Tag Archives: german

DBGR: Industrial Engine Of The EU

Germany is the cornerstone of EU industrial output. The majority of German products and services are considered top-of-the-line, globally. The weak Euro will make Germany’s best exports price competitive in every advanced economy market. Export economies are currency sensitive. In fact, export economies are almost always under the suspicion of purposely taking actions to weaken their currencies in order to be more ‘price competitive’. This is particularly true when the global economy slows. In the case of commodities, the competitive pressures are now even more intense. When demand for, say, iron ore or copper declines, the mining industry must clear inventory. Sometimes the problem is more complex; crude oil, for instance. Presently, not only has demand slowed, but production has continued on full tilt. ‘Semi-manufacturing’ trade is also complicated by currency imbalances. The trade of semi-completed products may be more expensive in one direction, but less expensive at the point of sale. So the middle manufacturer pays more for the parts and then receives less for the sale. That’s a nutshell description; the semi-manufacturing trade is far more complex. Having a common regional currency mitigates the problem and an entire region has a little more of a ‘currency hedge’. This is particularly so for an economy which manufactures discretionary durable goods and then exports globally. Take Germany for instance. Germany engages in the semi-manufacturing trade, markets and then distributes its products around the world. Hence, the German economy, a Eurozone member, benefits from a weak Euro. Germany’s economy had recovered strongly from the global credit collapse in 2008. Through innovative renegotiations with trade unions, and increasing production efficiency the economy has ‘motored ahead’ of its fellow EU members. Is the right time to take a share in the German economy? Deutsche Asset & Wealth Management , a German-based financial services company, offers an opportunity through its X-trackers portfolio of funds : the MSCI German Hedged Equity ETF (NYSEARCA: DBGR ) . (click to enlarge) According to X-trackers: The fund “… seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI Germany U.S. Dollar Hedged Index …” Further, by hedging the tracking index mitigates “… exposure to fluctuations between the value of the U.S. dollar and the euro. ..” A word about hedging: in this case, it doesn’t hurt to hedge, but over the long term it may not be all that helpful. The European Union has its very strong economies as well as its very weak economies. Every leading global economy will have its ‘ups and downs’: the U.S., China, Japan as well as the European Union. The EU has a strong core including Northern Italy, the Nordic members, France, Germany and the U.K. Even Spain seems to be well on track towards better economic times. The point is that having a hedge is a little extra insurance. So then, does the fund itself have a good foundation? First off, it’s well concentrated with 56 holdings, totaling about $149,344,364.00 in assets. The fund first listed on the NYSE on June 9, 2011, and has semi-annual distributions; management fees are in line with the industry average, at 0.45%. The table below makes an interesting comparison of annualized returns since listing. Average Annualized Returns 1 Year 3 Years Since 6/9/2011 listing Market Share Price 1.74% 6.43% 2.83% Net Asset Value 1.51% 6.10% 2.86% MSCI Germany U.S. Doller Hedged Index 1.77% 6.38% 3.22% MSCI Germany Index -9.26% -0.21% -1.42% The next important observation is the way the fund allocates its capital. This is summarized in the pie chart below and does not differ much from the MSCI Germany Index allocations as demonstrated in the table below the pie chart. MSCI Germany Index Allocations Discretionary 20.54% Financials 18.23% Health Care 15.30% Materials 13.44% Industrials 12.18% Info Tech 8.79% Telecom 5.4% Consumer Staples 3.97% Utilities 2.15% Data from MSCI The discretionary sector is composed of really solid companies but the sector also serves as an excellent example of why individual investors should suffer the tedium of going through the holdings when practicable. First, one of the sector’s top holdings is Volkswagen AG ( OTCPK:VLKAF ). The ’emission control bypass scandal’ has made global headlines. No doubt there will be seemingly endless fines, testimonies and restitutions. However, not to justify it by any means, but for the purpose of being objective, this scandal should be viewed in a larger context. For example, the environmental damage pales in comparison to the Exxon (NYSE: XOM ) Valdez or the BP (NYSE: BP ) Gulf of Mexico deep-water platform accident. It took Exxon and BP years to make restitutions on many levels. In terms of automobile liability, GM (NYSE: GM ), Toyota (NYSE: TM ) and Takata ( OTCPK:TKTDY ) oversights have resulted in death, serious injuries and huge recalls. To date, thankfully, there have been no reports of death or serious injury caused by the emission get-around-cheat. The point is that, most likely, Volkswagen will make restitutions and emerge a better company for it. Discretionary 20.913% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Daimler OTCPK:DDAIF 7.265% $91.988 3.25% 33.98 10.47% 11.00 R&D, production, marketing and sales of trucks, light trucks, automobiles; global BMW OTCPK:BAMXF 3.133% $68.25 2.95% 31.24 9.67% 10.57 Autos, light trucks, motorcycles under BMW, MINI and Rolls-Royce; global Continental OTC:CTTAF 2.341% $48.29 1.47% 24.43 11.42% 16.80 Full range of tires; also auto components, safety technology, powertrain, interior components; global Volkswagen VLKAF 2.244% $72.02 3.87% 37.20 13.99% 10.31 Autos, light trucks, parts and specialized components; financial services, fleet management under major brand names; global Adidas OTCQX:ADDDF 1.823% $20.54 1.66% *26.00 6.96% 28.49 Athletic footwear, apparel, equipment under Taylor-Made, Adidas Golf, Adams, Ashworth, Reebok; global Prosieben OTCPK:PBSFF 1.0324% $11.59 3.26% 81.40 0.82% 25.17 Media; commercial TV with 6 channels, internet video, games, music, e-commerce; Europe Averages 2.97% $52.11 2.74% 39.0142 8.89% 17.06 * as a percent of operating cash flow Data from Reuters, Yahoo Finance Data from Reuters, Yahoo Finance There’s also an example of a ‘hidden risk’ in this sector. It suffices to say that, in a complicated ‘merger’, Porsche Automobile Holdings SE acquired majority ownership of Volkswagen Group and Volkswagen Group acquired the Porsche Brand . The important point is that any restitution VW will undoubtedly make will affect the holding company, Porsche Automobile Holdings; a smaller holding of the fund. However, the point is that when making the decision to include a fund in a long-term portfolio, it’s worth the time and effort to uncover any links in the holdings. Financials 18.41% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Allianz OTCQX:ALIZF 7.147% $80.13 4.21% 48.77 1.19% 11.60 Holding company of PIMCO and Allianz Group; financial services, insurance asset management, reinsurance; global Deutsche Bank DB 3.110% $35.00 3.24% *9.823 -1.49% NA Investment Bank, retail through corporate, manager of this fund; global Muenchener Rueckver OTCPK:MURGF 2.989% $33.57 4.16% 41.87 3.54% 10.04 Holding company for Munich Health and Asset; ERGO insurance; Munich Re; primarily insurance as reinsurance; global Deutsche Boerse OTCPK:DBOEF 1.460% $16.58 2.67% 49.12 0.98% 18.42 Managing company for Xetra, Eurex, Clearstream, Market Data and Analytics; cash, electronic and specialist trading Vonovia OTC:VONOY 1.256% $14.08 **NA **NA **NA 19.94 Fmr: Deutsche Annington Immobilien: residential real estate management; Germany Commerzbank OTCPK:CRZBY 1.021% $13.48 **NA **NA -9.20% 20.92 Private and corporate banking services mainly Europe Averages 2.83% $32.48 3.57% 37.396 -1.00% 16.184 *as a percent of operating cash flow ** no information available; excluded from average Data from Reuters , Yahoo Finance Financials Holdings Less than 1% accounting for 1.423% Deutsche Wohnen AG ( OTC:DWHHF ) 0.792842% Hannover Rueck ( OTCPK:HVRRY ) 0.630016% Data from Reuters , Yahoo Finance Aside from Deutsche Bank, the financials are dominated by insurance, reinsurance, including world-class companies Allianz and Muenchener Rueckver (holding company of Munich Re ), REITs and also asset exchange corporation Deutsche Boerse . Hence, the fund’s financial holdings mostly avoid the European banking sector. Health Care 15.06% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Bayer OTCPK:BAYRY 9.364% $104.00 1.91% 51.08 6.27% 26.43 Healthcare, Crop-Science, Material-Science; Bayer Business and Technical Services and Currenta Fresenius OTCQX:FSNUY 2.411% $38.078 0.67% 19.03 10.62% 28.43 In and outpatient hospital care Manages Fresenius Medical Care; Fresenius Kabi, Fresenius Helios Fresenius Vamed * Fresenius Medical Care FMS 1.595% $27.99 1.04% 55.46 7.08% 24.08 Division of Fresnius SE; focus on kidney and dialysis; products for dialysis, renal disease and treatments; global Merck MRK 1.166% $149.845 3.43% 47.74 9.02% 14.29 Pharmaceuticals R&D, production, market & distribution, vaccines, therapies; animal health; global Averages 3.63% $79.98 1.76% 43.328 8.25% 23.31 *division of healthcare holding Fresenius Data from Reuters , Yahoo Finance The fund leads off the sector with a major, world class player in Bayer, accounting for about 62% of the health care sector’s weight. Once again it’s important to point out some overlap. Fresenius Medical Care is a subsidiary of Fresenius . Both are solid, established and well based holdings. However, the investor must keep in mind that, in a sense, Fresenius Medical Care is counted twice in that sector; once on its own and once as part of the parent company. Qiagen (NASDAQ: QGEN ) is a smaller but no less interesting holding in that it provides the means by which DNA, RNA or proteins are extracted from cells and analyzed; 0.520327% of the fund. Materials 12.80% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business BASF OTCQX:BASFY 6.439% $71.78 3.84% 49.76 7.95% 13.33 Functional materials and solutions; performance products; agricultural solutions; water management Linde OTCPK:LNEGY 2.447% $27.621 2.30% 51.12 8.74% 22.43 Gas engineering in healthcare, medical, food processing; cylinder packaged or liquified Heidelberg Cement OTCPK:HDELY 0.974% $14.64 1.04% 16.00 2.08% 15.40 Building materials; cement and aggregates, ready-mix concrete, mortar Averages 3.29% $38.01 2.39% 38.96 6.26% 17.053 Data from Reuters , Yahoo Finance Data from Reuters , Yahoo Finance The major component holding of the sector is the renowned BASF, which covers every major subsector of the materials industry including agriculture, electronics, nutrition, plastics and textile materials. BASF accounts for about 50% of the sector holdings. Industrials 11.96% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Siemens OTCPK:SIEGY 7.011% $87.62 3.81% *44.16 1.86% 14.56 Global, diversified, covering over 200 countries, manufactures turbines, automation technology, power transmission, renewable energy technology Deutsche Post OTCPK:DPSTF 2.396% $33.44 3.31% 68.21 3.23% 21.38 Logistics services; mail, freight and supply chain and contract logistics, warehousing services Averages 4.70% 60.53% 3.56% 56.185% 2.55% 17.97 *as a percent of operating cash flow Data from Reuters , Yahoo! Finance Data from Reuters , Yahoo! Finance Siemens accounts for nearly 60% of industrials. The company is participates in nearly every industrial subsector; automation, renewable energy, healthcare, mass transportation, consumer appliances and others. It’s worth mentioning Deutsche Post is an example of how innovative thinking in privatization may not only be successful, but independently and sustainably profitable. IT 8.92% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business SAP SAP 8.850% $96.427 1.55% 42.53 10.47% 28.12 Enterprise management software solutions; cloud services Infineon OTCQX:IFNNF 1.475% $17.00 1.47% 36.29 11.95% 25.34 Industrial semiconductor solutions; power control, automotive, security solutions United Internet OTC:UDIRF 0.596% $11.173 1.20% NA 13.06 23.43 Internet access, subscription provider and mobile internet services in Germany. Averages 3.64% $41.53 1.41% 39.41 11.82% 36.85 *as a percent of operating cash flow Of the 8.92% of the total IT holdings, 8.850% or over 99% is weighted by SAP a premier global name in enterprise, analytics, and mobile technology in nearly every business sector; aerospace, financial, consumer products mining and minerals and others. Telecom Services 5.407% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Deutsche Telekom OTCQX:DTEGY 5.110% $80.547 3.04% 100.09 -0.61% 33.36 Telecom and IT services in Germany, Europe and the U.S.; internet and mobile Telefonica Deutschland OTCPK:TELDF 0.297% $16.630 4.60% *57.63 8.07% NA Retail and business telephony services and small business solutions Averages 2.70% $48.59 3.82% 78.86 3.73% 33.36 *cash flow per share The fund weights Deutsche Telekom at 5.11% of the 5.407% of the sectors holdings; almost 95%. There’s good reason since not only is it the major telecommunications service provider in Germany, it also has a global reach in Europe and the U.S. providing broadband, mobile and corporate system solutions. Consumer Staples 3.999% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Henkel & Co KGAA * Vorzug 1.785% *$45.104 1.25% 32.07 *3.89% 30.06 Beauty care, home care, adhesives ( * Vorzugsaktien = preferred shares) Henkel & Co KGAA OTC:HELKF 0.893% $45.104 1.56% 32.07 3.89% 25.72 Common of the above company Beiersdorf OTCPK:BDRFY 0.823% $28.785 0.83% 25.69 1.80% 30.68 Cosmetics, personal care products, skin care Metro OTCPK:MTTRY 0.498% $10.108 3.46% *614.58 *NA *194.81 Holding Company hypermarkets, Metro Cash & Carry, Real hypermarkets, Media Market and store brands Averages 1.00% $28.00 1.78% 28.88 2.85% 28.82 *omitted The average Consumer Staples sector weighting is about 1.00%. Once again, due diligence is in order. The larger part of the top weighting is Henkel & Co. preferred shares at 1.785%, while a lesser amount, 0.893% are the common shares. The company is worthy of its position in the fund, no doubt; but the point is that in essence, it weights the sector’s holding more than might be expected. The company seems to be a mix of consumer staples as well as consumer discretionary products and markets household products as well as having retail and professional cosmetic distribution. Utilities 2.90%% Ticker Fund Weight Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business E.ON SE OTCQX:ENAKF 1.719% $18.906 5.60% *5.77 6.88% NA Energy via fossil, nuclear and renewables; energy commodity trading; exploration and production; Europe, CEE, U.K. RWE AG OTC:RWNEF 0.571% $7.623 8.21% 61.97 -0.64% 7.22 Electric & gas, energy commodity trading, lignite mining, nuclear, fossil, renewable electricity generation U.K., CEE, SEE Averages 1.15% $13.26 6.91% 33.87 3.12% 7.22 *as a percent of operating cash flow The lightest weight is the Utilities sector, accounting for 2.90% of the fund total and of that nearly 60% E.ON , which seems to be a run-of-the-mill energy company with good reach, covering generation, exploration and distribution in Europe, U.K., Russia, central and eastern Europe. It’s important to conclude with a few notes on the fund. First, it’s a solid investment with the potential for capital appreciation and continued distributions. The holdings, especially those top-weighted best-in-class companies anchor the fund’s NAV. Lastly, as a Eurozone industrial export economy, Germany has the added advantage of having a weak Euro on its side. In the case of this fund, the ‘overlapping’ holdings may be justified by their market capitalization and capital flow. In all fairness, though, since the fund uses a ‘passive’ approach, it merely emulates the MSCI index holdings. This means that the index is, essentially, governing the fund’s holdings. All said and done, the fund may be summed up in a word: Außerordentlich! Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

No, Jesse Had It Right: Owning Stocks Today Has An Unattractive Risk/Reward Profile

My rebuttal to Terrier’s rebuttal. Terrier seems to believe that timing the market is not possible, but beating the market through stock picking is very much possible. Many bulls look at one market over one long stretch of time and believe they’re all clear for 10+ year periods… nope. Terrier Investing posted a rebuttal this morning to Jesse Felder’s original piece : “Owning Stocks Today is Risking Dollars to Make Pennies.” Terrier makes three points in his rebuttal. To quote: Well, according to Jesse, it means stocks are so wildly overvalued that your potential return over the next ten years is miniscule, and your potential downside is massive. I posit this is: A) alarmist and statistically inaccurate; B) overly narrow in its definition of risk; and C) treats “stocks” as some monolithic entity” Each of Terrier’s points are problematic; I’ll handle them one by one. Before I do, however, let me say that Terrier makes many sensible claims in his rebuttal. I dispute his line of reasoning here, mainly because he uses three arguments that I think undergird many bulls’ logic, whether they realize it or not. Someone like Terrier who explicitly makes assumptions is in my view on much firmer soil than the many bulls who are implicitly making the identical assumptions. If Terrier sees reason to modify his explicit a priori, he can. Bulls that are actually sheep have no such explicit framework against which they can base a reasonable shift to their investment thesis. With those disclaimers out of the way, I will now address the problems that I see with Terrier’s arguments. A) Alarmist and statistically inaccurate (sorry to quote so much of Terrier’s piece, but I want to address what he DID say, not what he didn’t): What is the actual likelihood of stocks resulting in a significantly negative 10-year return? Here’s a link to a nice document providing this data from 1926 through 2013 in both tabular and graphical format. Summarily, there were only a very few rolling 10-year periods when investing in the S&P 500 would have resulted in losses in nominal terms. Specifically, you would have had to invest right before the Great Depression or in the late 1990s – two of the larger bubbles of all time. Looking at one market over one stretch of time, even a long stretch, does not give you a statistically robust sense of what that market can do over any 7-15 year timeframe. I’ll grant you that it’s better than a sharp stick in the eye, but the data can easily mislead. I wonder what the German stock market would have looked like over the first half of the twentieth century. After enduring two world wars, a bout of hyperinflation, and political dismemberment, I don’t believe that German stocks performed too well over that meaningfully long timeframe. The German stock market was at the time (and still is) a well-developed market. I wonder what fraction of those 10-year periods had sizeable losses. Whoever said that can’t be us? From an Investopedia article on history of stocks and bonds: At the same time, many other economies suffered great losses. For example, according to Phillipe Jorion and William N. Goetzmann in their article “Global Stock Markets In The Twentieth Century” (1999), the Japanese stock market saw a 95% decline in real returns between 1944 and 1949. The German market also suffered devastating losses. In this context, the U.S. market’s success seems to be an exception, which the previous lack of data for other countries may have obscured. (emphasis added) Japan 1986 to present?…let’s not look there I’m guessing. (click to enlarge) How about the US stock market from 1891-1974? There were many poor return stretches over that time frame, especially when viewed on a real return basis. That’s a long stretch in our own market; how do the total return statistics bear out? While I’ll grant that the percentage of positive ten-year returns would likely still be high, the final results would be substantially more lackluster, particularly for investors who did not reinvest all of the dividends over the entire horizon with no tax implications. In fact, depending on your starting and ending points, you can find periods of negative real returns over a fifty-year time frame if you don’t include complete dividend reinvestment over the entire 50+ horizon. To see that this is the case, check out Political Calculation’s S&P calculator . Enter some periods that end in 1974 or 1983 for instance. I’m not trying to cherry pick here; I am demonstrating that there certainly are periods for even the longest of practical time horizons where equity returns are quite unattractive. There are two other, larger reasons why past may not be prologue for S&P returns. And I’ll address these points alongside Terrier’s point B: B: Risk as volatility, not as permanent loss of capital Moreover, there is more than one definition of “risking dollars” – assuming you have a ten-year or greater time horizon and need to invest to fund long-term liabilities (kids’ college funds, retirement, etc.), then earning near-zero returns by investing exclusively in bonds is just as much of a risk as potential volatility from investing in stocks. Risk, in this context, means you won’t meet your financial goals – and if you don’t invest in any stocks, it’s very hard to see how you will generate sufficient returns with yields on fixed income where they are. Some clarification here first. Terrier goes on to say that he believes that the market as a whole is on the expensive side (which leads to his point C), so he’s not some brainless stock market cheerleader. To that same end, Felder never explicitly says that nobody should have any equity exposure. (As for me, I have plenty of equity exposure: I’m short SPX.) Terrier’s second point essentially makes an assumption: risk as volatility vs. risk as probability of permanent capital loss. If risk is merely volatility – stocks whipping around for short and maybe even violent bursts, only to recover over a reasonably quick timeframe and make new highs – then I believe that he is correct. In his defense, he doesn’t suggest going “all-in” on equities, and even recommends having a decent cash pile. The issue is that Terrier’s problematic analysis from his first point (stocks rarely have negative nominal 10-year returns) leads him to the next conclusion that equity risk is actually only volatility, not capital impairment. This is where Terrier and I truly part company. Many long-only investors believe that strong long-run SPX returns happen mostly as a simple function of time; they’re somehow owed these returns for weathering volatility. I find it amusing that these same long-only bulls don’t feel like Brazilian investors are owed strong long-run returns, or that Greek or Russian or Japanese or South African equity investors are owed long-run returns. This amounts to a personally dangerous form of financial jingoism. Let me make it clear: IF sustained poor equity returns can happen to Brazil (the world’s seventh largest economy), then they can happen for the US. See, investors today aren’t looking at the Greek market and shrugging it off as a temporary bout of volatility. Ditto the other markets mentioned above. Investors correctly see these declines for what they are: semi-permanent capital loss. That is to say that even a strong bounce and even full dividend reinvestment will not bring a buy-and-hold index investor who purchased in, say 2010, back to even for years to come. Bears like Felder and myself believe that S&P balance sheets, investor margin positioning, GDP growth trends, and equity valuations in light of a slowing global economy put the S&P 500 at risk of a vigorous fall that will NOT be recovered anytime soon. (click to enlarge) (click to enlarge) Source: FactSet Why should we expect S&P returns that approximate history when a) GDP growth (global or US) is nothing like what it has been in the past, b) corporate balance sheets are not very healthy and c) valuations for the broad market are MORE expensive for almost every decile than at the March 2000 peak? To conclude, Terrier states: Risk, in this context, means you won’t meet your financial goals – and if you don’t invest in any stocks, it’s very hard to see how you will generate sufficient returns with yields on fixed income where they are. Well, what if the S&P falls – a LOT – and does not recover? Meeting one’s financial goals goes from being difficult to completely impossible. I believe such an outcome needs to be given a very meaningful weight. Terrier’s last point is that we don’t have a stock market, but a market of stocks: Finally, point C: I think it’s unfair to treat “stocks” as a monolithic entity – as if you either own the S&P 500 (NYSEARCA: SPY ) or you do not, and there’s no other alternative. Even if you believe the market as a whole is overvalued, like I do, that doesn’t mean every single component of the market is overvalued. Terrier goes on to say that one can do research and find a basket of stocks that will beat the market. Which is basically saying that Terrier doesn’t believe that investors can beat the market via market timing (“Not owning the market is risking dollars to make pennies”), but that they can beat the market through security selection. I completely disagree. Look at all the “smart beta” ETFs and actively managed mutual funds that are essentially continuously fully invested. How many of those pros beat the market? Not too many. I’m not saying that it cannot be done, but I see no reason – whatsoever – why market outperformance through the security selection channel is so much easier to consistently achieve than market outperformance via the market timing channel. But my objection to Terrier’s point C goes well beyond this first point: In 2013, the most heavily-shorted stocks were some of the best performers . It tends to be sophisticated investors that short companies. Full disclosure: I have never in my life shorted an individual name, and so I claim absolutely no expertise on this process. These securities specialists had their you-know-what’s handed to them, because it was a bad idea to be short any stock in the S&P during 2013. Similarly, it was a bad idea to be long any stock in the S&P between March 2008-March 2009. When “the market” gets crazy (up or down), security selection absolutely will not save you… period. At that point, the macro takes over, and the micro gets buried. That doesn’t mean that security selection cannot help you (assuming that you can in fact do it AND stick to your discipline): better to lose 33% than 40% or 60% instead of 75%… but you still won’t be happy with your strongly negative returns. In conclusion, Terrier states in his point A (in context of negative 10-year returns): Specifically, you would have had to invest right before the Great Depression or in the late 1990s – two of the larger bubbles of all time. My stance, and I believe Felder’s as well (though I’ll let him speak for himself), is precisely that today’s market IS one of those great bubbles. James Paulsen of Wells Capital Management produced the chart below to compare P/Es of the S&P for each 5-percentile increment for year-end 2014 vs. June 2000. The overvaluation of the broad markets is far more severe than it was in 2000, and so when the bottom falls out, there may not be too many great places to hide from the merciless reaping that ensues. Permanent capital impairment from any and all long US equity exposure needs to be treated not as a fringe case, but as THE base case. In that world, long investors really indeed are risking dollars that they won’t recover for years in order to pick up those juicy 3-5% yields or hope for the continuation of a stretched and tired bull.