STATISTICIAN GEORGE E.P. Box once made this observation: “All models are wrong,” he said, “but some are useful.” This certainly applies to finance, where many of the concepts are imperfect but can nonetheless still be useful. Below are four such examples.
Market valuation. Are stocks overpriced? It’s a question without an easy answer. Even academics who have studied the topic can never be entirely sure. Consider the cyclically adjusted price-earnings (CAPE) ratio.
LAST WEEK, I MENTIONED the 17th century Dutch tulip bubble. There’s a lot we can learn from history. Current events, however, can teach us just as much. Below are three valuable lessons I see in today’s market.
Myopia. Open any finance textbook, and you’ll find that most of its ideas are built on the notion of “present value.” This simply means an investment should be worth the sum of its future cash flows.
I’ve been investing since the early 1980s. I have a business degree and took investing classes. A close friend of my parents wrote the first investing book I read at age 10, called Stock Market ABC by Joanne K. Friedlander and Jean Neal, published in 1969 and given to me on my 10th birthday in April of that year. This started my interest in investing. I also have a background in technology, going back to 1982.
BITCOIN HIT A NEW high last week, topping $112,000. Over the past 12 months, it’s climbed an impressive 55%.
What’s driving this gain, and what should you make of it? I believe there are three key factors. Two are new. One is not.
The first factor was a policy change last year. The federal government approved the launch of new exchange-traded funds (ETFs) that offer easier and more direct access to bitcoin. Following this rule change,
I recently posted on the forum (thank you for the responses) about getting out of the market, but that wasn’t the full story….
We’ve been invested 100% in stocks for a number of years and have reaped the rewards, however, general anxiety and market fluctuations don’t mix. I hated giving up the gains by migrating to a 60/40 (I am a victim to recency bias) and after reading Gary Antonacci’s Dual Momentum, I thought I had found the solution to my quandary.
Every so often, markets go stark, raving mad. Think about the tech-stock bubble of the late 1990s or the real-estate market in 2005 and 2006. But most of the time, markets—which reflect the collective wisdom of all participants—are smarter than any one individual. For proof, look no further than the sorry track record of professional money managers.
That’s why I think it’s worth paying attention to how the stock, bond and currency markets react to news.
IF THE NAME LIZ TRUSS sounds vaguely familiar, there’s a reason: Truss was once the prime minister of the U.K.—but for just 45 days.
How did Truss lose public confidence so quickly? The bond market forced her out. Shortly after taking office in the fall of 2022, Truss proposed substantial tax cuts for both corporations and individuals. That would have been a popular move, except that her budget didn’t include any offsetting spending cuts.
Make no mistake: Stocks are expensive, with the companies in the S&P 500-index currently at 28 times trailing 12-month reported earnings, offering a dividend yield of just 1.3% and sporting a Shiller price-earnings ratio of 37. All three metrics suggest stocks are pricey by historical standards.
Meanwhile, with far less risk, investors can collect 4.5% in annual interest with 10-year Treasury notes and an inflation-adjusted 2.1% with 10-year inflation-indexed Treasurys. Alternatively, for those who favor cash investments,
Hypothetically, say you lost your nerve and pulled you money out of the market because you thought it was obvious the entire economy was ready to collapse due to incredibly high valuations for both stocks and real estate and finally implementing tariffs, only to witness the market quickly recover. How would you get back in?
I suppose this person (not me, of course, since I am a long term index investor) would be best served using a dollar cost average,
https://obliviousinvestor.com/the-value-of-a-second-opinion/
It’s been a topsy-turvy year in the financial markets. Has that prompted you to make any changes to your portfolio’s asset allocation? I’m thinking about four key dimensions:
Stocks vs. bonds vs. cash investments
U.S. stocks vs. foreign shares
Large-cap vs. small-cap stocks
Growth vs. value stocks
If you’ve tweaked your asset allocation, I’d love to know what changes you’ve made—and why.
FRENCH HISTORIAN Alexis de Tocqueville toured the U.S. in the 1830s and chronicled his observations in a book titled Democracy in America. What mainly impressed him was Americans’ focus on trade and commerce.
They have a “purely practical” mindset, he wrote, and concluded that “the position of the American is quite exceptional.” In the years since, others have picked up on this concept of “American exceptionalism.”
Despite recent political and economic crosscurrents,
IT’S BEEN AN UNUSUAL year—to say the least—for investment markets. After rising earlier in the year, U.S. stocks and bonds have dropped in recent weeks. Market leaders like Apple and Nvidia have been among the hardest hit. The U.S. dollar has also dropped, helping boost the value of international shares, and gold has continued to hit new all-time highs, despite inflation cooling.
What can we learn from all this? I see seven lessons.
1.
I’ve mentioned my dumb luck at having most of our money in cash, earning about 4% as of 4/1. My strategy is to dollar cost average back into the market between now and the end of the year. If you ask my reasoning on this, I’d just say that I don’t want to be late to the party that follows the end of trade war. I have begun the process with my IRA, and will soon start on Chris’s.
From looking at the forum posts, Most HD readers are calm and it seems not worried about the markets. I really don’t believe that because what has happened in the last week and a half has been unprecedented and there is no end in sight.
Without injecting politics into the discussion how are we HD readers going to handle the next 45 months of this turmoil that is caused by the whims of one man who doesn’t understand economics and no one else in his cabinet no matter how bright and successful somehow agreed to be a yes man.