Posts Tagged ‘ Stocks ’

If Valuations Matter It Must Be Possible to Profit from This Reality

Beyond Buy-and-Hold #75

By Rob Bennett

You’re a Phillies fan. You have hopes for the team winning the World Series next year. The manager is interviewed on television. You are reassured to hear him say that “pitching is what matters in this game, it’s all about pitching.”

The next day, the manager releases the team’s best five pitchers on waivers. You are shocked. You tune in to the news that night to hear his explanation. He says: “I strongly believe that pitching matters. That said, I know of no reason to believe that teams with better pitchers win more games. So I am not even a tiny bit concerned that we are losing all our best pitchers. I am convinced that pitching matters a great deal in baseball, but I also am confident that it has no effect on whether you win or lose games.”

That’s crazy talk. To say that pitching matters is to say that, all else being equal, teams with good pitchers win more games than teams with bad pitchers. The idea in the game of baseball is to win games. To say that something matters in baseball is to say that it helps you win games.

Everyone understands this logic for so long as the discussion relates to baseball. Things get foggy for many when we turn our focus to stock investing.
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The Question That Should Terrify Investors

Beyond Buy-and-Hold #74

By Rob Bennett

At what price are stocks no longer worth buying?

That’s the question that should terrify Buy-and-Holders, for two reasons. One, it is a question that demands an answer. And, two, Buy-and-Holders are not able to come up with one.

Before you buy a car, you check Edmunds.com or some such site to identify the fair selling price. If you are in desperate need of a car, you might be willing to pay a bit more. But there are limits. You won’t pay $60,000 for a car that properly should go for $20,000.

Why doesn’t it work that way with stocks? Stocks were selling for three times fair value in 2000. Investors were buying like crazy. Why? Why don’t we care about getting ripped off when it comes to how we invest our retirement money?

Should “sky’s the limit” be the rule with stocks?

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You are Solely Responsible for Your Investing Success

Guest Post

It is quite unfortunate that the majority of investors approach investing with the mind set that they need to find stocks that will provide the greatest return in the shortest possible time. The entire day trading industry is built upon this need for instant gratification. Brokers are all too happy to fill this need by offering low trading commissions and beautiful charting and trading tools. As is often the case, constant portfolio turnover and churn is where the real money is for the brokers. “Making it up in volume” may not work for Detroit any more, but it works very well for the discount brokerage industry.

Investors who get seduced by these tools and the hope of a quick profit, tend to significantly under perform the market. Step back for a moment and consider this: The total market return (for example an index such as S&P 500) is the sum of the returns of all the individual investors in that market, institutional investors such as funds, less the commissions and fees they pay out to their brokers.

The problem is that of the three main participants in the market, individual investors are the only ones who are completely dependent on good stock picking for their profits:
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Developing Investment Strategies

Guest Post

Reaching a point when you can grow your money via investments is an exciting time. But there are many factors that affect investors’ decisions. These are normally guided by investment strategies, which are influenced by investment goals, risk tolerance, and your future needs for capital.

There are three basic types of investment strategies: growth investing, income investing and value investing, with the greatest thing separating them generally being the level of risk involved. Many younger investors have greater tolerance to risk as they can bank on having more time to make up losses, while investors closer to retirement may favour a conservative approach that’s protective towards their assets.

The basic investment strategies

Growth investors look for companies in markets that traditionally have high earnings and take risks buying stock from promising start-ups in the hope that the companies will grow into industry leaders. Value investors, by contrast, search for stocks that might have been overlooked by the market. Undervalued as opposed to low priced, these stocks represent a good deal to savvy investors. Income investing is a more conservative strategy that targets companies that consistently pay out high stock dividends.
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Why I Don’t Pull Punches in My Discussions With Buy-and-Holders

Beyond Buy-and-Hold #70

By Rob Bennett

I was talking with a friend of mine at the Financial Bloggers Conference in Chicago. He’s a Buy-and-Holder. He told me what I need to do to get reinstated at the various boards and blogs that have banned me for pointing out the dangers of this popular investing strategy.

I need to pull back a bit. It’s okay for me to say that valuations matter, people can deal with that. But I need to not post so often. It really gets on people’s nerves when they see me participating in every thread in which the valuation issue comes up. And my posts are so long! I need to write shorter posts less frequently and not take such strong stands. It wouldn’t hurt if I would stop describing Buy-and-Hold as a Get Rich Quick scheme, for example.

Okay.

He’s right, of course. The Buy-and-Holders would love it if I followed that advice.

The investment strategy of the future—maybe the near future

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In the Future There Will Be No Bulls or Bears

Beyond Buy-and-Hold #69

By Rob Bennett


As we learn more about how stock investing works (and as we permit ourselves to talk over what we have learned), we will need to change the language we use to discuss the subject.

Are you a bull?

Or are you a bear?

If you are a smart investor, you are neither.

The designations “bull” and “bear” were meaningful in the days before there was academic research showing that short-term timing (changing your stock allocation because of a guess as to where stock prices are headed) doesn’t work. In the days when large numbers of investors believed that guessing where prices were headed was the way to buy low and sell high, the most important thing to know about an investor was whether he was a bull or a bear.

”Bull” and “Bear” no longer matter

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How Our Stock Addiction Grew Gradually Worse Over Time

Beyond Buy-and-Hold #68

By Rob Bennett

One of my critics makes a great point in a recent Bogleheads Forum discussion of the Valuation-Informed Indexing concept. A poster going by the name “nisiprius” says: “I just don’t believe that a few simple rules based on numbers that are easily available to everyone will substantially improve your risk-adjusted returns.”

I say that the typical middle-class investor could retire five to ten years sooner if he were willing to switch from Buy-and-Hold to Valuation-Informed Indexing. I say that the heavy promotion of Buy-and-Hold was the primary cause of the economic crisis. I say that we would eliminate 80 percent of the risk of stock investing by letting investors know about the 30 years of academic research supporting this approach.

Yet the only difference between Buy-and-Hold and Valuation-Informed Indexing is that Buy-and-Holders choose a single stock-allocation percentage that makes sense for them at all times while Valuation-Informed Indexers change their stock allocations in response to big valuation shifts. Could this one strategic change really make such a big difference? That’s more than a little hard to believe, isn’t it?

It’s hard to believe.
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It Takes a Tough Man to Put Forward Sound Investing Advice

Beyond Buy-and-Hold #67

By Rob Bennett

I was talking by telephone with a supporter of mine the other day. He generally shares my views on investing. He likes my stuff. He thinks I have made important contributions. He also thinks I am a bully.

Well, not exactly.

He really did use the word “bully” in the conversation. He also used the word “intimidating.” He said that he didn’t think that either word properly described me. He wasn’t able to think of the precise word that fits. But those were the two that came to his mind.

If I am not quite a bully, I am something close to it. This is according to a friend of mine! This is according to a supporter!

How did I respond when he said that?
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Few Investing Experts Understand the Meaning of the Word “Safe”

Beyond Buy-and-Hold #65

By Rob Bennett

In all areas of life endeavor outside of stock investing, the word “safe” has a similar meaning. A trampoline is “safe” if it does not cause injury or death to the kids who jump on it. A food is “safe” if it does not cause sickness. A driving speed is “safe” if it does not cause you to get in accidents. An action is described as “safe” when the chances of a devastating result are small.

That’s not how the word is employed in InvestoWorld.

What do you think it is that aspiring retirees are looking for when they enter “safe withdrawal rate” or “safe retirement” into a Google search engine? They are looking for information that will help them to know whether their retirement plan is almost sure to work. They don’t want to be taking chances on that. A failed retirement is a horrible life setback that they very much want to avoid.

The existing studies do not serve this purpose.
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Most Stock Investors Are Gambling with Their Retirement Money

Beyond Buy-and-Hold #64

By Rob Bennett

We go to markets to buy things. We go to casinos to have fun.

Why do we invest in stocks?

We tell ourselves that we invest in stocks to provide for our retirements. We refer to the place at which stocks are bought and sold as a “market.” I think we are kidding ourselves.

Actions speak louder than words. The behavior we engage in when buying stocks is more akin to the behavior we exhibit in gambling casinos than it is to the behavior we exhibit when buying things.

Seeking value

What is it you are most worried about when participating in the car market or the banana market or the computer market? You want to obtain a good value proposition. You don’t want to overpay.

How many people do you know who worry when they are buying stocks that they are overpaying?
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