Sometimes I think about the money I made and blew of crap between the age of 16 and 21 (1976 to 1981). If I put into a tax deferred index fund instead and did nothing else with it, I’d retire a millionaire. Learn the Rule of 72.
Robert Prechter has an interesting article at this link:
http://www.marketoracle.co.uk/Article9532.html
The S&P 400 currently has a book value of 3.8, which means stock prices are at 3.8 times the break-up value of the underlying companies. This is an overvaluation.
For stocks in general to be worth a buy (and hold) the book value should be 2 or less.
Also, dividends are being slashed at the fastest rate in 50 years. That does NOT bode well for stock prices or for anyone counting on dividends to pay their bills.
The best investment right now might be furthering one’s education/training, and simply loading up on 3 month T-Bills (or TIPS).
[quote]shookers wrote:
Did you know that about 60% of Money Managers fail to even beat the index on a yearly basis?
It’s hard/impossible to “learn” the stock market as a whole.
[/quote]
With this in mind, do you think that an average medium to long term sharemarket investor would be better of simply making regular payments into an index tracking fund with low fees?
It just seems pointless to me for investors with limited knowledge to attempt to pick individual stocks and to try to time the market.
[quote]zephead4747 wrote:
Sorry for 2 posts, but I was planning on putting ~500-700$ in: [/quote]
If you want to major in Econ/business/finance and you want to use your $500-700 to impress a dean/admissions counselor or businessman, take that money and invest it in something outside the stock market like your own little business venture. Go buy a car and deliver pizzas and track your earnings and show them the profitably and return on investment of the original cost of the vehicle. If you really want to throw them for a loop, depreciate the cost of the vehicle and show them the after tax return on investment. Or finance lemonaid stands on four different corners in your hometown for a month and track the p/l of those stands and allocate the next week’s capital according to the previous weeks results.
You’ll get a helluva lot more practical experience then trading stocks in a market that is anticipating both deflation in the immediate term and trying to price the potential for massive inflation in the short/intermediate term.
If you are truly interested in economics, PM me zephead and I can point you in the correct direction or discuss things with you…however if you decide not to, I’ll give you a quick heads up: The stock market really isn’t the place you should be looking if you are truly interested in economic theory and the inner workings of an economy. Not just in terms of investment, I mean in terms of focused attention and study…
[quote]Regular Gonzalez wrote:
shookers wrote:
Did you know that about 60% of Money Managers fail to even beat the index on a yearly basis?
It’s hard/impossible to “learn” the stock market as a whole.
With this in mind, do you think that an average medium to long term sharemarket investor would be better of simply making regular payments into an index tracking fund with low fees?
It just seems pointless to me for investors with limited knowledge to attempt to pick individual stocks and to try to time the market.[/quote]
Avoid trying to “time the market” – hmmm. This can mean different things:
A) Ignore the historical average, and just start investing in an index fund even if the P/E when you start investing happens to be twice the historical average.
B) Invest in an index fund whenever the P/E looks reasonable compared to the long term historical average, but don’t try to time the market bottom.
I think even “B” might be a little shaky these days if the index fund is too heavily weighted in U.S. stocks. But in any case I think “B” it a better idea than “A”.
If avoidance of index investing when the Price Earnings ratio is way higher than the historical average is market timing, then in that case:
-
I believe in market timing, in its broadest form, even for long-term investors.
-
Anyone who cannot do market timing in its broadest form (understand P/E; avoid purchasing the index when the P/E is a lot higher than the historical average; understand that the historical average should include the Great Depression) should stay out of the stock market entirely, including index funds.
-
Paradoxically, if enough people were to adhere to #2, the prices of stocks would come down enough so that it would no longer be necessary for any particular individual person to adhere to #2.
[quote]Growing_Boy wrote:
You missed the bottom!!!
[/quote]
Maybe; maybe not. Don’t bet the farm on that one just yet.
[quote]NealRaymond2 wrote:
Regular Gonzalez wrote:
shookers wrote:
Did you know that about 60% of Money Managers fail to even beat the index on a yearly basis?
It’s hard/impossible to “learn” the stock market as a whole.
With this in mind, do you think that an average medium to long term sharemarket investor would be better of simply making regular payments into an index tracking fund with low fees?
It just seems pointless to me for investors with limited knowledge to attempt to pick individual stocks and to try to time the market.
Avoid trying to “time the market” – hmmm. This can mean different things:
A) Ignore the historical average, and just start investing in an index fund even if the P/E when you start investing happens to be twice the historical average.
B) Invest in an index fund whenever the P/E looks reasonable compared to the long term historical average, but don’t try to time the market bottom.
I think even “B” might be a little shaky these days if the index fund is too heavily weighted in U.S. stocks. But in any case I think “B” it a better idea than “A”.
If avoidance of index investing when the Price Earnings ratio is way higher than the historical average is market timing, then in that case:
-
I believe in market timing, in its broadest form, even for long-term investors.
-
Anyone who cannot do market timing in its broadest form (understand P/E; avoid purchasing the index when the P/E is a lot higher than the historical average; understand that the historical average should include the Great Depression) should stay out of the stock market entirely, including index funds.
-
Paradoxically, if enough people were to adhere to #2, the prices of stocks would come down enough so that it would no longer be necessary for any particular individual person to adhere to #2.[/quote]
When I say “timing the market” I mean predicting a market peak or bottom. I’m not saying that the P/E ratio should be ingnored, but an amateur investor needs to be aware of their own limitations.
For example in Australia, back in October the P/E of the market dropped below 10x historical earnings which was the lowest in around 25 years. Many people were claiming that it was a good time to invest as there was “good value” in the market at that time. That advice doesn’t look so good with the benefit of hindsight.
For all we know, the P/E could go lower than it did in 74 when it dropped to 5x historical earnings.
I personally think that over the long term, even option A would produce better returns than what the majority of people get with their investments. Someone who spent the last 20 years using dollar cost averaging to regularly invest in a low fees index fund would have done pretty well for themselves (this is true for both the US and Australian sharemarkets). That’s not to say that the next 20 years will be the same though.
Just out of curiosity, what investment strategy do you use for your medium to long term investmments (broadly speaking)?
Edit - Just to be clear, I am not claiming to be remotely knowledgeable on any of this. The only reason I am bringing any of this up is to improve my own knowledge .
[quote]NealRaymond2 wrote:
Growing_Boy wrote:
You missed the bottom!!!
Maybe; maybe not. Don’t bet the farm on that one just yet.
[/quote]
This is what I mean when I say that amateur investors shouldn’t be attempting to time the market.
[quote]ajcook99 wrote:
zephead4747 wrote:
Sorry for 2 posts, but I was planning on putting ~500-700$ in:
If you want to major in Econ/business/finance and you want to use your $500-700 to impress a dean/admissions counselor or businessman, take that money and invest it in something outside the stock market like your own little business venture. Go buy a car and deliver pizzas and track your earnings and show them the profitably and return on investment of the original cost of the vehicle. If you really want to throw them for a loop, depreciate the cost of the vehicle and show them the after tax return on investment. Or finance lemonaid stands on four different corners in your hometown for a month and track the p/l of those stands and allocate the next week’s capital according to the previous weeks results.
You’ll get a helluva lot more practical experience then trading stocks in a market that is anticipating both deflation in the immediate term and trying to price the potential for massive inflation in the short/intermediate term. [/quote]
It’s what I do with about 70% of my money. The rest I try to beat the index with. I’ve beaten the index with my 30% 5 years out of six, but this last one has made them fall even - so I might as well have just put all 100% into the index.
[quote]Headhunter wrote:
Robert Prechter has an interesting article at this link:
http://www.marketoracle.co.uk/Article9532.html
The S&P 400 currently has a book value of 3.8, which means stock prices are at 3.8 times the break-up value of the underlying companies. This is an overvaluation.
For stocks in general to be worth a buy (and hold) the book value should be 2 or less.
Also, dividends are being slashed at the fastest rate in 50 years. That does NOT bode well for stock prices or for anyone counting on dividends to pay their bills.
The best investment right now might be furthering one’s education/training, and simply loading up on 3 month T-Bills (or TIPS).[/quote]
This is retarded.
Lets take Amazon.com for example. It’s a website. It owns a few warehouses. It’s net book value is miniscule - yet its making huge profits. Are you saying its overvalued?
It seems to me that for a company such as Amazon, the value a person places its shares should be based on high expectation of its making similar profits over the next couple of years, pretty good expectation of doing so for several more, quite substantial risk of no profits at all or quite low past say the 5 year point, and very substantial possibility of nothing past say 7 or 10 years.
Why?
Because, with no physical plant to speak of and no key intellectual property or anything else, it’s entirely possible that another company or companies doing the same sort of things will for whatever reason become more popular and/or completely dominant.
Alta Vista was once the premiere search engine (or I thought so anyway: perhaps not in terms of volume.) Where is it now? People happened to turn elsewhere. The same could happen with Amazon’s business.
Anyway, I’d personally value the stock no higher than what its dividends over relatively few years could repay and provide a profit.
Viewed in the context of possibly only a few years of dividends being paid out, with little costly plant or hard assets that could reasonably be assumed to be a revenue-generator for decades, does a P/E of 47 – vs for example a historic average of about 20 for the S&P 500 and, what, something like 13 now – make sense?
[quote]Regular Gonzalez wrote:
Just out of curiosity, what investment strategy do you use for your medium to long term investmments (broadly speaking)?
[/quote]
Because of poor self-discipline in the past, I only recently got my credit cards paid off. When I have enough saved to meet the minimum requirement, I might invest in silver and/or a few conservative stocks with Euro Pacific Capital (Peter Schiff’s company).
If I were going to invest in an index fund, I don’t think I would put most of my money in a primarily U.S.-companies index fund.
There is too much of a risk that the real value of earnings (and ultimately stocks) in the U.S. will be substantially reduced, and not recover within our lifetimes. I would think it might be more prudent to be in an international index fund, or split up among index funds in several different countries.
[quote]Regular Gonzalez wrote:
When I say “timing the market” I mean predicting a market peak or bottom. I’m not saying that the P/E ratio should be ingnored, but an amateur investor needs to be aware of their own limitations.
[/quote]
That seems very reasonable.
I remember hearing a very glib financial talk show host several years ago, who stated or implied that people should not stay out of the market because it appeared to be over-valued (P/E too high), because that would be “timing the market”.
That is why I brought up the possibility that someone who is against “timing the market” might be in favor of ignoring high P/E.
[quote]Regular Gonzalez wrote:
Edit - Just to be clear, I am not claiming to be remotely knowledgeable on any of this. The only reason I am bringing any of this up is to improve my own knowledge .
[/quote]
I am not claiming to be knowledgeable about this either. But I think I understand a basic principle or two; I know a basic historical fact or two; and I think I know how to apply them in a logical manner to see how one or two things might be a lot riskier than people are led to believe.