The Little Book of Sideways Markets
Investors should focus on valuation more than price.
In general, it takes three negative events to change an investor’s mind.
Once the bond market thinks a country is not serious about repaying its debts, interest rates begin to rise, taking a larger and larger portion of tax revenues.
Secular sideways markets consist of cyclical bull and bear markets. The ups and downs are often characterized by changes in earnings and appetite for P/E multiples.
As would be expected, during sideways markets, the vast majority of gains come from dividend payments.
The value of any asset is the present value of the asset’s future cash flows.
The less ambiguous your investment plan is, the more likely you will stick to it.
Growth opportunities and return on capital are the two main ingredients used in the earnings growth formula.
Cash flows are more volatile than earnings in the short run, but they tell a truer story of a company’s profitability.
The success of raising prices largely depends on the elasticity (or lack thereof) of demand. Increased prices also encourages consumer transitions to cheaper competitors or new players to enter the market and undercut those higher prices.
Cost-cutting has a defined upper limit since getting rid of all costs is impossible.
Investors in sideways or bear markets should prioritize absolute valuation tools rather than relative valuation tools.
Price-to-book evaluations are more accurate for banks because their assets and liabilities are marked-to-market frequently, but they are less reliable for companies that have a lot of intellectual property like pharmaceutical companies.
When valuing a company, look at any subsidiaries and assess whether or not different valuation models or multiples are appropriate for each one based on its size and business model.
Break down companies by quality, value, and growth. Never sacrifice more than one of those three legs.
Stimulus creates the appearance of stability and growth, but is teetering on a very weak foundation of government intervention.
Diversification is protection against ignorance.