean stocks whose price is too low after taking into account that it’s a bear market.  Of course prices are going to be lower on average in a bear market than in a bull market, but they can be appropriately lower (because investors are more risk averse and, therefore, have a higher required rate of return for assuming risk), or it can be too low.  And when making that comparison, I’m not sure that “talking about price” is necessarily “talking about return”.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

I see what you’re saying and that’s always the academic argument as well as a fair line of reasoning when dealing with idiosyncratic valuation drops.  But in reality when you’re investing in cyclicals and broad market weakness you see this same play over and over.  Mass euphoria, mass panic, mass euphoria.  Take Chemours, they split off of DuPont and everyone decided TiO2 prices would never go up again, stock drops from $20 to $5 and its doom and gloom, that’s January 2016.  Suddenly it’s oh wait, Trump and industrial euphoria, Ti02 jumps and the same company rallies 10X to $57 in October 2017.  Now the same company with the same assets, long term earnings, dividend and strong cashflows hits $25 in December 2018.  It’s the same play on re-run across cyclicals as a whole and it makes it hard for anyone rationally covering this space to believe in the gospel of CAPM or even the sanity of these quarter by quarter investment managers.  Realize that for a full three quarters people happily traded this thing above $50 and 6 months later they’re half that on a basic ingredient for paints, plastics, paper. 

You hear and see the same thing from WB on his investing and over time its become impossible for me to believe that anyone with patience, captive capital and the ability to sit disciplined with cash couldn’t kill the market over long holding periods and WB and Charlie Munger have made the same case.  You can see the flaws of the industry, but the way it’s structured its a simple, yet seemingly impossible thing to achieve the freedom to invest long term.

#FreeCVM #FreeTurd #2007-2017