Advisors say “Get Defensive”

By December 20, 2018 Blog

From Charles Schwab to Goldman Sachs, analysts and investment advisors are warning investors to “get defensive.”  That may be good advice, but from a fundamental valuation standpoint it is a bit odd.  From a fundamental valuation perspective, the time to get defensive is when the ratio of market price to reasonable estimates of fundamental value is at peak levels.  As we noted in this blog on numerous occasions, that was the case at the end of the summer.  We argued that that was an ideal time to “get defensive.”  Today, even with the sharp pull back in stock prices, the ratio of price to value still remains on the high side in our opinion.   By definition, however, much less so than at the end of the summer.  The key point is that whether or not to “get defensive” should not be based on recent movements in stock prices because there is virtually no autocorrelation in stock returns.  That means that the fact that prices have fallen sharply in the past month has predictive power or whether they will fall next month.  Nonetheless, it after major pull backs that you see widespread warnings to get defensive.  The best advice is to ignore recent movements in the market and make decisions regarding whether to “get defensive” on the basis of a thoughtful comparison of price and value.

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