Opinion: Now is the time to buy stocks, say two investment veterans from the old school
By Mark HulbertPublished: Sept 9, 2015 5:00 a.m. ET
It's better to find bargains than to build up cash, according to Sam Eisenstadt and Norman Fosback
Sam Eisenstadt at home with his wife, Edith.Adrienne Grunwald for the Wall Street Journal
CHAPEL HILL, N.C. (MarketWatch) — The stock market should be given the benefit of the doubt, according to two investment veterans with at least 50 years of experience each.
I'm referring to Sam Eisenstadt, the former research director at Value Line, and Norman Fosback, the former president of the Institute for Econometric Research and, more recently, editor of Fosback's Fund Forecaster. Eisenstadt has been rigorously following the stock market for more than seven decades; Fosback has been a student of the market for "only" five decades.
To be sure, Eisenstadt is more bullish than Fosback is. But even he is focusing more on finding bargains than on building up cash.
Eisenstadt bases his forecast on a complex econometric model he has been perfecting for decades, incorporating a number of individual indicators that his research has found to have significant forecasting ability. The model is projecting that the S&P 500 Index will trade at the 2,170 level in six months' time, an 11% increase from today.
You may be inclined to dismiss Eisenstadt's latest forecast, since his model six months ago was far too bullish, predicting the benchmark index would now be trading around 2,300. (It closed at 1,969 on Tuesday.) But it's worth remembering that no model is right all the time, and his has been more right than wrong.
In fact, Eisenstadt reports an R-squared of 0.33 for his model's forecasts since the early 1950s, which means that it has been able to explain 33% of the variation in six-month changes in the S&P 500. Almost all other models you hear or read about have R-squareds that are far lower — if they are even statistically significant in the first place.
Fosback focuses on a longer-term investment horizon than Eisenstadt does, relying on various valuation measures. And because in recent months they were reporting the market to be overvalued, his advice had been to "lie low." But in the wake of the S&P 500's recent correction, his advice shifted to telling clients that "you can now rise from a prone position and re-evaluate equities and re-position your portfolio from more advantageous levels."
Fosback is particularly dismissive of those who are blaming China's devaluation for the equity market's recent weakness. He calculates that we import more than four times more from China as we export to that country, so its recent currency devaluation helps the U.S. far more than it hurts.
Fosback reminds us that, when the stock market is vulnerable because it's overvalued, "there will always be a convenient excuse for a price correction." If it weren't for China, something else would have emerged.
Eisenstadt's and Fosback's calm and reasoned responses to the market's recent turmoil is a refreshing antidote to the panic suffered by many younger advisers. I am reminded of what Adam Smith, the pseudonymous author in the late 1960s of the famous book "The Money Game," referred to as "kids" markets. Those are markets in which investors making the most money are those too young to remember bear markets of the past.
Kids markets typically emerge during long-lasting bull markets in which the "kids," unaffected as they are by memories of the previous bear market, take excessive risks. They make more money than veterans, so long as the market continues going up.
But when the market turns, the kids panic. At that point, it's the geezers who emerge victorious.
It certainly seems as though the market is undergoing just such a transition.
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