* Did you know that stocks with 'just' double-digit growth rates typically outperform stocks with triple-digit growth rates?
* Did you also know that stocks with crazy high growth rates test almost as poorly as those with the lowest growth rates?
Did your last loser have a spectacular growth rate?
If so, and it still got crushed, would you have picked it if you knew that stocks with the highest growth rates have spotty track records?
It seems logical to think that companies with the highest growth rates would do the best. But it doesn't always turn out to be the case.
One explanation for this is that sky high growth rates are unsustainable. And the moment a more normal (albeit still good) growth rate emerges, the stock gets a dose of reality as well.
Instead, I have found that comparing a stock to the median growth rate for its industry is the best way to find solid outperformers with a lesser chance to disappoint.
* Did you know that the top performing stocks each year will usually see their P/E ratios more than double from where it started?
* Did you also know that, historically, most of the best performers began their runs with P/Es over the 'magic' number of a P/E ratio of 20?
* And did you know that an even greater majority of the top performers finished with P/E ratios of well over 20?
If you only confine yourself to stocks with P/Es under 20, you'll be consistently keeping yourself from getting in on some of the best performing stocks each year.
Moreover, knowing that the top performers will typically see their P/E ratios rise (more than 100%) during their move, you'd be getting out the moment those stocks get above 20.
So many people I speak to believe that a P/E ratio of less than 20 is the key to success. But statistics prove otherwise.
Don't get me wrong, lower P/E ratios in general are a good thing. But since different industries have different P/E ratios, it makes sense to do relative comparisons.
Tuesday, October 27, 2009
Saturday, October 24, 2009
lessons from the bear market
Jason Zweig's latest book, Your Money and Your Brain, looks at how the brain responds when making real-life financial decisions. In an interview that appeared on Morningstar.com last week, Zweig, who writes The Intelligent Investor for The Wall Street Journal, shared some tips for overcoming your brain's worst impulses. In part two of that interview, he shares some wisdom for making good decisions during times of financial crisis.
Let's think back to October or November of last year or March of this year, when the Dow seemed to be headed toward 6,000, and people were just terrified. There's no doubt that millions of investors, both retail and professional alike, were acting out of sheer uncontrolled fear. And the level of stress that investors felt was unbelievable. And when people are afraid, and when you're feeling stress, not stress in the pop psychology sense but stress in the physiological sense, when your blood pressure goes up, you're sweating, your heart is racing, your hands are shaking, you can't sleep, and you're on the verge of depression, and you're snapping at your family and kicking your dog, people make bad decisions. And they make impulsive decisions, they make big decisions when they should be making small ones. Instead of making incremental adjustments to portfolios, instead of rebalancing at the margin, people bailed out of asset classes entirely or just moved completely into cash. The other thing that neuroeconomics suggests goes on in people's minds in a time of market panic is the automatic perception of illusory patterns--detecting "trends" in random data that simply are not there. Things that seem to be predictable loom much more important in people's minds. People develop a belief that the future is more knowable. That's stronger in a time of extreme uncertainty.
So what was I seeing in my e-mails were hundreds of messages from people about how the world was coming to an end, quite literally. "We're going into another Great Depression." "The financial markets will cease to function completely." "I'm stocking up on granola bars and bottled water and extra cartridges for my gun." I got any number of "I'm going off the grid" e-mails. And the thing that's surprising to me is not that all of that happened, because that's exactly the sort of thing I would have predicted. What has surprised me is how quickly the mindset has shifted. And now it seems that people have completely forgotten how they felt a few months ago. And that's very troubling to me. It suggests to me that we're nowhere near out of the woods. I do not tend to make market forecasts of any kind, but that worries me so much that I think we're probably in for another big surprise before we have a full recovery.
Let's think back to October or November of last year or March of this year, when the Dow seemed to be headed toward 6,000, and people were just terrified. There's no doubt that millions of investors, both retail and professional alike, were acting out of sheer uncontrolled fear. And the level of stress that investors felt was unbelievable. And when people are afraid, and when you're feeling stress, not stress in the pop psychology sense but stress in the physiological sense, when your blood pressure goes up, you're sweating, your heart is racing, your hands are shaking, you can't sleep, and you're on the verge of depression, and you're snapping at your family and kicking your dog, people make bad decisions. And they make impulsive decisions, they make big decisions when they should be making small ones. Instead of making incremental adjustments to portfolios, instead of rebalancing at the margin, people bailed out of asset classes entirely or just moved completely into cash. The other thing that neuroeconomics suggests goes on in people's minds in a time of market panic is the automatic perception of illusory patterns--detecting "trends" in random data that simply are not there. Things that seem to be predictable loom much more important in people's minds. People develop a belief that the future is more knowable. That's stronger in a time of extreme uncertainty.
So what was I seeing in my e-mails were hundreds of messages from people about how the world was coming to an end, quite literally. "We're going into another Great Depression." "The financial markets will cease to function completely." "I'm stocking up on granola bars and bottled water and extra cartridges for my gun." I got any number of "I'm going off the grid" e-mails. And the thing that's surprising to me is not that all of that happened, because that's exactly the sort of thing I would have predicted. What has surprised me is how quickly the mindset has shifted. And now it seems that people have completely forgotten how they felt a few months ago. And that's very troubling to me. It suggests to me that we're nowhere near out of the woods. I do not tend to make market forecasts of any kind, but that worries me so much that I think we're probably in for another big surprise before we have a full recovery.
Roubini on gold
I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies. So there’s no inflation, and there’s not going to be for the time being.
The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon.
[via bdparts]
The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon.
[via bdparts]
Friday, October 16, 2009
jobless claims
[10/15/09 Schwab Alerts] Weekly initial jobless claims fell by 10,000 to 514,000, versus last week's figure that was upwardly revised by 3,000 to 524,000. The Bloomberg consensus called for claims to reach 520,000. The four-week moving average, considered a smoother look at the trend in claims, declined by 9,000 to 531,500. Continuing claims also fell, declining by 75,000 to 5,992,000, versus the forecast of 6,000,000.
[10/8/09 Schwab Alerts] Weekly initial jobless claims fell by 33,000 to 521,000, versus last week's figure that was upwardly revised by 3,000 to 554,000. The Bloomberg consensus called for claims to reach 540,000. The four-week moving average, considered a smoother look at the trend in claims, decreased by 9,000 to 539,750. Continuing claims also fell, declining by 72,000 to 6,040,000, versus the forecast of 6,105,000.
[10/8/09 Schwab Alerts] Weekly initial jobless claims fell by 33,000 to 521,000, versus last week's figure that was upwardly revised by 3,000 to 554,000. The Bloomberg consensus called for claims to reach 540,000. The four-week moving average, considered a smoother look at the trend in claims, decreased by 9,000 to 539,750. Continuing claims also fell, declining by 72,000 to 6,040,000, versus the forecast of 6,105,000.
Wednesday, October 14, 2009
Dow breaks 10,000
The Dow Jones Industrial Average ($INDU) closed above 10,000 today for the first time in about a year, as all three major indexes hit new highs for 2009.
The rally was prompted by strong earnings from banking giant JPMorgan Chase (JPM) and Intel (INTC), and it reflects a strongly held view that an economic recovery is emerging in the United States and around the world.
The Dow finished up 145 points, or 1.5%, to 10,016. That is its best finish since Oct. 3, 2008, in the midst of last year's financial collapse. The Standard & Poor's 500 Index ($INX) was up 19 points, or 1.8%, to 1,092, also the best finish for the broad-based index since Oct. 3, 2008. The Nasdaq Composite Index ($COMPX) was up 32 points, or 1.5%, to 2,172. That's the best finish for the index since Sept. 26, 2008.
The Dow is now up 53% since bottoming on March 9. The S&P 500 is up 61%, and the Nasdaq
has soared 71%. The Nasdaq-100 Index ($NDX.X), which tracks the largest Nasdaq stocks, is up 68%.
Bernanke to tighten (at some point)
Federal Reserve Chairman Ben Bernanke spoke yesterday evening at a Board of Governors conference in Washington, giving an update on the Fed's balance sheet. The Fed Chief reiterated the Federal Open Market Committee's (FOMC) latest policy statement last month that its accommodative policies will likely be warranted for an extended period. But Bernanke pointed out that, "At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road."
[Schwab Alerts, 10/9/09]
[Schwab Alerts, 10/9/09]
Wednesday, October 07, 2009
gold at record high
Gold surged again today, hitting a record $1,049.70 an ounce before falling back to $1,044.40. The intraday hight and the close topped Tuesday's record of $1043.45 an ounce.
Demand for gold has been rising as U.S. government debt reaches record levels and the Federal Reserve keeps interest rates at record lows near zero percent. A weak dollar has also contributed to gold's recent surge.
Despite the record price of gold, the commodity is still well below its inflation-adjusted record of about $2,200, set in January 1980, when gold hit $850 an ounce.
Demand for gold has been rising as U.S. government debt reaches record levels and the Federal Reserve keeps interest rates at record lows near zero percent. A weak dollar has also contributed to gold's recent surge.
Despite the record price of gold, the commodity is still well below its inflation-adjusted record of about $2,200, set in January 1980, when gold hit $850 an ounce.
Tuesday, October 06, 2009
Three Bears
Oct. 5 (Bloomberg) -- New York University Professor Nouriel Roubini said stock markets may drop and billionaire George Soros warned the “bankrupt” U.S. banking system will hamper its economy, highlighting doubts about the sustainability of the global recovery.
“Markets have gone up too much, too soon, too fast,” Roubini, who accurately predicted the financial crisis, said in an interview in Istanbul on Oct. 3. U.S. stocks may suffer a “major decline” after climbing to the highest levels in almost a year two weeks ago, according to technical analyst Robert Prechter, founder of Elliott Wave International Inc.
U.S. consumers are “overdebted” and the country’s banking system has been “basically bankrupt,” Soros said in Istanbul today. “The United States has a long way to go.”
“Stocks are very overvalued,” Prechter, who advised betting against U.S. equities three months before the market peaked in October 2007, said in an Oct. 1 telephone interview. “Stocks peaked in September and are back in a bear market.”
The S&P 500 will probably fall “substantially below” 676.53, the 12-year low reached on March 9, he said. His projection implies a drop of more than 34 percent from last week’s close of 1025.21. It rose to 1031.77 at 10:05 a.m. in New York.
[via bdparts]
“Markets have gone up too much, too soon, too fast,” Roubini, who accurately predicted the financial crisis, said in an interview in Istanbul on Oct. 3. U.S. stocks may suffer a “major decline” after climbing to the highest levels in almost a year two weeks ago, according to technical analyst Robert Prechter, founder of Elliott Wave International Inc.
U.S. consumers are “overdebted” and the country’s banking system has been “basically bankrupt,” Soros said in Istanbul today. “The United States has a long way to go.”
“Stocks are very overvalued,” Prechter, who advised betting against U.S. equities three months before the market peaked in October 2007, said in an Oct. 1 telephone interview. “Stocks peaked in September and are back in a bear market.”
The S&P 500 will probably fall “substantially below” 676.53, the 12-year low reached on March 9, he said. His projection implies a drop of more than 34 percent from last week’s close of 1025.21. It rose to 1031.77 at 10:05 a.m. in New York.
[via bdparts]
Saturday, October 03, 2009
Living Legends
No phony newsreel footage is necessary to convey the wisdom of two living legends who thrived through the granddaddy of them all, the Great Crash of 1929. Both Irving Kahn, the oldest active money manager on Wall Street at 103, and 106 year-old Roy Neuberger, saw the recent shakeout in global markets as just another opportunity to buy good companies cheaply while competitors a third their age rushed for the exits.
Kahn says he ignores market gyrations and typically holds stocks for at least three years, sometimes as much as 15, until value is realised. His firm, Kahn Brothers, compares its philosophy to tending an orchard with different types of fruit, some of which ripen more slowly than others. If that sounds suspiciously like the father of value investing, Benjamin Graham, it is no accident – Kahn was Graham’s first teaching assistant and helped him with his 1934 classic Security Analysis. Like Graham, Kahn seeks out unloved and obscure stocks, eschewing highfliers.
“Never buy popular stocks, except maybe in a depression,” he warns.
Neuberger, and the firm he founded, Neuberger Berman, hew to similar principles. He retired at age 99 and is now too frail to be interviewed. His 68-year-old protégé Marvin Schwartz, who joined the firm in 1961, consults with him regularly though and credits Neuberger with providing appropriate perspective in hard times such as these.
“In almost each and every instance, he advised us to buy in what would be a passing negative period,” says Schwartz.
Shareholders of Berkshire Hathaway hoping that the 79-year-old Oracle of Omaha will achieve longevity on par with Messrs Kahn and Neuberger have cause for cheer. Optimistic value-seekers have remarkable staying-power. Philip Carret and Philip Fisher, two of Buffett’s key influences aside from Graham and among the most successful investors of all-time, died at age 101 and 96, respectively. Another legendary investor, Sir John Templeton, remained active until his death last summer at age 95 and is credited with two of the great contrarian investing quotes: “Invest at the point of maximum pessimism” and “the four most dangerous words in investing are ‘it’s different this time.’”
[via iluvbabyb]
Kahn says he ignores market gyrations and typically holds stocks for at least three years, sometimes as much as 15, until value is realised. His firm, Kahn Brothers, compares its philosophy to tending an orchard with different types of fruit, some of which ripen more slowly than others. If that sounds suspiciously like the father of value investing, Benjamin Graham, it is no accident – Kahn was Graham’s first teaching assistant and helped him with his 1934 classic Security Analysis. Like Graham, Kahn seeks out unloved and obscure stocks, eschewing highfliers.
“Never buy popular stocks, except maybe in a depression,” he warns.
Neuberger, and the firm he founded, Neuberger Berman, hew to similar principles. He retired at age 99 and is now too frail to be interviewed. His 68-year-old protégé Marvin Schwartz, who joined the firm in 1961, consults with him regularly though and credits Neuberger with providing appropriate perspective in hard times such as these.
“In almost each and every instance, he advised us to buy in what would be a passing negative period,” says Schwartz.
Shareholders of Berkshire Hathaway hoping that the 79-year-old Oracle of Omaha will achieve longevity on par with Messrs Kahn and Neuberger have cause for cheer. Optimistic value-seekers have remarkable staying-power. Philip Carret and Philip Fisher, two of Buffett’s key influences aside from Graham and among the most successful investors of all-time, died at age 101 and 96, respectively. Another legendary investor, Sir John Templeton, remained active until his death last summer at age 95 and is credited with two of the great contrarian investing quotes: “Invest at the point of maximum pessimism” and “the four most dangerous words in investing are ‘it’s different this time.’”
[via iluvbabyb]