[3/22/06] (Marty Zweig writes in the ZF annual report),
"Although much has been written about the relationship between the two-year note and the 10-year, we think it is more important to compare the 3-month yield to the 10-year yield. Right now they are about even. Historically, over the past 52 years when short rates have been 95% or more of the long rate (more would represent an inverted curve), the S&P has gone down approximately 11% on an annualized basis. When the short rate has been 95% or less than the long rate (less would be a relatively normal yield curve), the market has gone up almost 12%. This time the curve has inverted because the short rate has gone up while the long rate has been fairly flat. That seems a more neutral yield curve. However, if bond yields rise toward 5%, we’d start to get concerned."
[2/25/06] Mauldin presents a Fed paper which correlates the the yield curve spread and the probability of recession. With the current spread, the probability of a recession is 20%. However the spread figures to invert more negatively in the coming month.
"It is all but a foregone conclusion that the Fed will raise rates at its March meeting. If the ten year stays where it is, we will see a negative 27 basis point spread in the middle of March, which within 90 days would suggest a mid-30% chance of recession.
If the Fed raises again in May to 5%, without the ten year moving up, we would see a 40% chance of recession as the 90 day average would soon be a negative 50 basis points."
[2/28/06] Liz Ann Sonders writes much the same thing.
Saturday, February 25, 2006
Wednesday, February 15, 2006
the fourth year
Bull markets often follow a predictable pattern. In the first year of a rally, bulls tend to charge out of the gate: the Standard & Poor's 500-stock index has posted rip-snorting price gains of 38 percent, on average, in the initial year of bull markets since 1942, according to a recent study by S.& P.
This is typically followed by a more subdued second year, with the S.& P. 500 up around 12 percent, on average. And in the third year, the rally starts to sputter, with average gains of just 3 percent.
This is close to the way the last three years have unfolded - with the S.& P. up more than 26 percent in 2003, 9 percent in 2004 and 3 percent last year.
So how do stocks perform once bulls like this one enter their fourth year? The short answer is that they tend "to catch a second wind," said Sam Stovall, S.& P.'s chief investment strategist. Over the last 63 years, the S.& P. 500 has soared 14 percent, on average, in the fourth year of a bull market.
This is typically followed by a more subdued second year, with the S.& P. 500 up around 12 percent, on average. And in the third year, the rally starts to sputter, with average gains of just 3 percent.
This is close to the way the last three years have unfolded - with the S.& P. up more than 26 percent in 2003, 9 percent in 2004 and 3 percent last year.
So how do stocks perform once bulls like this one enter their fourth year? The short answer is that they tend "to catch a second wind," said Sam Stovall, S.& P.'s chief investment strategist. Over the last 63 years, the S.& P. 500 has soared 14 percent, on average, in the fourth year of a bull market.
Friday, February 10, 2006
Why are bank stock P/Es so low?
[Vitaliy Katsenelson writes] In my piece on Lloyds TSB (NYSE: LYG), I wrote that banks usually trade at lower price-to-earnings ratios to the market, because they are considered riskier investments as a result of their high use of debt. That line caught the eye of Foolish financial editor Joey Khattab, who asked writers Stephen Simpson and Nate Parmelee whether they agreed with my logic. Both disagreed. They argued that larger banks generally have lower P/Es because they are perceived to have a slower or more limited growth potential.
At first, I thought there might be a conspiracy of Fools at work against me! So I asked several investment professionals for their opinion. And to my amazement, they all agreed with the Fools.
At first, I thought there might be a conspiracy of Fools at work against me! So I asked several investment professionals for their opinion. And to my amazement, they all agreed with the Fools.
Thursday, February 09, 2006
Nonsensical Nine
[John Dorfman writes] Each year I compile a warning list of nine stocks that I think display striking danger signs. I call them the Nonsensical Nine. This year the warning list includes such well-known stocks as Celgene Corp., Continental Airlines Inc. and Dun & Bradstreet Corp.
Since I started the list in 2001, members of the Nonsensical Nine have averaged a one-year return of negative 7 percent. The S&P 500 over the same five years has averaged a return of positive 3.4 percent. Three of the five Nonsensical Nine lists have produced a negative one-year return, and four of the lists trailed the S&P 500.
For the Nonsensical Nine, I look at U.S. stocks with a market value of $1 billion or more, selling for at least three times book value (assets minus liabilities per share). Then I select the three stocks that sell for the highest multiple of earnings, the three that sell for the highest multiple of revenue, and the three that have the highest ratio of debt to equity.
Since I started the list in 2001, members of the Nonsensical Nine have averaged a one-year return of negative 7 percent. The S&P 500 over the same five years has averaged a return of positive 3.4 percent. Three of the five Nonsensical Nine lists have produced a negative one-year return, and four of the lists trailed the S&P 500.
For the Nonsensical Nine, I look at U.S. stocks with a market value of $1 billion or more, selling for at least three times book value (assets minus liabilities per share). Then I select the three stocks that sell for the highest multiple of earnings, the three that sell for the highest multiple of revenue, and the three that have the highest ratio of debt to equity.
Monday, February 06, 2006
The April Effect
A 1987 article in the University of Chicago Press' Journal of Business observed that, for years, returns on the London Stock Exchange in April weren't particularly different from returns in other months. Subsequent to the imposition of a capital-gains tax, however, the British stock return data exhibited "apparent monthly effects" in April.
Saturday, February 04, 2006
Morningstar's Equity Research
[10/27/06] The Morningstar approach to stocks
* * *
[2/4/06] Many people think of Morningstar as a mutual fund research provider. And while that’s certainly true, it’s only part of the story. Our stock analysts cover 1,700 companies in more than 100 industries, including more than 85% of the market capitalization of the Wilshire 5000 Index.
We evaluate stocks for what they truly are--pieces of a business. Instead of prognosticating short-term price movements or momentum, our analysts focus on determining the value of a business, its risks, and whether the stock price accurately reflects both the value and risk.
Simply put, we look for superior businesses that trade at discounts to their fair values. The market, of course, doesn't always agree with us, so sometimes our recommendations are out of step with consensus thinking. But we believe this approach is the most sensible way to create wealth over the long term.
(sounds good to me)
* * *
[2/4/06] Many people think of Morningstar as a mutual fund research provider. And while that’s certainly true, it’s only part of the story. Our stock analysts cover 1,700 companies in more than 100 industries, including more than 85% of the market capitalization of the Wilshire 5000 Index.
We evaluate stocks for what they truly are--pieces of a business. Instead of prognosticating short-term price movements or momentum, our analysts focus on determining the value of a business, its risks, and whether the stock price accurately reflects both the value and risk.
Simply put, we look for superior businesses that trade at discounts to their fair values. The market, of course, doesn't always agree with us, so sometimes our recommendations are out of step with consensus thinking. But we believe this approach is the most sensible way to create wealth over the long term.
(sounds good to me)
Morningstar looks at growth stocks
[4/29/06] Morningstar's five principles on investing in growth stocks
[2/4/06] Morningstar focuses on three factors when looking for growth ideas.
* * *
[11/22/05] Morningstar studied the return earned by investors in a sample of 50 widely known growth stocks over periods starting in 1990, 1995, and 2000, in an attempt to increase their insight into growth stock valuation.
"Of course, there's no chance that we'll abandon our preference for investing with a margin of safety--this remains a core Morningstar principle. In our view, one of the most frequent investment sins is overpaying for growth. It's entirely unnecessary, as an informed investor is well positioned to determine when growth is attractively priced--and when it isn't. Margins of safety remain vital, but when it comes to the best companies, there's often more to consider than most investors realize."
... "while many investors shy away from stocks with high P/E ratios, our research concludes that this isn't always wise. And while P/E ratios for growth stocks must eventually decline, this can take years to happen--by which time the "E" can be several times larger. For example, investors who bought Qualcomm QCOM at a P/E of 78 in 1995 have earned tremendous results. And as we illustrate, those investors could have paid up to a P/E of 577 before they would have underperformed the S&P 500. Similarly, investors could have happily bought Starbucks SBUX at 62 times earnings (maximum P/E 298) or Fastenal FAST at 41 times earnings (maximum P/E 80) and done magnificently. For the right company, growth is most assuredly worth "paying up for."
[2/4/06] Morningstar focuses on three factors when looking for growth ideas.
* * *
[11/22/05] Morningstar studied the return earned by investors in a sample of 50 widely known growth stocks over periods starting in 1990, 1995, and 2000, in an attempt to increase their insight into growth stock valuation.
"Of course, there's no chance that we'll abandon our preference for investing with a margin of safety--this remains a core Morningstar principle. In our view, one of the most frequent investment sins is overpaying for growth. It's entirely unnecessary, as an informed investor is well positioned to determine when growth is attractively priced--and when it isn't. Margins of safety remain vital, but when it comes to the best companies, there's often more to consider than most investors realize."
... "while many investors shy away from stocks with high P/E ratios, our research concludes that this isn't always wise. And while P/E ratios for growth stocks must eventually decline, this can take years to happen--by which time the "E" can be several times larger. For example, investors who bought Qualcomm QCOM at a P/E of 78 in 1995 have earned tremendous results. And as we illustrate, those investors could have paid up to a P/E of 577 before they would have underperformed the S&P 500. Similarly, investors could have happily bought Starbucks SBUX at 62 times earnings (maximum P/E 298) or Fastenal FAST at 41 times earnings (maximum P/E 80) and done magnificently. For the right company, growth is most assuredly worth "paying up for."
The Cliches of Wall Street
A Cliché a Day Keeps
Wall Street Losses Away
By E.S. BROWNING
Staff Reporter of THE WALL STREET JOURNAL
December 27, 2005; Page C1
Words to the wise: Buy low, sell high, and don't follow the crowd.
The Street of Dreams (Wall Street) is paved with clichés. Analysts love to write that stocks offer "positive price potential" and are in "sustainable advances." Price targets get "revised upward." Stocks rarely seem to sport negative potential or falling targets.
And yet, some of the clichés can be helpful, if only as red flags. The above phrases scream that the advice being offered can be taken with a grain of salt. And some other old saws actually are rooted in market reality.
"The market is all about attitudes and people," says Phil Roth, chief technical market analyst at New York brokerage firm Miller Tabak. Many sayings "started because they contain a grain or more than a grain of truth."
So herewith, dear reader, in honor of the season, is a gift box of beloved Wall Street adages, with explanatory notes appended. Without further ado:
Santa Claus Rally
Oddly enough, stocks often rise right after Christmas. In fact, the entire fourth quarter is, on average, the year's strongest. The Dow industrials have suffered a fourth-quarter decline just once in the past 10 years -- in 1997. The average is up about 3% in the current quarter. The fourth quarter usually is a strong time for corporate profits. Investors are looking ahead to big injections of retirement money into stocks in the new year, and at Christmastime, people tend to look for better days to come. So today might -- might -- be a good day to buy.
Sell in May and Go Away
Sounds like nothing but a catchy phrase, but amazingly, it often is good advice. Over history, the market's biggest gains have come from October through April. From May through September, the market, on average, rises little. But that's not always the case. From October 2004 through April 2005, the Dow Jones Industrial Average rose just 1%. It went up almost 4% from May through September of this year. In most years, though, the winter is better for stocks. Why? See above.
Summer Rally
This is talked about almost as much as the Santa Claus rally, but it is a dubious concept. Sure, stocks tend to rally at least once in most seasons, but historically, summer tends to be a weak period. Stocks tend to bounce up and down over the summer and hit bottom in September or October. September, historically, is the worst month for stocks, the only one that averages a noticable decline. Summer tends to end with a thud.
Beware the Dead-Cat Bounce
Some stocks -- and some entire markets -- are so troubled that they just aren't going to rebound for a while. In such cases, the temporary bounce is a fake, a rally that won't last. The origin of the phrase, in brutal terms: Even a dead cat will bounce a little, if it falls from a high enough perch. A dead-cat bounce can be caused by bearish investors covering their bets. They sold borrowed shares in hopes of replacing them with cheaper ones bought later, called shorting. After their buying starts, the stock climbs, but when they finish, the decline resumes.
Bulls and Bears Make Money. Pigs Get Slaughtered
Another saying that is cruel to animals, but at least it is self-explanatory. If you have a clear investment plan, be it bullish or bearish, you have a chance of success. If you get greedy, pushing a bet too far or staying in a risky investment too long, you may suffer.
Don't Fight the Fed
An old rule on Wall Street is that two things drive stocks: Corporate profit and interest rates. When the Federal Reserve is raising interest rates, as it has been for almost 18 months now, it puts a burden on companies and consumers alike. You should expect the stock market to have trouble -- which it has. This time, at least, stocks haven't fallen, as they have during many previous periods of rate increases.
Don't Fight the Tape
This has mostly to do with crowd psychology. If the market, once tracked by ticker-tape machines, is moving strongly in one direction, up or down, it may not be a great time to bet the other way. No matter how smart you are, or how good your analysis, short-term market momentum can overwhelm your genius. To quote more clichés: Don't fight the trend. Timing is everything. Pick your spots. The trend is your friend.
Stocks Climb a Wall of Worry
This seems like upside-down logic, but it actually makes sense. Stocks tend to rise when investors are anxious. That was the case in October 2002, amid market scandal and an economic slowdown, when the current bull market began. Bull markets begin after people have taken money out of the market, and have it free to invest. As investors resolve their fears, one by one, they put money back in and stocks rise -- climbing a wall of worry. Stocks top out when people become too optimistic. This year, they rose in late October, after worries about profit and interest rates had grown, then ran out of steam as worries eased in December. So this year, Santa is investors' last best hope. The corollary is instructive, too: Buy to the sound of cannons; sell to the sound of trumpets. Translation: Buy when people are too pessimistic, sell when they are too optimistic.
Don't Catch a Falling Knife
This is the opposite of the "wall of worry" maxim above. Sometimes, when things look bad, they are bad, and it is too soon to buy. Think General Motors Corp. Anyone who tried to catch GM stock this year, such as investor Kirk Kerkorian, found it knifing right through their hands. GM repeatedly plunged to new lows. Related: Don't get in front of a freight train (or a Chevy, in this case.)
The Market is Driven by Fear and Greed
Wait a minute. We thought it was driven by profit and interest rates. Oh, well. It is driven by fear and greed, too. When the stock market is doing well, investors set aside fears and build higher and higher expectations for stocks. They become so greedy that they pay inflated prices, thinking stocks never will fall. Expectations become impossible to meet, and that's when a bear market sets in. Remember the bubble? As stocks crumble, greed is replaced by fear, driving stocks still lower. Eventually, fears become excessive and stocks have nowhere to go but up. That's when the old "wall of worry" kicks in. Investors begin to work through their fears, and stocks rise. Then comes the greed again.
Buy the Rumor, Sell the News
Stocks often rise on chatter speculating about pending good news, such as a strong corporate profit announcement. When the news actually breaks, short-term traders sell to take gains. If profit news doesn't exceed Wall Street expectations, the stock may rise before the news but then stagnate or fall afterward. Indexes can do the same. This year, it seems, most of the year-end rally may have occurred early (on the rumor) in November. This cliché also works in reverse. If bad news is anticipated, you sell the rumor and buy the news.
Never Short a Dull Market
This year has definitely been dull, without much sharp movement up or down. Amid rising oil prices, hurricanes and Fed rate increases, you would think it would be a fine time to short the market, betting that indexes would decline. But, as this year showed, that can be a dangerous move unless there is a strong catalyst to push stocks down. Stocks this year have tended to go nowhere, and those who bet on broad market declines have been wrong, although many short sellers betting against individual stocks have had a fine year.
It's Not a Stock Market; It's a Market of Stocks
This is sometimes also expressed as, "This is a stock picker's market." Money managers say such things when the overall market is going nowhere. The way to make money, they say, is to pick stocks that will beat the market. Trouble is, history shows that few people are gifted stock pickers. Trying to beat the market can be a recipe for disaster, as most people stub their toes on that other cliché, buying high and selling low.
Write to E.S. Browning at jim.browning@wsj.com
http://online.wsj.com/public/article/SB113564768089231861-KEnkfFHUTJ_tsqHH_i8L_Yks8Rg_20060102.html?mod=mktw
Wall Street Losses Away
By E.S. BROWNING
Staff Reporter of THE WALL STREET JOURNAL
December 27, 2005; Page C1
Words to the wise: Buy low, sell high, and don't follow the crowd.
The Street of Dreams (Wall Street) is paved with clichés. Analysts love to write that stocks offer "positive price potential" and are in "sustainable advances." Price targets get "revised upward." Stocks rarely seem to sport negative potential or falling targets.
And yet, some of the clichés can be helpful, if only as red flags. The above phrases scream that the advice being offered can be taken with a grain of salt. And some other old saws actually are rooted in market reality.
"The market is all about attitudes and people," says Phil Roth, chief technical market analyst at New York brokerage firm Miller Tabak. Many sayings "started because they contain a grain or more than a grain of truth."
So herewith, dear reader, in honor of the season, is a gift box of beloved Wall Street adages, with explanatory notes appended. Without further ado:
Santa Claus Rally
Oddly enough, stocks often rise right after Christmas. In fact, the entire fourth quarter is, on average, the year's strongest. The Dow industrials have suffered a fourth-quarter decline just once in the past 10 years -- in 1997. The average is up about 3% in the current quarter. The fourth quarter usually is a strong time for corporate profits. Investors are looking ahead to big injections of retirement money into stocks in the new year, and at Christmastime, people tend to look for better days to come. So today might -- might -- be a good day to buy.
Sell in May and Go Away
Sounds like nothing but a catchy phrase, but amazingly, it often is good advice. Over history, the market's biggest gains have come from October through April. From May through September, the market, on average, rises little. But that's not always the case. From October 2004 through April 2005, the Dow Jones Industrial Average rose just 1%. It went up almost 4% from May through September of this year. In most years, though, the winter is better for stocks. Why? See above.
Summer Rally
This is talked about almost as much as the Santa Claus rally, but it is a dubious concept. Sure, stocks tend to rally at least once in most seasons, but historically, summer tends to be a weak period. Stocks tend to bounce up and down over the summer and hit bottom in September or October. September, historically, is the worst month for stocks, the only one that averages a noticable decline. Summer tends to end with a thud.
Beware the Dead-Cat Bounce
Some stocks -- and some entire markets -- are so troubled that they just aren't going to rebound for a while. In such cases, the temporary bounce is a fake, a rally that won't last. The origin of the phrase, in brutal terms: Even a dead cat will bounce a little, if it falls from a high enough perch. A dead-cat bounce can be caused by bearish investors covering their bets. They sold borrowed shares in hopes of replacing them with cheaper ones bought later, called shorting. After their buying starts, the stock climbs, but when they finish, the decline resumes.
Bulls and Bears Make Money. Pigs Get Slaughtered
Another saying that is cruel to animals, but at least it is self-explanatory. If you have a clear investment plan, be it bullish or bearish, you have a chance of success. If you get greedy, pushing a bet too far or staying in a risky investment too long, you may suffer.
Don't Fight the Fed
An old rule on Wall Street is that two things drive stocks: Corporate profit and interest rates. When the Federal Reserve is raising interest rates, as it has been for almost 18 months now, it puts a burden on companies and consumers alike. You should expect the stock market to have trouble -- which it has. This time, at least, stocks haven't fallen, as they have during many previous periods of rate increases.
Don't Fight the Tape
This has mostly to do with crowd psychology. If the market, once tracked by ticker-tape machines, is moving strongly in one direction, up or down, it may not be a great time to bet the other way. No matter how smart you are, or how good your analysis, short-term market momentum can overwhelm your genius. To quote more clichés: Don't fight the trend. Timing is everything. Pick your spots. The trend is your friend.
Stocks Climb a Wall of Worry
This seems like upside-down logic, but it actually makes sense. Stocks tend to rise when investors are anxious. That was the case in October 2002, amid market scandal and an economic slowdown, when the current bull market began. Bull markets begin after people have taken money out of the market, and have it free to invest. As investors resolve their fears, one by one, they put money back in and stocks rise -- climbing a wall of worry. Stocks top out when people become too optimistic. This year, they rose in late October, after worries about profit and interest rates had grown, then ran out of steam as worries eased in December. So this year, Santa is investors' last best hope. The corollary is instructive, too: Buy to the sound of cannons; sell to the sound of trumpets. Translation: Buy when people are too pessimistic, sell when they are too optimistic.
Don't Catch a Falling Knife
This is the opposite of the "wall of worry" maxim above. Sometimes, when things look bad, they are bad, and it is too soon to buy. Think General Motors Corp. Anyone who tried to catch GM stock this year, such as investor Kirk Kerkorian, found it knifing right through their hands. GM repeatedly plunged to new lows. Related: Don't get in front of a freight train (or a Chevy, in this case.)
The Market is Driven by Fear and Greed
Wait a minute. We thought it was driven by profit and interest rates. Oh, well. It is driven by fear and greed, too. When the stock market is doing well, investors set aside fears and build higher and higher expectations for stocks. They become so greedy that they pay inflated prices, thinking stocks never will fall. Expectations become impossible to meet, and that's when a bear market sets in. Remember the bubble? As stocks crumble, greed is replaced by fear, driving stocks still lower. Eventually, fears become excessive and stocks have nowhere to go but up. That's when the old "wall of worry" kicks in. Investors begin to work through their fears, and stocks rise. Then comes the greed again.
Buy the Rumor, Sell the News
Stocks often rise on chatter speculating about pending good news, such as a strong corporate profit announcement. When the news actually breaks, short-term traders sell to take gains. If profit news doesn't exceed Wall Street expectations, the stock may rise before the news but then stagnate or fall afterward. Indexes can do the same. This year, it seems, most of the year-end rally may have occurred early (on the rumor) in November. This cliché also works in reverse. If bad news is anticipated, you sell the rumor and buy the news.
Never Short a Dull Market
This year has definitely been dull, without much sharp movement up or down. Amid rising oil prices, hurricanes and Fed rate increases, you would think it would be a fine time to short the market, betting that indexes would decline. But, as this year showed, that can be a dangerous move unless there is a strong catalyst to push stocks down. Stocks this year have tended to go nowhere, and those who bet on broad market declines have been wrong, although many short sellers betting against individual stocks have had a fine year.
It's Not a Stock Market; It's a Market of Stocks
This is sometimes also expressed as, "This is a stock picker's market." Money managers say such things when the overall market is going nowhere. The way to make money, they say, is to pick stocks that will beat the market. Trouble is, history shows that few people are gifted stock pickers. Trying to beat the market can be a recipe for disaster, as most people stub their toes on that other cliché, buying high and selling low.
Write to E.S. Browning at jim.browning@wsj.com
http://online.wsj.com/public/article/SB113564768089231861-KEnkfFHUTJ_tsqHH_i8L_Yks8Rg_20060102.html?mod=mktw
The Three Ways to profit on a stock
Haywood Kelly writes, "My future return on the stock can come in three ways. The company can grow. The price multiple between my purchase date and the sale date can rise. Or I can collect dividends and earn the return that way.
The way this is usually expressed is:
Return = Earnings Growth + Change in P/E + Dividend Yield.
Expressed crudely and admittedly too simplistically, a growth investor will focus on the first component, a value investor on the second, and an income investor on the third."
The charts in the article remind me of the charts in Peter Lynch's book, One Up On Wall Street.
And speaking of Lynch, here's a nice post I found while browsing Shai's blog. See also the Lynch link in the entry below.
The way this is usually expressed is:
Return = Earnings Growth + Change in P/E + Dividend Yield.
Expressed crudely and admittedly too simplistically, a growth investor will focus on the first component, a value investor on the second, and an income investor on the third."
The charts in the article remind me of the charts in Peter Lynch's book, One Up On Wall Street.
And speaking of Lynch, here's a nice post I found while browsing Shai's blog. See also the Lynch link in the entry below.
Friday, February 03, 2006
The Warren Buffett Cartoon
MOVE OVER, SPONGEBOB--BILLIONAIRE FINANCIER WARREN Buffett could be the next big TV animated star.
DIC Entertainment, the mid-size kids' TV program producer and syndicator, is working on a direct-to-video animated kids' series called "The Secret Millionaire's Club," in which Warren Buffett, chairman of Berkshire Hathaway, offers up lessons on money and financing to children.
"It's about financial literacy," said Andy Heyward, chairman and CEO of the Burbank, Calif.-based DIC Entertainment.
-- from tairbear00 via chucks_angels
DIC Entertainment, the mid-size kids' TV program producer and syndicator, is working on a direct-to-video animated kids' series called "The Secret Millionaire's Club," in which Warren Buffett, chairman of Berkshire Hathaway, offers up lessons on money and financing to children.
"It's about financial literacy," said Andy Heyward, chairman and CEO of the Burbank, Calif.-based DIC Entertainment.
-- from tairbear00 via chucks_angels
Monday, January 30, 2006
Sunday, January 29, 2006
a breadth flip-flop
We witnessed an extreme flip-flop in market breadth late last week that’s worth noting given its historical significance. Days like Friday [1/20/06] are discouraging for investors holding long positions, given the complete reversal of Thursday’s relatively healthy day. Almost 2½ times more stocks rose on Thursday than declined. Then Friday came, and almost 2 ½ times more stocks declined than rose. The last time we saw the discouraging pattern of a 2-to-1 up day followed immediately by a 2-to-1 down day (using NYSE advance/decline figures) was on July 21, 2005. That was a notable day as the S&P had hit a new yearly high the day before on July 20. The market went on to enjoy a couple more weeks of gains before a deeper correction set in. That was the case most times this has happened in the past.
According to SentimenTrader, over the past 30 years, there have been 21 other cases where we saw these types of immediate up-down reversals in breadth. Two weeks later, the S&P was positive 17 times (81%) and posted an average return of 1.2% (it was positive 10 out of 11 times over the past decade). It wasn’t a free ride however—on eight of the instances, the maximum drawdown one would have suffered during that two weeks was more than -2%, including a couple of huge declines in September 1986 and October 1987 (after the crash).
According to SentimenTrader, over the past 30 years, there have been 21 other cases where we saw these types of immediate up-down reversals in breadth. Two weeks later, the S&P was positive 17 times (81%) and posted an average return of 1.2% (it was positive 10 out of 11 times over the past decade). It wasn’t a free ride however—on eight of the instances, the maximum drawdown one would have suffered during that two weeks was more than -2%, including a couple of huge declines in September 1986 and October 1987 (after the crash).
Low Priced Stocks
Perhaps orphan stocks (stocks under $5) should be avoided, but Rick Munarriz has done well in picking low-priced stocks between $5 and $10. And here are Rick's picks for 2006: part 1, part 2
Wednesday, January 25, 2006
Charlie Munger
[1/25/06] “It is occasionally possible for a tortoise, content to assimilate proven insights of his best predecessors, to outrun hares which seek originality or don't wish to be left out of some crowd folly which ignores the best work of the past. This happens as the tortoise stumbles on some particularly effective way to apply the best previous work, or simply avoids standard calamities. We try more to profit by always remembering the obvious than from grasping the esoteric. It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” [from Value Investor Insight, article referenced by Respazz at value_investment_thoughts, page 21]
The value of technical analysis
[2/24/07] Randy Harmelink passes on a few websites on technical analysis
http://stockcharts.com/education/IndicatorAnalysis/index.html
http://www.prophet.net/analyze/popglossary.jsp
http://www.chartfilter.com/education/index.htm
http://www.incrediblecharts.com/technical/candlesticks.htm
[10/21/06] [Dr. Sjuggerud writes] [The] topic of technical analysis is a touchy one. But before we dive into this heated debate, we should probably first come up with some sort of definition of technical analysis. How about this: Stock market technical analysis, at its core, is looking at price action alone to determine some course of action.
That said, there are essentially two heated sides of the debate, both with convincing arguments:
On the "technical analysis is a sham" side, the argument (from guys called "fundamental analysts") goes something like this: "The value of a company is purely determined by the fundamentals of that company's business, not by some silly squiggles on a chart. Therefore, the only worthwhile analysis is analyzing the company's business."
On the "technical analysis is the holy grail" side, the argument goes something like this: "Anyone who only looks at earnings and ignores emotions in the market is an idiot. The market is made up of live human beings, who always bid things up beyond any reasonable value, and sell things below any reasonable value. Sticking your head in the sand and ignoring market action is ridiculous."
Both arguments make some sense when you read them, no? As a rule, these two camps are firmly divided - you either believe stock technical analysis is useful or you don't. Generally, there is no in between. So by picking one side in this debate, I'm bound to outrage the other side. But where I stand on technical analysis actually makes NEITHER side happy...
You see, I'm in the "in between" camp - I believe that both EARNINGS and EMOTIONS matter. And therefore I like to mix and match the two. Here's what I mean...
I like to buy good values - cheap stocks. You find those through fundamental analysis. And I don't like to try to "catch a falling knife" in those stocks - I like to wait until the share price at least starts to recover to give me a margin of safety. I prefer to buy in an uptrend rather than in a downtrend.
The Investors Business Daily newspaper is the most popular example of this. It ranks stocks based on both fundamental indicators (like earnings) and technical indicators, like what's called "relative strength." (Relative strength is just what it suggests - how well a stock is performing relative to the market or its industry. In the case of Investor's Business Daily, this is based heavily on the latest three months action. So if a stock has high relative strength, it's likely beginning an uptrend.
... For one other example of useful stock technical analysis, consider the "moving average" of a stock price. While stocks fluctuate wildly over days and weeks, looking at the movement of the average over a period of time can smooth out the fluctuations and let you grasp the underlying trend. More importantly, moving averages can be a great way to significantly decrease your risk and slightly improve your returns...
Jeremy Siegel, author of Stocks for the Long Run and a noted Finance Professor at the Wharton School (University of Pennsylvania), broke with the tradition of academics and actually tested a simple technical analysis rule - the 200-day moving average - himself. During his test, when a stock's price moved above it's 200-day average, Siegel bought. And if a stock dipped below it's 200-day average, he sold.
What Siegel found is that since 1886, using the 200-day moving average as your indicator, you would have earned 2% points better than someone using a "buy and hold" strategy (11% instead of 9%, I believe), and you would have done so with significantly less risk. You were only in the market about 2/3 of the time. And my own research corroborates Siegel's - I've found that you simply don't make money in stocks when they are below their 200-day moving average.
[after reading discussion at magicformulainvesting]
[8/31/06] Chart your way to Easy Street
[5/9/06] How one contrarian uses charts
[4/24/06] veryearly1 shows an experienced view of technical analysis
[1/28/06] Here's one value investor's view on technical analysis
[1/25/06] I see that Shai has posted a discussion on technical analysis on his blog with interesting viewpoints on both sides.
[1/24/06] Joseph Khattab says technical analysis is not for him. He then proves his case by presenting 12 best-performing stocks of 2004. Four of them went up in 2005 while eight of them went down.
But let me see what these 12 stocks would have returned in total. If you had put in $1000 in each of them, you would have started with $12,000. Crunching the numbers with his data, you would have ended up with $13,500. So despite twice as many losers as winners, there was a profit of $1550 or a return of 13% which would have beaten the market in 2005. Case not so closed.
[11/9/05] Why did Citigroup fire its technical analysis research team?
http://stockcharts.com/education/IndicatorAnalysis/index.html
http://www.prophet.net/analyze/popglossary.jsp
http://www.chartfilter.com/education/index.htm
http://www.incrediblecharts.com/technical/candlesticks.htm
[10/21/06] [Dr. Sjuggerud writes] [The] topic of technical analysis is a touchy one. But before we dive into this heated debate, we should probably first come up with some sort of definition of technical analysis. How about this: Stock market technical analysis, at its core, is looking at price action alone to determine some course of action.
That said, there are essentially two heated sides of the debate, both with convincing arguments:
On the "technical analysis is a sham" side, the argument (from guys called "fundamental analysts") goes something like this: "The value of a company is purely determined by the fundamentals of that company's business, not by some silly squiggles on a chart. Therefore, the only worthwhile analysis is analyzing the company's business."
On the "technical analysis is the holy grail" side, the argument goes something like this: "Anyone who only looks at earnings and ignores emotions in the market is an idiot. The market is made up of live human beings, who always bid things up beyond any reasonable value, and sell things below any reasonable value. Sticking your head in the sand and ignoring market action is ridiculous."
Both arguments make some sense when you read them, no? As a rule, these two camps are firmly divided - you either believe stock technical analysis is useful or you don't. Generally, there is no in between. So by picking one side in this debate, I'm bound to outrage the other side. But where I stand on technical analysis actually makes NEITHER side happy...
You see, I'm in the "in between" camp - I believe that both EARNINGS and EMOTIONS matter. And therefore I like to mix and match the two. Here's what I mean...
I like to buy good values - cheap stocks. You find those through fundamental analysis. And I don't like to try to "catch a falling knife" in those stocks - I like to wait until the share price at least starts to recover to give me a margin of safety. I prefer to buy in an uptrend rather than in a downtrend.
The Investors Business Daily newspaper is the most popular example of this. It ranks stocks based on both fundamental indicators (like earnings) and technical indicators, like what's called "relative strength." (Relative strength is just what it suggests - how well a stock is performing relative to the market or its industry. In the case of Investor's Business Daily, this is based heavily on the latest three months action. So if a stock has high relative strength, it's likely beginning an uptrend.
... For one other example of useful stock technical analysis, consider the "moving average" of a stock price. While stocks fluctuate wildly over days and weeks, looking at the movement of the average over a period of time can smooth out the fluctuations and let you grasp the underlying trend. More importantly, moving averages can be a great way to significantly decrease your risk and slightly improve your returns...
Jeremy Siegel, author of Stocks for the Long Run and a noted Finance Professor at the Wharton School (University of Pennsylvania), broke with the tradition of academics and actually tested a simple technical analysis rule - the 200-day moving average - himself. During his test, when a stock's price moved above it's 200-day average, Siegel bought. And if a stock dipped below it's 200-day average, he sold.
What Siegel found is that since 1886, using the 200-day moving average as your indicator, you would have earned 2% points better than someone using a "buy and hold" strategy (11% instead of 9%, I believe), and you would have done so with significantly less risk. You were only in the market about 2/3 of the time. And my own research corroborates Siegel's - I've found that you simply don't make money in stocks when they are below their 200-day moving average.
[after reading discussion at magicformulainvesting]
[8/31/06] Chart your way to Easy Street
[5/9/06] How one contrarian uses charts
[4/24/06] veryearly1 shows an experienced view of technical analysis
[1/28/06] Here's one value investor's view on technical analysis
[1/25/06] I see that Shai has posted a discussion on technical analysis on his blog with interesting viewpoints on both sides.
[1/24/06] Joseph Khattab says technical analysis is not for him. He then proves his case by presenting 12 best-performing stocks of 2004. Four of them went up in 2005 while eight of them went down.
But let me see what these 12 stocks would have returned in total. If you had put in $1000 in each of them, you would have started with $12,000. Crunching the numbers with his data, you would have ended up with $13,500. So despite twice as many losers as winners, there was a profit of $1550 or a return of 13% which would have beaten the market in 2005. Case not so closed.
[11/9/05] Why did Citigroup fire its technical analysis research team?
Saturday, January 21, 2006
mutual fund performance and turnover
[1/21/06] Here's a different study mentioned in Lowenstein's column in the February SmartMoney. Kevin Laughlin, assistant to Vanguard founder Jack Bogle, divided mutual funds into four groups: those with the highest turnover down to the lowest.
* * *
[8/1/05] A quote from Chris Davis
[7/20/05] One would normally suspect that high turnover means low returns. Although funds pay very little in stock-trading commissions, those costs can add up when you rip out trades at a rapid pace. And rapid-fire trading often leads to rapid-fire mistakes.
But your suspicions would be wrong.
A note: One of the funds I own, White Oak Growth, has low turnover, but has been one of the worst performers since 2000. Their problem was holding high growth stocks all the way down even as the bubble popped. Turnover by itself doesn't seem to be an indicator of performance.
Sure enough, as turnover went up, performance went down. Among all domestic equity funds, over 10 years the funds that traded least had an annualized return of 11.49 percent; those that traded most had a return of 9.78 percent.A possible factor may be that low turnover funds had lower expenses. Sure enough
Again, Laughlin has the numbers: The average expense ratio of high-turnover funds is 1.31 percent a year. At low-turnover funds expenses are only 1.0 percent.
* * *
[8/1/05] A quote from Chris Davis
Our feeling is that if our research process is going to add value, it will do so by identifying companies with competitive advantages. Those advantages rarely manifest themselves in a year or two of the company's results. I don't know how someone could claim to have a research focus and also have 100% turnover. You only get to know a company well when you watch it closely over time. When you know a company well, you know when it gets mispriced and can take advantage of it.
[7/20/05] One would normally suspect that high turnover means low returns. Although funds pay very little in stock-trading commissions, those costs can add up when you rip out trades at a rapid pace. And rapid-fire trading often leads to rapid-fire mistakes.
But your suspicions would be wrong.
A note: One of the funds I own, White Oak Growth, has low turnover, but has been one of the worst performers since 2000. Their problem was holding high growth stocks all the way down even as the bubble popped. Turnover by itself doesn't seem to be an indicator of performance.
The Rules of Trading
Mauldin presents a chapter from his book Just One Thing. It is Dennis Gartman's Rules of Trading
R U L E # 1
Never, ever, under any circumstance, should one add to a losing position ... not EVER!
Averaging down into a losing trade is the only thing that will assuredly take you out of the investment business. This is what took LTCM out. This is what took Barings Brothers out; this is what took Sumitomo Copper out, and this is what takes most losing investors out. The only thing that can happen to you when you average down into a long position (or up into a short position) is that your net worth must decline. Oh, it may turn around eventually and your decision to average down may be proven fortuitous, but for every example of fortune shining we can give an example of fortune turning bleak and deadly.
By contrast, if you buy a stock or a commodity or a currency at progressively higher prices, the only thing that can happen to your net worth is that it shall rise. Eventually, all prices tumble. Eventually, the last position you buy, at progressively higher prices, shall prove to be a loser, and it is at that point that you will have to exit your position. However, as long as you buy at higher prices, the market is telling you that you are correct in your analysis and you should continue to trade accordingly.
[On the other hand, there's investor Bill Miller.]
R U L E # 1
Never, ever, under any circumstance, should one add to a losing position ... not EVER!
Averaging down into a losing trade is the only thing that will assuredly take you out of the investment business. This is what took LTCM out. This is what took Barings Brothers out; this is what took Sumitomo Copper out, and this is what takes most losing investors out. The only thing that can happen to you when you average down into a long position (or up into a short position) is that your net worth must decline. Oh, it may turn around eventually and your decision to average down may be proven fortuitous, but for every example of fortune shining we can give an example of fortune turning bleak and deadly.
By contrast, if you buy a stock or a commodity or a currency at progressively higher prices, the only thing that can happen to your net worth is that it shall rise. Eventually, all prices tumble. Eventually, the last position you buy, at progressively higher prices, shall prove to be a loser, and it is at that point that you will have to exit your position. However, as long as you buy at higher prices, the market is telling you that you are correct in your analysis and you should continue to trade accordingly.
[On the other hand, there's investor Bill Miller.]
Friday, January 20, 2006
Morningstar performance
[1/20/06] In this update, Morningstar reports their star rating system is just about matching the equal-weighted S&P 500 for the trailing 3-year period while trouncing the cap-weighted index. Looking at the list, it would seem like the best buys right now are TGIC, WMT, KMX, LEA, PIR, TPX since they are all still rated 5 stars (and all have gone down).
[7/16/05] How well do Morningstar ratings perform? Morningstar started a study on 8/6/01 where they bought five stars stocks and held them until they became one star stocks. It has outperformed the S&P 500, though it's about par for the cash-flow matched equal-weighted S&P 500. That comparison index may be a little unfair because it doesn't sound easy for the individual to replicate. In any case, they're both trouncing the S&P 500. Even the equal-weighted S&P 500 (where each stock is given equal weight in the index) sounds like a good strategy since it's also been beating the plain S&P 500.
[7/16/05] How well do Morningstar ratings perform? Morningstar started a study on 8/6/01 where they bought five stars stocks and held them until they became one star stocks. It has outperformed the S&P 500, though it's about par for the cash-flow matched equal-weighted S&P 500. That comparison index may be a little unfair because it doesn't sound easy for the individual to replicate. In any case, they're both trouncing the S&P 500. Even the equal-weighted S&P 500 (where each stock is given equal weight in the index) sounds like a good strategy since it's also been beating the plain S&P 500.
Thursday, January 19, 2006
Fools vs. Mark Cuban
Munarriz says Mark Cuban (that's billionaire Mark Cuban) is wrong
Seth Jayson pontificates Cuban is not all wrong
Seth Jayson pontificates Cuban is not all wrong
2006 Predictions
[2/3/06] Paul Saffo rates 10 different technology trends as buy, sell, or hold over the next decade.
[1/19/06] Munarriz makes five stock predictions
[1/6/06] Mauldin thinks the market will end the year down, going against consensus (and Elaine Garzarelli).
[1/6/06] According to Hulbert, the low volatility of 2005 portends another "calm" market in 2006.
[1/4/06] Sivy is fairly optimistic overall for 2006
[1/1/06] The first half of 2006 could be rough says CNNMoney.
[1/1/06] Forget about 2006, what about 2016?
[1/1/06] Bull vs. Bear: Munarriz and Beyers duel 2006
[12/24/05] Morningstar estimates the Dow's fair value at 11,694, so it's about 8% undervalued. However they estimate the overall market as overvalued by 5%.
[12/23/05] Liz Ann Sonders, Chief Investment Strategist for Charles Schwab looks for outperformance by large-cap growth stocks.
"There’ve been a number of periods in history (like the last two years) when the market had single-digit returns and compressed valuations. The year that followed was typically positive for the market overall, but with multiple expansion particularly pronounced for growth companies."
[12/23/05] Robert Aronen shares his predictions.
[1/19/06] Munarriz makes five stock predictions
[1/6/06] Mauldin thinks the market will end the year down, going against consensus (and Elaine Garzarelli).
[1/6/06] According to Hulbert, the low volatility of 2005 portends another "calm" market in 2006.
[1/4/06] Sivy is fairly optimistic overall for 2006
[1/1/06] The first half of 2006 could be rough says CNNMoney.
[1/1/06] Forget about 2006, what about 2016?
[1/1/06] Bull vs. Bear: Munarriz and Beyers duel 2006
[12/24/05] Morningstar estimates the Dow's fair value at 11,694, so it's about 8% undervalued. However they estimate the overall market as overvalued by 5%.
[12/23/05] Liz Ann Sonders, Chief Investment Strategist for Charles Schwab looks for outperformance by large-cap growth stocks.
"There’ve been a number of periods in history (like the last two years) when the market had single-digit returns and compressed valuations. The year that followed was typically positive for the market overall, but with multiple expansion particularly pronounced for growth companies."
[12/23/05] Robert Aronen shares his predictions.
Friday, January 13, 2006
The 11000 Barrier
[1/19/06] According to MarketHistory.com, there have been 15 prior occurrences (dating back to May 1999, and omitting repeat occurrences within 10 trading days) where the Dow hit an intra-day high above the 11,000 level. Over the next 27 trading days, the Dow declined in 14 of the 15 cases by an average of -4.1%.
[1/13/06] Dow 11000: Does It Matter?
* * *
[7/28/05] More than six years after the Dow topped 10,000 and then 11,000 for the first time, the index has struggled to leave that trading range behind for good. The Dow has crossed and re-crossed 10,000 at least 49 times in six years.
The Dow's struggles to make a major, long-term move beyond 11,000 aren't unusual by historical standards. Twice in the past century, the markets stagnated for prolonged periods
• After the 1929 stock market crash, the Dow did not permanently move above the pre-crash lows for 25 years.
• More recently, the Dow struggled to top and then move significantly beyond 1,000 during a 16-year period ending in 1982. The high oil prices, inflation jitters and unpopular war (Vietnam) of that era are somewhat similar to the gas price worries, inflation anxieties and another unpopular conflict (Iraq) facing the country today, although the pain may not be as severe this time, said Michael Burke, editor of Investors Intelligence, a newsletter based in New Rochelle.
[1/13/06] Dow 11000: Does It Matter?
* * *
[7/28/05] More than six years after the Dow topped 10,000 and then 11,000 for the first time, the index has struggled to leave that trading range behind for good. The Dow has crossed and re-crossed 10,000 at least 49 times in six years.
The Dow's struggles to make a major, long-term move beyond 11,000 aren't unusual by historical standards. Twice in the past century, the markets stagnated for prolonged periods
• After the 1929 stock market crash, the Dow did not permanently move above the pre-crash lows for 25 years.
• More recently, the Dow struggled to top and then move significantly beyond 1,000 during a 16-year period ending in 1982. The high oil prices, inflation jitters and unpopular war (Vietnam) of that era are somewhat similar to the gas price worries, inflation anxieties and another unpopular conflict (Iraq) facing the country today, although the pain may not be as severe this time, said Michael Burke, editor of Investors Intelligence, a newsletter based in New Rochelle.
Can Investors Profit from the Prophets?
[2/25/06] in every single year of the new millennium, stocks rated "sell" by Wall Street have outperformed stocks rated "buy" or "hold." From 2000 to 2004, stocks that the Street told you to sell rose 19% per annum on average. Meanwhile, the "buys" and "holds" rose just 7%.
[1/13/06] On the other hand, John Dorfman relays this. "For eight years, I've been tracking results for the four stocks analysts most adore at the start of each year, and the four they just can't stand. The Adored Stocks have averaged a loss of 4.5 percent. The Despised Stocks have lost 2.8 percent on average. The Standard & Poor's 500 Index has easily beaten both groups, averaging a gain of 6.4 percent."
[9/22/05] Does a portfolio of stocks recommended by analysts outperform the market? A contrarian or skeptic might say no. But this study says yes. [chucks_angels message dated 9/17/05, 4:51 AM]
[1/13/06] On the other hand, John Dorfman relays this. "For eight years, I've been tracking results for the four stocks analysts most adore at the start of each year, and the four they just can't stand. The Adored Stocks have averaged a loss of 4.5 percent. The Despised Stocks have lost 2.8 percent on average. The Standard & Poor's 500 Index has easily beaten both groups, averaging a gain of 6.4 percent."
[9/22/05] Does a portfolio of stocks recommended by analysts outperform the market? A contrarian or skeptic might say no. But this study says yes. [chucks_angels message dated 9/17/05, 4:51 AM]
Selecting Mutual Funds
[from brknews] A new study has taken a big step forward, suggesting a selection method so easy and direct that investors can only wonder why it hasn't received more attention. The idea is to compare each fund's returns with how it would have performed had it simply held, without trading, the stocks it listed in its most recent public disclosure.
The study was done by three finance professors: Marcin Kacperczyk, of the University of British Columbia, and Clemens Sialm and Lu Zheng of the University of Michigan. They focused on what they called the return gap: the difference between a fund's actual returns and what it would have earned had it stuck with its most recently listed holdings. The SEC requires that funds make such disclosures twice a year; the professors report that nearly half of all funds do so at least quarterly.
The study found that, on average, funds with consistently positive return gaps were much better bets for future performance than those that were consistently negative, regardless of the frequency of portfolio disclosures. They analyzed more than 2,500 domestic equity mutual funds over a 20-year period - 1984 through 2003.
The study was done by three finance professors: Marcin Kacperczyk, of the University of British Columbia, and Clemens Sialm and Lu Zheng of the University of Michigan. They focused on what they called the return gap: the difference between a fund's actual returns and what it would have earned had it stuck with its most recently listed holdings. The SEC requires that funds make such disclosures twice a year; the professors report that nearly half of all funds do so at least quarterly.
The study found that, on average, funds with consistently positive return gaps were much better bets for future performance than those that were consistently negative, regardless of the frequency of portfolio disclosures. They analyzed more than 2,500 domestic equity mutual funds over a 20-year period - 1984 through 2003.
Stocks that go up year after year
Of the 10,000-plus stocks available for purchase today, only 17 have recorded positive total returns in every one of the past 10 years.
Four words of advice
Bill Barker comments on investment advice that can be given in four words. Actually he presents three of them, so that's twelve words.
Wednesday, January 04, 2006
Bill Miller
[1/4/06] Bill Miller has done it again, but it was a close call. Miller's Legg Mason Value LMVTX extended its winning streak against the S&P 500 Index to 15 straight years, with a 2005 return of 5.32%. The S&P 500 returned 4.91% for the year.
[12/21/05 brknews] It looks like Miller is about to make it 15 years in a row.
[6/23/05] Tilson's interview with Bill Miller (actually birge writing of said interview)
Meet Mr. Market
[12/21/05 brknews] It looks like Miller is about to make it 15 years in a row.
[6/23/05] Tilson's interview with Bill Miller (actually birge writing of said interview)
Meet Mr. Market
Tuesday, January 03, 2006
But What About Tomorrow?
[12/27/05] Looking in Zweig's Winning On Wall Street (page 159), "if the market does not do what it's supposed to do prior to the holidays (or immediately after Thanksgiving and Christmans), then that in itself is a negative sign and increases the probability that stocks will fall in the short run. Thus, the general trading strategy is to observe prices during the pre-holiday period, and if, at the close of the day, the market is unchanged or down -- defying the normal tendency -- then one should sell short the market for the day after the holiday."
So by this rule, one should have shorted today. And should short tomorrow. It would have worked out for today because the market was down. In fact, "The Standard & Poor's 500 Index, after rallying in early trading, dropped 12.12, or 1 percent, to 1256.54, its worst performance for the first trading day after Christmas since 1987." The Dow lost 105 to 10778. The Nasdaq lost 23 to 2227. What happened on the next day in 1987? The S&P dropped from 245.57 to 244.59. The Dow dropped from 1942.97 to 1926.89. The Nasdaq dropped from 325.60 to 325.50. However the day after that was positive.
So based on 1987, expect the market to be mildly down tomorrow, but the bulk of the move was today. In fact, based on 1987, one might look to buy tomorrow since the day after was positive. And 1988 was positive. The only slight flaw to this discussion is that this ain't 1987. Who really knows?
Chart of Dow Jones Industrial Average 1987-1989
[1/1/06] So what happened? Instead of going down Wednesday, the market finished barely positive. So while the Tuesday prediction was correct, the Wednesday prediction was barely incorrect. The market was down on Friday, normally an up day. So Zweig would say to short the market Monday (is it open Monday?)
[1/3/06] The market was closed Monday. And was up big today on the opening day of the year. In other words, the Zweig indicator was wrong big-time.
So by this rule, one should have shorted today. And should short tomorrow. It would have worked out for today because the market was down. In fact, "The Standard & Poor's 500 Index, after rallying in early trading, dropped 12.12, or 1 percent, to 1256.54, its worst performance for the first trading day after Christmas since 1987." The Dow lost 105 to 10778. The Nasdaq lost 23 to 2227. What happened on the next day in 1987? The S&P dropped from 245.57 to 244.59. The Dow dropped from 1942.97 to 1926.89. The Nasdaq dropped from 325.60 to 325.50. However the day after that was positive.
So based on 1987, expect the market to be mildly down tomorrow, but the bulk of the move was today. In fact, based on 1987, one might look to buy tomorrow since the day after was positive. And 1988 was positive. The only slight flaw to this discussion is that this ain't 1987. Who really knows?
Chart of Dow Jones Industrial Average 1987-1989
[1/1/06] So what happened? Instead of going down Wednesday, the market finished barely positive. So while the Tuesday prediction was correct, the Wednesday prediction was barely incorrect. The market was down on Friday, normally an up day. So Zweig would say to short the market Monday (is it open Monday?)
[1/3/06] The market was closed Monday. And was up big today on the opening day of the year. In other words, the Zweig indicator was wrong big-time.
Sunday, January 01, 2006
Goodbye 2005
[1/14/06] Munarriz was right on his 2005 predictions -- about half of the time
For the year, the Dow lost 0.6 percent, the Nasdaq gained 1.4 percent, the S&P 500 gained 3 percent and the Russell 2000 small cap index gained 3.4 percent.
Munarriz looks back at 2005
[1/7/06] Tech's top stories of 2005
For the year, the Dow lost 0.6 percent, the Nasdaq gained 1.4 percent, the S&P 500 gained 3 percent and the Russell 2000 small cap index gained 3.4 percent.
Munarriz looks back at 2005
[1/7/06] Tech's top stories of 2005
Another Magic Formula?
This Scrooge screen reminds me of Greenblatt's Magic Formula but is easier to implement with the common screening tools. Basically the screen looks for "cheap stocks possessing a high degree of earnings quality".
The screen produced a return of 17.5% for 2005 (outperforming the SPYDR's 7.7%). There are seven stocks (that Tim Beyers) picked from the screen this year. Returning is Taiwan Semiconductor (TSM). Another stock is Posco (PKX) that Warren Buffett is said to have bought. This one looks dirt cheap with a p/e of 3.5 and an ROE of 30.2. Another one that's dirt cheap is Southern Copper (PCU) with a p/e of 5.7 and an ROE of 40.8.
(Disclaimer: I own none of these stocks -- yet.)
The screen produced a return of 17.5% for 2005 (outperforming the SPYDR's 7.7%). There are seven stocks (that Tim Beyers) picked from the screen this year. Returning is Taiwan Semiconductor (TSM). Another stock is Posco (PKX) that Warren Buffett is said to have bought. This one looks dirt cheap with a p/e of 3.5 and an ROE of 30.2. Another one that's dirt cheap is Southern Copper (PCU) with a p/e of 5.7 and an ROE of 40.8.
(Disclaimer: I own none of these stocks -- yet.)
Scoffing at Fortune
TMF Selena is scoffing at Fortune's "10 Stocks for the Next Decade" which were picked in 1999. Following are the stocks and their performance since 7/19/00. (Don't know why they picked that starting date when the stocks were picked in 1999.)
Broadcom (BRCM) -80%
Charles Schwab (SCH) -58%
Enron -100%
Genentech (DNA) +157%
Morgan Stanley (MWD) -36%
Nokia (NOK) -67%
Nortel Networks -96%
Oracle -66%
Univision -46%
Viacom -49%
Average -44%
S&P 500 -18%
I'm not really super-bullish on any of these stocks (though I actually own three of them in varying amounts), but I'd bet overall they'll be up five years from now. Well maybe not Enron. Stay tuned.
Broadcom (BRCM) -80%
Charles Schwab (SCH) -58%
Enron -100%
Genentech (DNA) +157%
Morgan Stanley (MWD) -36%
Nokia (NOK) -67%
Nortel Networks -96%
Oracle -66%
Univision -46%
Viacom -49%
Average -44%
S&P 500 -18%
I'm not really super-bullish on any of these stocks (though I actually own three of them in varying amounts), but I'd bet overall they'll be up five years from now. Well maybe not Enron. Stay tuned.
Foolish Fundamentals
The fool.com explains some fundamental concepts
The significance of book value
Income Statement
Enterprise Value
Meet the P/E Ratio
Stock Dilution
The Price-to-Sales (P/S) Ratio
The Balance Sheet
Payout Ratios
Cash Flow Statement
Return on Invested Capital
Inventory
Cash Conversion Cycle
Free Cash Flow
Stocks
Bonds
GAAP
Margin
The significance of book value
Income Statement
Enterprise Value
Meet the P/E Ratio
Stock Dilution
The Price-to-Sales (P/S) Ratio
The Balance Sheet
Payout Ratios
Cash Flow Statement
Return on Invested Capital
Inventory
Cash Conversion Cycle
Free Cash Flow
Stocks
Bonds
GAAP
Margin
Wednesday, December 28, 2005
Capital Structure
When evaluating a company's merits as a possible investment, you should examine the components of its value and explore how it finances its workings. This is referred to as a company's capital structure. [via Russ]
Friday, December 23, 2005
Investing With the Stars
There are people out there who invest according to the stars, or according to patterns they see in stock prices, and sometimes even simply according to the calendar.
Wednesday, December 21, 2005
[1/13/06] Google now has a larger market cap than IBM and Chevron [chucks_angels]
[12/22/05] Is the Google deal with AOL a good deal?
[12/21/05] What will stop Google's ascent?
[12/19/05] David Kirkpatrick says Google will stumble in 2006 (and 7 more predictions for tech)
[12/18/05] Rick Munarriz names Google as a stock to sell in 2006, with reservations.
[12/15/05] Does Google want to rule the world?
[12/6/05] David Meier faces the prospect of Google hitting $500.
[12/2/05] Google's greatest weakness
[5/9/05] Is Google cheap?
[5/7/05] I'm changing my mind as the stock goes up and it gets glowing reports from respected investors (including Jim Cramer and Ben Stein!). It may not be the greatest company. It may not be a Rule Maker. But it could be the next best thing.
[3/3/05] What's the greatest company in America? This Fool says Google (!)
(I have serious doubts on this call.)
[9/15/05] Google headed for $1 trillion market cap?
[1/3/05] How does Google make money?
[11/14/04] Is Google bringing back the bubble?
[12/22/05] Is the Google deal with AOL a good deal?
[12/21/05] What will stop Google's ascent?
[12/19/05] David Kirkpatrick says Google will stumble in 2006 (and 7 more predictions for tech)
[12/18/05] Rick Munarriz names Google as a stock to sell in 2006, with reservations.
[12/15/05] Does Google want to rule the world?
[12/6/05] David Meier faces the prospect of Google hitting $500.
[12/2/05] Google's greatest weakness
[5/9/05] Is Google cheap?
[5/7/05] I'm changing my mind as the stock goes up and it gets glowing reports from respected investors (including Jim Cramer and Ben Stein!). It may not be the greatest company. It may not be a Rule Maker. But it could be the next best thing.
[3/3/05] What's the greatest company in America? This Fool says Google (!)
(I have serious doubts on this call.)
[9/15/05] Google headed for $1 trillion market cap?
[1/3/05] How does Google make money?
[11/14/04] Is Google bringing back the bubble?
Sunday, December 18, 2005
Socially Responsible Investing
[12/23/05] Socially responsible investing (SRI) is a growing trend among investors.
[12/18/05] Fools duel.
[12/18/05] Fools duel.
Richard Rainwater
Rainwater is no crackpot. But you don't get to be a multibillionaire investor—one who's more than doubled his net worth in a decade—through incremental gains on little stock trades. You have to push way past conventional thinking, test the boundaries of chaos, see events in a bigger context. You have to look at all the scenarios, from "A to friggin' Z," as he says, and not be afraid to focus on Z.
[discussed at chucks_angels]
[discussed at chucks_angels]
Saturday, December 17, 2005
To GAAP or not to GAAP
Thursday, December 15, 2005
10 Comeback Kid Stocks for 2006
Harry Domash picks 10 Comeback Kids stocks for 2006.
The stocks are
The stocks are
Company/Symbol Recent price* Industry 52-week price change
Symantec (SYMC) 17.99 Software -46.0%
Ford Motor (F) 8.53 Auto Mfg. -41.6%
General Motors (GM) 23.00 Auto Mfg. -39.8%
Fannie Mae (FNM) 49.43 Credit Services -31.4%
Avon Products (AVP) 27.49 Personal Products -30.1%
Biogen Idec (BIIB) 43.03 Biotech -29.5%
Dell (DELL) 30.42 Personal Computers -27.4%
Zimmer Holdings (ZMH) 62.50 Medical Appliances & Equip. -25.2%
Gannett (GCI) 61.49 Newspaper Publishers -25.0%
Boston Scientific (BSX) 26.45 Medical Equipment -23.7%
*As of Nov. 11, 2005
Thursday, December 08, 2005
Off-The-Wall Investments
You win some, you lose some -- nine off-the-wall investments that paid off, and four that flopped.
NEW YORK (FORTUNE) - They all laughed when Jefferson bought half the continent from France. Alaska was called "Seward's folly." Other "crazy" investments have worked out fine, too. But some oddball bets fell flat.
One of the surprising losers in our gallery is Warren Buffett, and there's a host of other investors profiled, both winners (the entrepreneur who bought the formula for a weird brown health drink called Coca-Cola) and losers (remember Webvan?).
-- from InvestorGuide (but I had to hunt down the URLs)
NEW YORK (FORTUNE) - They all laughed when Jefferson bought half the continent from France. Alaska was called "Seward's folly." Other "crazy" investments have worked out fine, too. But some oddball bets fell flat.
One of the surprising losers in our gallery is Warren Buffett, and there's a host of other investors profiled, both winners (the entrepreneur who bought the formula for a weird brown health drink called Coca-Cola) and losers (remember Webvan?).
-- from InvestorGuide (but I had to hunt down the URLs)
Wednesday, December 07, 2005
The Different Kinds of Companies
The fool.com describes the different kinds of companies in this primer.
Peter Lynch places companies into one of six general companies: slow growers, stalwarts, fast growers, cyclicals, asset plays, and turnarounds.
I see that this Lynch page is on the web page of Peter A. Ammermann, Assistant Professor of Finance at Long Beach State. The content though was written by Maria Scott Crawford for the AAII Journal (she is or was the editor of the Journal). She also wrote an overview of Philip Fisher.
In your reading, you'll run across many terms used to describe different kinds of companies. Here are some of the most common ones:
"Cyclical" companies are defined by how their businesses react to economic change. During recessions, people spend money more conservatively, putting off major purchases such as cars and refrigerators. Thus, manufacturers of large appliances are cyclical. Companies such as pharmaceutical firms that aren't so affected are "defensive." If you're taking heart medication, you're not going to stop because of an economic downturn.
"Seasonal" companies experience significantly different levels of business at various times of the year. Department stores, for example, see sales surge during the Christmas season. Swimming pool companies operate mainly in the summer.
"Blue chip" companies have been around a long time and are known for being solid, relatively safe investments. They're steady growers, usually paying dividends. Examples: General Electric, ExxonMobil, Johnson & Johnson. At the other end of the spectrum are "speculative" stocks, typically tied to young, relatively unknown and risky companies. Many promise great things but have yet to prove themselves. Examples include gold mines or companies trying to develop cures for cancer.
"Growth" stocks, favored by aggressive investors, grow faster than the market average. They often don't pay any dividends, using their cash to continue growing. Their stock prices often go up -- and down -- quickly. Some examples: Amazon.com, eBay. (Railroad and telegraph businesses were growth companies once -- fortunes change over time.)
"Value" stocks are favored by investors looking to buy the proverbial dollar for 50 cents. They seek promising companies that are out of favor.
"Income" stocks may not grow too quickly, but they pay fat dividends. In pre-deregulation days, utility companies reliably paid high dividends. Today many real estate companies do. Income stocks are often favored by those in or near retirement, who rely on the dividends to supplement pensions or savings.
Note that many companies will fit into several categories, and savvy investors will often seek firms with several characteristics, such as those that are both growing and valued attractively.
Peter Lynch places companies into one of six general companies: slow growers, stalwarts, fast growers, cyclicals, asset plays, and turnarounds.
- Slow Growers: Large and aging companies expected to grow only slightly faster than the U.S. economy as a whole, but often paying large regular dividends. These are not among his favorites.
- Stalwarts: Large companies that are still able to grow, with annual earnings growth rates of around 10% to 12%; examples include Coca-Cola, Procter & Gamble, and Bristol-Myers. If purchased at a good price, Lynch says he expects good but not enormous returns--certainly no more than 50% in two years and possibly less. Lynch suggests rotating among the companies, selling when moderate gains are reached, and repeating the process with others that haven’t yet appreciated. These firms also offer downside protection during recessions.
- Fast-Growers: Small, aggressive new firms with annual earnings growth of 20% to 25% a year. These do not have to be in fast-growing industries, and in fact Lynch prefers those that are not. Fast-growers are among Lynch’s favorites, and he says that an investor’s biggest gains will come from this type of stock. However, they also carry considerable risk.
- Cyclicals: Companies in which sales and profits tend to rise and fall in somewhat predictable patterns based on the economic cycle; examples include companies in the auto industry, airlines and steel. Lynch warns that these firms can be mistaken for stalwarts by inexperienced investors, but share prices of cyclicals can drop dramatically during hard times. Thus, timing is crucial when investing in these firms, and Lynch says that investors must learn to detect the early signs that business is starting to turn down.
- Turnarounds: Companies that have been battered down or depressed--Lynch calls these "no-growers"; his examples include Chrysler, Penn Central and General Public Utilities (owner of Three Mile Island). The stocks of successful turnarounds can move back up quickly, and Lynch points out that of all the categories, these upturns are least related to the general market.
- Asset opportunities: Companies that have assets that Wall Street analysts and others have overlooked. Lynch points to several general areas where asset plays can often be found--metals and oil, newspapers and TV stations, and patented drugs. However, finding these hidden assets requires a real working knowledge of the company that owns the assets, and Lynch points out that within this category, the "local" edge--your own knowledge and experience--can be used to greatest advantage.
I see that this Lynch page is on the web page of Peter A. Ammermann, Assistant Professor of Finance at Long Beach State. The content though was written by Maria Scott Crawford for the AAII Journal (she is or was the editor of the Journal). She also wrote an overview of Philip Fisher.
Monday, December 05, 2005
BlogShares
Hey, I see this blog is currently worth B$2,353,43 (whatever that B means) at blogshares. Not bad. Then again it was worth B$7,467.48 on November 15.
Seven Sins of Stock Picking
As the market bounces back and forth between heaven and heck, and fortunes are wagered on a wing and a prayer, it's a good time to check out the seven sins of stock picking, behaviors that can put a serious crimp in your upcoming earthly reward.
Friday, December 02, 2005
Lousy Offices, Great Investments
Bill Barker (TMF Lazarus) writes about Peter's Principle No. 7:
Golden West (I owned this stock back in the 1990s - looking at the chart now, I should have held on to it!) came to mine when I (re)read the above principle. Looking it up, I see it was actually mentioned in a different chapter of that same book (chapter 11).
The extravagance of any corporate office is directly proportional to management's reluctance to reward shareholders.Looking it up, I see that Principle is from Peter Lynch's book Beating The Street which discusses 20 Golden Rules as well as 21 Principles
Golden West (I owned this stock back in the 1990s - looking at the chart now, I should have held on to it!) came to mine when I (re)read the above principle. Looking it up, I see it was actually mentioned in a different chapter of that same book (chapter 11).
At Golden West Financial in California, a champion of productive penny-pinching and the lowest-cost operator in the S&L business, the role of the receptionist was taken over by an old-fashioned black telephone and a sign that said, "Pick up."
Morningstar Fund Analyst Picks
Morningstar analysts are a very serious and committed group of investors. "While we each have our individual biases, more often than not, we agree about what makes a fund a good one. As such, a regular feature on Morningstar.com has been our Fund Analyst Picks, which represent our best ideas on a category-by-category basis."
So, what exactly does Morningstar look for in a Fund Analyst Pick?
In summary,
So, what exactly does Morningstar look for in a Fund Analyst Pick?
In summary,
- Consistent, Thoughtful Strategies
- Experienced, Successful Management
- Low Expenses
- Good Stewards
- Other Considerations
Gold Band
From Richard Band's Journal, December 1, 2005.
* * *
[12/8/05] On the other hand, toddfinances over at chuck_angels thinks gold is likely to see 4 digits.
* * *
[12/11/05] Patrick Heller (I believe it's him writing anyway) says "in my judgment, there is little potential for a significant decline of 10% or more in gold and silver prices. There is a good possibility that we have already started the massive jump in precious metal prices similar to what we experienced in 1979-1980." He further makes the "mute"d forecast.
Gold: I think there is a 75% probability that gold will reach $600 by the end of 2006, a 50% chance that it will top $700, and a 25% chance that it could reach $1000. Even though these numbers might seem fantastic, I believe I am being conservative.
Silver: I expect silver to reach $10.00 by the end of March 2006. I give it a 75% chance that it will reach $15 by year end, and a one-third chance that it will pass $20.
As of November 30, the price for gold was $494.50 and the price for silver was $8.28. (This is from Liberty's Outlook, Liberty Coin Service's Monthly Review of Precious Metals and Numismatics where Heller is the Editor. I see that it's volume 11, issue 12. So by my calculations, that would make 132 issues that they have been bullish.)
Golden CrestBand's report reminds me of Andrew Tobias' story of his 5000 silver dimes in his book Money Angles. (I knew it sounded familiar.) Tobias alludes to the story in a 2000 column.
Thu, 01 Dec 2005 17:17:30 ET
I don't often darken the door of a coin dealer's shop -- only when I'm selling. (I do most of my buying through the mail.) This afternoon, I saw on the Net that gold was trading at an 18-year high, just over $500 an ounce. That was Mozart to my ears. So I hopped in the old van and drove as fast as I could to a shop 45 minutes away. It was time to unload most of my cache of gold coins.
Am I nuts? The dealer probably thought so. After I sat down in his disheveled office and he began examining my Double Eagles, he advised me, in a low but firm voice, to keep my coins. 'Chances are, the price of gold will be higher a year from now,' says he.
I loved it. Indeed, I was hoping the dealer would try to dissuade me from selling. That's exactly the psychology that prevails at every major market top. Did your stockbroker tell you to sell your NASDAQ darlings in March 2000? At the top, the promoters will always try to stop you from selling.
My thoughts ran back to my last visit to a coin dealer's, in April 1987. At the time, silver was at the top of a roaring bull market -- and I wanted to dump my silver dollars. (They've never fetched anywhere near the same prices since.)
I sat down and the dealer picked up the phone to call his wholesaler for a quote. 'Well, what did he say?' I asked. 'Biggest demand for silver dollars since January 1980. Everybody's buying.'
I stifled a smile. January 1980? That was the manic top, when silver hit $50 an ounce. (Even today, 25 years after that peak, silver is down 80%.)
'Sure you still want to sell?' he asked. 'Yep.'
Gold could certainly gain another $10-$20 from here without disturbing me in the least. I'm focusing on the next $100-$150 move, which I expect will be down. In 2006, the Federal Reserve's tight-money policy will bite a wide range of markets -- and the ones that will fall hardest are those (like gold) that have benefited the most from the easy money of the past few years.
If you own gold or gold-mining shares, don't waste a lot of time celebrating your good fortune. History shows that the great selling opportunities in hard assets slip away quickly, with little or no warning. Consider yourself forewarned!
* * *
[12/8/05] On the other hand, toddfinances over at chuck_angels thinks gold is likely to see 4 digits.
* * *
[12/11/05] Patrick Heller (I believe it's him writing anyway) says "in my judgment, there is little potential for a significant decline of 10% or more in gold and silver prices. There is a good possibility that we have already started the massive jump in precious metal prices similar to what we experienced in 1979-1980." He further makes the "mute"d forecast.
Gold: I think there is a 75% probability that gold will reach $600 by the end of 2006, a 50% chance that it will top $700, and a 25% chance that it could reach $1000. Even though these numbers might seem fantastic, I believe I am being conservative.
Silver: I expect silver to reach $10.00 by the end of March 2006. I give it a 75% chance that it will reach $15 by year end, and a one-third chance that it will pass $20.
As of November 30, the price for gold was $494.50 and the price for silver was $8.28. (This is from Liberty's Outlook, Liberty Coin Service's Monthly Review of Precious Metals and Numismatics where Heller is the Editor. I see that it's volume 11, issue 12. So by my calculations, that would make 132 issues that they have been bullish.)
VectorVest Special Reports
VectorVest reports by Dr. Bart DiLiddo
Feb 07 - Bottom Fishing: The Art Of Buying Low and Selling High
Dec 05 - Five Stock Market Myths
Sep 05 - Timing: The Ultimate Weapon
Aug 05 - Earnings Growth: The Golden Touch
Jul 05 - Timing: The Ultimate Weapon
Jul 05 - Beating the Odds (VectorVest and market timing)
Jun 05 - How To Pick Stocks (buy undervalued, safe stocks that are going up)
Jun 05 - Stock Valuation and Stock Market Cycles
Jun 05 - Stock Safety: The Missing Link
May 05 - High Growth vs. Low P/E Stocks
And more
[originally posted 6/16/05?]
Feb 07 - Bottom Fishing: The Art Of Buying Low and Selling High
Dec 05 - Five Stock Market Myths
Sep 05 - Timing: The Ultimate Weapon
Aug 05 - Earnings Growth: The Golden Touch
Jul 05 - Timing: The Ultimate Weapon
Jul 05 - Beating the Odds (VectorVest and market timing)
Jun 05 - How To Pick Stocks (buy undervalued, safe stocks that are going up)
Jun 05 - Stock Valuation and Stock Market Cycles
Jun 05 - Stock Safety: The Missing Link
May 05 - High Growth vs. Low P/E Stocks
And more
[originally posted 6/16/05?]
Monday, November 28, 2005
2005 Year-End Rally?
Here's how Goldman Sachs compares 2005 with 2004's year-end rally.
Similarities with 2004: (1) Seasonal Pattern: in 2004 SPX was FLAT through October 22nd and then rallied 11% to finish the year up 11%. In 2005, market was flat through October 27th and has now rallied almost 8%. (2) Sector Leadership: The 2004 rally was led by Materials (+13%) and Consumer Discretionary (+13%), the same leaders as in 2005. Financials, Health Care, Industrials were up 12% with Technology up 11%.
Differences: Breadth. The 2004 year-end rally was consistent across the market with ALL TEN sectors rallying. 8 of the 10 sectors rallied between 10% and 13%. Weakest rally was in Telecom (+7%) and Consumer Staples (+8%). HOWEVER, we have had more dispersion in the 2005 rally with Utilities (-4%) and Consumer Staples (-4%) down last month. Looking Ahead: We recommend investors overweight Energy, Technology, Industrials and Health Care, avoid Financials and the Consumer.
Thursday, November 24, 2005
Buy Low
[7/31/06] Seth Klarman's 1991 work, Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor, came and went without much notice at the time and is long out of print. Klarman holds the copyright but has never revised or even reprinted it.
Still, over the past few years this work has taken on iconic stature among value investors. Originally listed at $25, the title trades for top prices on the used-book market. About a half-dozen copies are for sale online: The best deal is $700 from a seller at Amazon.com (AMZN ). Another vendor offers it for nearly $2,500.
Since Klarman and his book are hard to come by, here's a quick summary. The term "margin of safety" refers to the cushioning, or wiggle room, that investors should build into what they pay for a security. He doesn't claim to have invented the term, which comes from Graham & Dodd. "How can investors be certain of achieving a margin of safety?" writes Klarman. "By always buying at a significant discount to underlying business value, and giving preference to tangible assets over intangibles....By replacing current holdings as better bargains come along. By selling when the market price of an investment comes to reflect its underlying value and by holding cash, if necessary, until other attractive investments become available."
Although definitions of "underlying value" abound, Klarman's interpretation opts for a more no-nonsense view that's shorn of intangible assets such as goodwill. "Since investors cannot predict when values will rise or fall," he writes, "valuation should always be performed conservatively, giving considerable weight to worst-case liquidation value as well as to other methods."
[12/5/05] Perhaps more accurate than 'buy low' is 'buy cheap'. [Seth] Klarman has identified a new class of investor he has termed value pretenders ... "These investors apply a dip strategy. They buy what's down, not what's cheap."
[11/24/05] Finding a great idea is fantastic. It's also very difficult. Harder still is waiting for your great idea to play out. The market sometimes makes your great ideas seem, well, not so great. In 2001, both McDonald's (NYSE: MCD) and Home Depot (NYSE: HD) were mauled -- the stock market simply abandoned them to the inevitability that their competitive dominance had waned. That turned out to be a pretty massive mistake; folks who bought these two stalwarts have seen their stocks triple and double, respectively. For some of us though -- those of us who already owned one or both of these stocks -- the drops in these share prices should have caused us to tremble with greed. As an owner, you have that advantage. You can act when your company is unfairly or irrationally thrown out with the trash.
Still, over the past few years this work has taken on iconic stature among value investors. Originally listed at $25, the title trades for top prices on the used-book market. About a half-dozen copies are for sale online: The best deal is $700 from a seller at Amazon.com (AMZN ). Another vendor offers it for nearly $2,500.
Since Klarman and his book are hard to come by, here's a quick summary. The term "margin of safety" refers to the cushioning, or wiggle room, that investors should build into what they pay for a security. He doesn't claim to have invented the term, which comes from Graham & Dodd. "How can investors be certain of achieving a margin of safety?" writes Klarman. "By always buying at a significant discount to underlying business value, and giving preference to tangible assets over intangibles....By replacing current holdings as better bargains come along. By selling when the market price of an investment comes to reflect its underlying value and by holding cash, if necessary, until other attractive investments become available."
Although definitions of "underlying value" abound, Klarman's interpretation opts for a more no-nonsense view that's shorn of intangible assets such as goodwill. "Since investors cannot predict when values will rise or fall," he writes, "valuation should always be performed conservatively, giving considerable weight to worst-case liquidation value as well as to other methods."
[12/5/05] Perhaps more accurate than 'buy low' is 'buy cheap'. [Seth] Klarman has identified a new class of investor he has termed value pretenders ... "These investors apply a dip strategy. They buy what's down, not what's cheap."
[11/24/05] Finding a great idea is fantastic. It's also very difficult. Harder still is waiting for your great idea to play out. The market sometimes makes your great ideas seem, well, not so great. In 2001, both McDonald's (NYSE: MCD) and Home Depot (NYSE: HD) were mauled -- the stock market simply abandoned them to the inevitability that their competitive dominance had waned. That turned out to be a pretty massive mistake; folks who bought these two stalwarts have seen their stocks triple and double, respectively. For some of us though -- those of us who already owned one or both of these stocks -- the drops in these share prices should have caused us to tremble with greed. As an owner, you have that advantage. You can act when your company is unfairly or irrationally thrown out with the trash.
Wednesday, November 23, 2005
Five Stocks They Love
During the summer, [the Motley Fool] ran our "A Stock I'd Love to Own" contest. The rules were simple. Participants were asked to submit a short report about a great business they would hold for at least 10 years, a money-making machine that would be likely to grow and provide huge profits for years to come. Valuation didn't matter -- we were looking for superior businesses that subscribers could add to a watch list and purchase if they ever reached an attractive price. The five most compelling arguments received prizes.
The winner of the contest was Canadian Natural Resources (CNQ). Unfortunately they don't mention the other four prize winners and instead (somewhat misleadingly) list the top performers of the (approximately 40) contest entries. They were
Life Time Fitness (LTM)
J2 Global Communications (JCOM)
Expeditors International (EXPD)
Iron Mountain (IRM)
Google (GOOG)
It would be interesting to look back five years from now how well these stocks perform.
The winner of the contest was Canadian Natural Resources (CNQ). Unfortunately they don't mention the other four prize winners and instead (somewhat misleadingly) list the top performers of the (approximately 40) contest entries. They were
Life Time Fitness (LTM)
J2 Global Communications (JCOM)
Expeditors International (EXPD)
Iron Mountain (IRM)
Google (GOOG)
It would be interesting to look back five years from now how well these stocks perform.
Tuesday, November 22, 2005
sustainable competitive advantage (moats)
[7/16/13] Morningstar mentions five main ways a company can carve out an economic moat
[4/1/09] Finding a company to hold forever
[1/18/08] four sources of sustaininable competitive advantage
[11/5/07] If a business can sell goods or services for more than it must pay to provide or produce them, it makes a profit. However, pricing power comes in many different shapes and forms, so let's take a look at some key questions to ask.
[2/26/07] Three different types of moats
[7/13/06] Michael Mauboussin talks about competitive advantage
[7/3/06] Morningstar takes a look at the relationship between moats and risk
[5/5/06] How to identify competitive advantages
[4/5/06] If you could ask only one question about a company before deciding whether to invest in it, what would it be?
[12/21/05] brknews reports that shai reports that Buffett and Pat Dorsey wrote about moats.
[11/22/05] it's easy to point to the incredible stocks of the past 15 years, but it's much harder to find the huge performers of the next 15 years. But history can still help, because what all these businesses have in common is that they really aren't run-of-the-mill companies. All of them are fantastic businesses that obliterate weaker competitors.
[11/6/05] Do numbers matter? Yes, but so do the intangibles says Nathan Slaughters. (I'd probably say, though, that the intangibles are largely reflected in the numbers.)
[10/5/05] Can small companies have moats?
[1/9/05] The best investors say they look for businesses with a competitive advantage, referring to them as moats. Here are some of those businesses.
[4/1/09] Finding a company to hold forever
[1/18/08] four sources of sustaininable competitive advantage
[11/5/07] If a business can sell goods or services for more than it must pay to provide or produce them, it makes a profit. However, pricing power comes in many different shapes and forms, so let's take a look at some key questions to ask.
[2/26/07] Three different types of moats
[7/13/06] Michael Mauboussin talks about competitive advantage
[7/3/06] Morningstar takes a look at the relationship between moats and risk
[5/5/06] How to identify competitive advantages
[4/5/06] If you could ask only one question about a company before deciding whether to invest in it, what would it be?
[12/21/05] brknews reports that shai reports that Buffett and Pat Dorsey wrote about moats.
[11/22/05] it's easy to point to the incredible stocks of the past 15 years, but it's much harder to find the huge performers of the next 15 years. But history can still help, because what all these businesses have in common is that they really aren't run-of-the-mill companies. All of them are fantastic businesses that obliterate weaker competitors.
[11/6/05] Do numbers matter? Yes, but so do the intangibles says Nathan Slaughters. (I'd probably say, though, that the intangibles are largely reflected in the numbers.)
[10/5/05] Can small companies have moats?
[1/9/05] The best investors say they look for businesses with a competitive advantage, referring to them as moats. Here are some of those businesses.
Wealth Creation
There is an interesting philosophical discussion on the topic of accumulating wealth over at chucks_angels. knead_ansur started it off this way
I am the first generation in my family that ever made any money. I
have come to the realization that putting 10-15% per year in a
diversified mutual fund is NOT the way to create real wealth. I
have always made good money and have always saved 10-20%. I have a
nice litte nest egg, but certainly not anything approaching FckU-
money (where if you want to you can go into your boss and say FckU-I-
QUIT). I want to pass on some advise to my kids and would
appreciate any thoughts on the subject.
Here is what I have observed
I am the first generation in my family that ever made any money. I
have come to the realization that putting 10-15% per year in a
diversified mutual fund is NOT the way to create real wealth. I
have always made good money and have always saved 10-20%. I have a
nice litte nest egg, but certainly not anything approaching FckU-
money (where if you want to you can go into your boss and say FckU-I-
QUIT). I want to pass on some advise to my kids and would
appreciate any thoughts on the subject.
Here is what I have observed
- Real Estate - I never made any money in real estate (I moved around too much). One path to riches seems to be real estate; or
- Start your own business; or
- Make large bets on a small group of undervalued stocks (rather than holding a diversified portfolio).
- I read Rich Dad/Poor Dad. The guy had some good ideas, but he seemed like some what of a flim-flam man to me. He did emphasize the "tax trap" of working for someone else. I almost think I should invest in some small business (car washes or something), just to have some company that I can pass onto my kids so they can make
other investments from it.
Reversal of Fortune
Mauldin relays this essay by Ed Easterling who writes about a study by Dreman and Lufkin. The work, entitled Investor Overreaction: Evidence That Its Basis is Psychological," is an analysis of investor behavior that illustrates that perceptions are more important than the fundamentals.
Dreman and Lufkin look at a database for 4,721 companies from 1973 through 1998. Each year, they divide the database up into five parts, or quintiles, based on the companies' perceived market valuations. They separately study price to book value (P/BV), price to cash flow (P/CF), and the traditional price to earnings (P/E). This creates three separate ways to analyze stocks by value for any given year so as to remove the bias that might occur from using just one measure of valuation.
The results? Almost immediately upon creating the portfolio, the price performance comparisons change, and change dramatically. The in-favor stocks underperform the market for the next five years, and the out-of-favor (value) stocks outperform the market.
How much better did the well-performing stocks do than the poorly performing stocks in the 10 years prior to creating the portfolios? The highest P/BV (price to book value) stocks outperformed the market by 187 percent. The lowest stocks underperformed the market by -79 percent for a differential of 266 percent! If you look at the P/CF (price to cash flow), the differential between the two is 172 percent.
Yet in the next five years, the hot stocks underperformed the market by -26 percent on a P/BV basis and -30 percent on a P/CF basis. The out-of-favor stocks did 33 percent and 22 percent better than the market, respectively. This is a huge reversal of trend.
Much more in the article.
Dreman and Lufkin look at a database for 4,721 companies from 1973 through 1998. Each year, they divide the database up into five parts, or quintiles, based on the companies' perceived market valuations. They separately study price to book value (P/BV), price to cash flow (P/CF), and the traditional price to earnings (P/E). This creates three separate ways to analyze stocks by value for any given year so as to remove the bias that might occur from using just one measure of valuation.
The results? Almost immediately upon creating the portfolio, the price performance comparisons change, and change dramatically. The in-favor stocks underperform the market for the next five years, and the out-of-favor (value) stocks outperform the market.
How much better did the well-performing stocks do than the poorly performing stocks in the 10 years prior to creating the portfolios? The highest P/BV (price to book value) stocks outperformed the market by 187 percent. The lowest stocks underperformed the market by -79 percent for a differential of 266 percent! If you look at the P/CF (price to cash flow), the differential between the two is 172 percent.
Yet in the next five years, the hot stocks underperformed the market by -26 percent on a P/BV basis and -30 percent on a P/CF basis. The out-of-favor stocks did 33 percent and 22 percent better than the market, respectively. This is a huge reversal of trend.
Much more in the article.
Monday, November 21, 2005
Eight Tips from Morningstar
[Paul Larson writes] I had the pleasure of being the lead writer and editor of three just-published Morningstar books on stocks--How to Get Started in Stocks for beginners, How to Select Winning Stocks for those looking to dig into individual companies, and How to Refine Your Stock Strategy for those who've been running their own portfolios for a while. In the course of writing some of the chapters for these books, I came up with a list of stock-investing tips that boils down our collective experience and insights here at Morningstar. Here are some of those tips. Whether you're a beginning or seasoned investor, these tips and commentary can provide a useful framework for your investing strategy.
-- relayed by Russ (value_investment_thoughts)
-- relayed by Russ (value_investment_thoughts)
America imports, Asia exports
Bob Miller is an American importer. Scott Hong is an Asian exporter. Together they epitomize an enormous imbalance in the global economy, in which the United States imports, consumes and borrows while Asian nations export, save and lend.
-- from Investorguide Daily, 11/21/05
-- from Investorguide Daily, 11/21/05
Wednesday, November 16, 2005
Rules of Speculation
Says Doug Casey, "There are certain rules that will likely be just as good in the future as they have been in the past because they're based on human nature, and that hasn't changed much over the thousands of years. I've listed five signals that should be present before you enter a market. You may never find a situation where they're all there, but the more that are, the more the odds are tilted in your favor."
Casey's five signals are
* * *
[1/6/06] Isn't buying stocks gambling?
Casey's five signals are
- A Climactic Bottom
- Period of Accumulation
- Relatively Low Bottom
- Historically Low Prices
- Pessimism in the Market
* * *
[1/6/06] Isn't buying stocks gambling?
Selena Maranjian's stock picks
[11/28/05] Selena presented six more stocks a week later. Here were the picks.
* * *
[11/16/05] Is Selena a stock picking genius?
Here's the list with the prices (Yahoo's adjusted close) in March (when the article was written) and now.
So one up (IRM) and the rest haven't moved much. So I guess that's pretty good for a flat market. But, of course, eight months is probably not enough time.
MDT 52 56I didn't want to look up the exact prices, so the above are just eyeballed from the chart.
PAYX 32 42
PEP 52 60
PG 52 57
SYY 33 33
WWY 64 69
SPX 1175 1255
* * *
[11/16/05] Is Selena a stock picking genius?
Here's the list with the prices (Yahoo's adjusted close) in March (when the article was written) and now.
BUD 46.71 43.13
KO 41.94 42.14
FDC 40.77 41.36
GIS 51.52 47.84
IRM 30.75 43.77
JNJ 66.92 63.25
SPX 1200 1231
So one up (IRM) and the rest haven't moved much. So I guess that's pretty good for a flat market. But, of course, eight months is probably not enough time.
Saturday, November 12, 2005
Why Do Stocks Get Cheap?
[11/12/05] What causes stocks to become cheap?
This is one of the most fascinating questions about the stock market. With literally millions of investors scanning the market for opportunities, a near-instantaneous flow of information, and financial reporting better than ever, how is it that stocks can become mispriced with such regularity?
[11/16/05] Profit from Panic: investing in turnarounds
This is one of the most fascinating questions about the stock market. With literally millions of investors scanning the market for opportunities, a near-instantaneous flow of information, and financial reporting better than ever, how is it that stocks can become mispriced with such regularity?
[11/16/05] Profit from Panic: investing in turnarounds
Tuesday, November 08, 2005
time horizon (long-term vs. short-term thinking)
[11/8/05] What does sailboat racing have to do with investing?
[11/7/05] As the head of Berkshire Hathaway, master investor Warren Buffett has said that he expects to "keep permanently our primary holdings." Buffett has never sold a share of Berkshire Hathaway, and he says his performance would have been even better than 21.9% if he'd never sold a single share of any of his investments.
[10/30/05] One of the toughest lessons to learn as a value investor is how often it is absolutely critical to do nothing but sit and wait.
[10/28/05] How long should you wait?
[10/25/05] Admonitions to listen to and emulate the masters by having a long-term focus are everywhere. Warren Buffett has advised investors to act as if their investing careers were limited to a lifetime decision card with just 20 punches on it, and has expounded that Berkshire Hathaway makes investments in businesses, caring not a whit if the market closed for 10 years.
[4/23/05] Ron Baron writes about the Baron Funds time horizon in investing:
In the March 2004 quarterly report, Baron talks about investing in bull markets:
[11/7/05] As the head of Berkshire Hathaway, master investor Warren Buffett has said that he expects to "keep permanently our primary holdings." Buffett has never sold a share of Berkshire Hathaway, and he says his performance would have been even better than 21.9% if he'd never sold a single share of any of his investments.
[10/30/05] One of the toughest lessons to learn as a value investor is how often it is absolutely critical to do nothing but sit and wait.
[10/28/05] How long should you wait?
[10/25/05] Admonitions to listen to and emulate the masters by having a long-term focus are everywhere. Warren Buffett has advised investors to act as if their investing careers were limited to a lifetime decision card with just 20 punches on it, and has expounded that Berkshire Hathaway makes investments in businesses, caring not a whit if the market closed for 10 years.
[4/23/05] Ron Baron writes about the Baron Funds time horizon in investing:
‘‘Don’t gamble. Buy some good stock and hold it til it goes up, then sell it. If it don’t go up, don’t buy it.’’ Will Rogers. 1930.
Humorist Will Rogers was ahead of his time with his 1930 market advice which, on reflection, seems to have provided the ‘‘momentum’’ traders of today with their philosophical raison d’etre, i.e., it’s not a big leap, we think, from Will Rogers’ stratagems to buying stocks while they are going up and selling them short while they are falling, a momentum traders’ credo.
But how, in momentum, news reactive, efficient markets, when everyone has access to the same information at the same time, compliments of the Internet, do we think we can purchase growth stocks at attractive prices?
We think it’s principally because we have a different time horizon than most investors. We don’t make investment decisions based upon whether next quarters’ earnings will beat or miss estimates; a contract has been awarded or denied; a drug approved or denied; or monthly same store sales will ‘‘surprise.’’ We’re trying to invest in businesses that we believe have opportunities to grow substantially over the long term and which are often currently investing in their own businesses to achieve that growth. Business capital investments intended to achieve long term growth usually do not produce immediate earnings. In fact, such expenditures usually penalize current earnings and therefore may negatively impact current stock prices. As a result, we often, despite Will Rogers’ exhortations, buy stocks that are falling
or have fallen in price. Many of which have become our most successful investments.
Our strategy, of course, has not always been successful since at times what we have judged to be short term interruptions in growth have proven to be long term problems, or worse, management deficiencies.
In the March 2004 quarterly report, Baron talks about investing in bull markets:
But, how do we find value in a bull market like the one that began in October 2002? We think by identifying trends and ideas that offer businesses significant growth opportunities before most other investors recognize and value those opportunities. By doing our own research, not relying upon others’ advice and
recommendations, and by having a long time horizon we think our shareholders will have a chance to invest in businesses at what we believe are attractive prices and benefit if those businesses grow significantly.
We invest in businesses that we think can benefit from long lasting ‘‘mega-trends’’ like proprietary schools in a technology-based society that provide secondary education which allows you to get and keep your job. Healthcare providers in an aging society when it is obvious that the older you get, the more care you’ll need. Security services in a society afraid of not just terror, but of fraud and criminal behavior. Businesses we think have longer term sustainable competitive advantages that can benefit from the Internet and other scientific advances. Differentiated entertainment for our increasingly affluent society.
These themes are just a few of the growth opportunities we’ve identified and in which we’re trying to invest for the long term.
In addition, we believe long term investors are given many opportunities every year, even during ‘‘normal’’ times, to buy and sell stocks at attractive prices when traders react to short term, unexpected news events which, for the most part are not predictable and are of little, lasting consequence to businesses. We think the terror-induced decline in mid-March is on point.
Sunday, November 06, 2005
Just One Thing (by John Mauldin)
John Mauldin has come out with a new book, entitled Just One Thing. Mauldin asked eleven of his high brow friends to write a chapter on the one best idea they have learned about investing.
It sounds like an interesting read, but I can't really recommend (or not recommend) it because I haven't read it.
It sounds like an interesting read, but I can't really recommend (or not recommend) it because I haven't read it.
Saturday, November 05, 2005
poker and investing
[1/30/07] I want to make money in the stock market (and not be the sucker), and you probably do, too. So how can we do it? By following some simple rules great poker players use to maximize their winnings:
1. Play more hands when the odds are in your favor and less when the odds are not.
2. Bet big when the odds are in your favor.
[1/16/06] poker tips can be applied to investing
The goal in poker is relatively straightforward. It's not about how many pots you win. It's about making good investments [starbulletin, 10/2/05]
1. Play more hands when the odds are in your favor and less when the odds are not.
2. Bet big when the odds are in your favor.
[1/16/06] poker tips can be applied to investing
The goal in poker is relatively straightforward. It's not about how many pots you win. It's about making good investments [starbulletin, 10/2/05]
Tuesday, November 01, 2005
Bull or Bear?
11/01/05 - Bull: Arne Alsin predicts Dow 13000-15000 in two or three years
8/22/05 - Bear: Woody Dorsey
8/19/05 - Bear: A. Gary Shilling
8/22/05 - Bear: Woody Dorsey
8/19/05 - Bear: A. Gary Shilling
Sunday, October 30, 2005
Charter Communications
High debt? Big price drop? SEC investigation?
These could all signal buying opportunities. But in the case of Charter Communications, Tom Gardner and Rex Moore thought it was too much of a bad thing.
Weitz sold out the last of his shares before 6/30/05. This is one Wally got wrong. CHTR is currently at 1.20.
These could all signal buying opportunities. But in the case of Charter Communications, Tom Gardner and Rex Moore thought it was too much of a bad thing.
Weitz sold out the last of his shares before 6/30/05. This is one Wally got wrong. CHTR is currently at 1.20.
Saturday, October 29, 2005
Guru managers
The equities team at Morningstar is a group of stock junkies: We love investing, and we love to research and find great investment ideas. In my experience, stocks are the discussion topic of choice (since we're in Chicago, the White Sox have temporarily supplanted stocks, but hey, it's been 46 years!) as we chat around the office. We also enjoy discussing what our favorite money managers think about the market, and what stocks those managers are buying. Most of this information can be found easily, thanks to an excellent, free resource available to everyone: shareholder letters.
Among the funds are Baron Asset (Ron Baron), Clipper (James Gipson), FPA Capital (Robert Rodriguez), Legg Mason Value (Bill Miller), Longleaf (Mason Hawkins), Oak Value (David Carr), Oakmark Select (Bill Nygren), Olstein Financial Alert (Robert Olstein), Selected American Shares (Chris Davis), Sequoia (Goldfarb and Ruane), Third Avenue Value (Martin Whitman), Weitz Value (Wally Weitz). Coincidentally, many of these same managers are covered at gurufocus also.
Among the funds are Baron Asset (Ron Baron), Clipper (James Gipson), FPA Capital (Robert Rodriguez), Legg Mason Value (Bill Miller), Longleaf (Mason Hawkins), Oak Value (David Carr), Oakmark Select (Bill Nygren), Olstein Financial Alert (Robert Olstein), Selected American Shares (Chris Davis), Sequoia (Goldfarb and Ruane), Third Avenue Value (Martin Whitman), Weitz Value (Wally Weitz). Coincidentally, many of these same managers are covered at gurufocus also.
The best predictor of mutual fund performance
[10/28/05] According to an S&P study, the most consistently top-performing funds had three common characteristics: longer manager tenure, lower expense ratios, protected downside.
[8/8/05] the expense ratio isn't only the best predictor of performance, it is the only statistically reliable predictor, according to a study by Boston-based Financial Research Corp.
FRC tested 11 popular criteria that investors use in picking mutual funds: Morningstar ratings, past performance, turnover ratios, asset size, expense ratios, fund-manager tenure, net sales as well as four measures of risk/volatility.
The results showed that out of the 11 criteria, the expense ratio was the only one that had sufficient statistical relevance in predicting fund performance. Funds with low operating costs "deliver above-average future performance across nearly all time periods," the study says.
[8/8/05] the expense ratio isn't only the best predictor of performance, it is the only statistically reliable predictor, according to a study by Boston-based Financial Research Corp.
FRC tested 11 popular criteria that investors use in picking mutual funds: Morningstar ratings, past performance, turnover ratios, asset size, expense ratios, fund-manager tenure, net sales as well as four measures of risk/volatility.
The results showed that out of the 11 criteria, the expense ratio was the only one that had sufficient statistical relevance in predicting fund performance. Funds with low operating costs "deliver above-average future performance across nearly all time periods," the study says.
When to sell a stock
[3/7/06] The best reason to sell
[3/2/06] Seth Jayson chimes in with signs of a superior business that shouldn't be sold.
[2/28/06] I say again. Almost never.
[10/28/05] the only good strategic reason to ever sell a position: When the reason you bought it no longer holds true.
[3/30/05] Actually Philip Fisher gives three reasons
[3/18/05] Philip Fisher wrote "almost never"
[3/2/06] Seth Jayson chimes in with signs of a superior business that shouldn't be sold.
[2/28/06] I say again. Almost never.
[10/28/05] the only good strategic reason to ever sell a position: When the reason you bought it no longer holds true.
[3/30/05] Actually Philip Fisher gives three reasons
[3/18/05] Philip Fisher wrote "almost never"
Monday, October 24, 2005
Bernanke nominated as Greenspan's successor
President Bush on Monday nominated Ben Bernanke to succeed Federal Reserve Chairman Alan Greenspan, whose term is set to expire at the end of January. Bernanke, currently chairman of the president's Council of Economic Advisers and a former Fed governor, was widely considered one of the leading candidates for the job.
Friday, October 21, 2005
Lazy Investing
Seth Jason writes
A while back, I also suggested applying some strategic sloth to your stock picking. I was trying to find businesses that required very little babysitting, but better yet, had the potential to beat the market, not in spite of, but because of those same characteristics.Sounds good to me, (though I wouldn't have chosen the stocks that he chose).
Briefly put, I figure opportunity is in Wall Street's madness. As the rest of the Wise flit from next big thing to next big thing, trying to zig when the other guys are zagging, I thought we could do better by concentrating on solid, dependable business leaders that didn't require daily checkups or keep you up at night. The same characteristics that made these investments easy on the stomach should, I thought, make them superior performers over the long term.
Tuesday, October 18, 2005
Free Cash Flow
[9/9/05] The joy of free cash flow
Four cash-flow red flags
Forbes says free cash flow doesn't do justice to growth companies
Investopedia says free cash flow is a great gauge of corporate health but is not infallible
[10/5/05] Free cash flow is a great metric for measuring the cash profitability of a business over time. But it's possible to overestimate it if you don't pay careful attention to details. Nathan Parmelee walks through a few of the items he likes to check for when analyzing a company's free cash flow.
[10/18/05] If you ask 10 mathematically inclined Fools what a firm's free cash flow is, you're going to get 10 different answers
Four cash-flow red flags
Forbes says free cash flow doesn't do justice to growth companies
Investopedia says free cash flow is a great gauge of corporate health but is not infallible
[10/5/05] Free cash flow is a great metric for measuring the cash profitability of a business over time. But it's possible to overestimate it if you don't pay careful attention to details. Nathan Parmelee walks through a few of the items he likes to check for when analyzing a company's free cash flow.
[10/18/05] If you ask 10 mathematically inclined Fools what a firm's free cash flow is, you're going to get 10 different answers
The Price-To-Sale Ratio (and other ratios)
[11/16/05] Philip Durell (himself!) discusses the usage of the p/s ratio
[10/18/05] a look at the p/b (price-to-book) ratio
[1/13/05] I often prefer to use the p/s ratio instead of (or in addition to) the p/e ratio since earnings can fluctuate more than revenue.
Follow the links for more discussion of the p/s and p/e.
[10/18/05] a look at the p/b (price-to-book) ratio
[1/13/05] I often prefer to use the p/s ratio instead of (or in addition to) the p/e ratio since earnings can fluctuate more than revenue.
Follow the links for more discussion of the p/s and p/e.