Clippings

Recommended reading, economic debates, predictions and opinions.
Post Reply
Taggart
Veteran Contributor
Veteran Contributor
Posts: 6893
Joined: 05 Dec 2005 07:34

Clippings

Post by Taggart »

GETTING GOING

By JONATHAN CLEMENTS

December 11, 2005

"Question everything.

The longer I write this column, the less faith I have in conventional financial wisdom.

We all rely on rules of thumb and generally accepted notions because we don't have time to research every financial issue and probe every assumption. Life is just way too short.

Yet conventional financial wisdom often doesn't stand up to close scrutiny. Here are five ideas I have tossed out in recent years."

http://users2.wsj.com/lmda/do/checkLogi ... 19431.html
User avatar
dakota
Veteran Contributor
Veteran Contributor
Posts: 3270
Joined: 27 Feb 2005 12:00
Location: Bay of Quinte

Post by dakota »

Reading that article gives me the impression that no matter what a person does he is doomed to failure. Guess I might just as well throw in the towel :cry:
A fool and his money are lucky to get togethere in the first place
User avatar
smelly
Veteran Contributor
Veteran Contributor
Posts: 1094
Joined: 05 Mar 2005 22:26
Location: Windsor ON

Post by smelly »

Maybe the problem is that we don't know what the term "conventional wisdom" really means/what it was originally meant to describe. It's something quite different than what conventional wisdom now deems it to mean (see what I did there? :wink: )

http://www.theage.com.au/articles/2002/ ... 60814.html
How'd we know all this? Conventional wisdom, of course - that venerable stockpile of essential suppositions, eternal verities and time-tested beliefs that we rely on to muddle through our otherwise clueless daily lives.
When Harvard economist John Kenneth Galbraith coined the term in his influential book The Affluent Society (1958), he used it to designate those ironclad economic principles and political catechisms passed down through generations.

The trouble with this type of conventional wisdom, Galbraith suggested, wasn't necessarily that it was erroneous, but that it had been around so long that it tended to stifle creative thinking and concentrate power in the hands of the few. Favouring acceptability and expediency over logic, conventional wisdom had become a shibboleth for the elites, who used it to maintain the status quo. Conventional wisdom was the dogmatic foundation of 20th century capitalism.
User avatar
Shakespeare
Veteran Contributor
Veteran Contributor
Posts: 23396
Joined: 15 Feb 2005 23:25
Location: Calgary, AB

Post by Shakespeare »

Reading that article gives me the impression that no matter what a person does he is doomed to failure
Au contraire, mon ami. Somebody who sets up a well-diversified, balanced portfolio, and who stays the course, is doomed to success. :wink:
Sic transit gloria mundi. Tuesday is usually worse. - Robert A. Heinlein, Starman Jones
Adrian
Contributor
Contributor
Posts: 177
Joined: 18 Nov 2005 16:54
Location: Vancouver
Contact:

Re: Five Bits of Conventional Wisdom to Ignore

Post by Adrian »

For too many, investing is one obsession after another. Benchmarks, yardsticks, performance, quartiles, foreign content, what the average investor is doing - the list goes on. They become very busy at second guessing. No wonder the strategy does not deliver.

All they have to do is park all these distractions, figure out what's really important to them and follow it. Works quite well in my investment patch.

Just my take.

Adrian
KCM Wealth Management Inc.
www.kcmwealth.com
User avatar
Brix
Veteran Contributor
Veteran Contributor
Posts: 3249
Joined: 22 Feb 2005 12:29
Location: Victoria

Post by Brix »

Shakespeare wrote:Somebody who sets up a well-diversified, balanced portfolio, and who stays the course, is doomed to success.
Adrian wrote:All they have to do is park all these distractions
Yabbut once you're no longer caught up in all the noise and action you feel you're socking away cash (with which you could have a fair bit of fun!) for the privilege of watching your fingernails grow. It's like the really important stuff must have happened while you were asleep. By the time you're comfortably well-fixed for retirement you don't even notice. Yawn.

And the ultimate objective is to make sure you don't run out of money before you die! I mean, really -- could it be more of a downer? It's just brutal. :)
[size=84]It doesn’t matter if the cat is black or white so long as it's determined to screw everything up.[/size]
blonde
Veteran Contributor
Veteran Contributor
Posts: 3250
Joined: 19 Feb 2005 13:43
Location: Calgary area

Post by blonde »

What does not get measured does not get done.

Without numbers you are toast.

Assume nothing.

Everybody's in 'sales'.
steves
Veteran Contributor
Veteran Contributor
Posts: 3200
Joined: 01 Mar 2005 15:02
Location: Hornby Island BC
Contact:

Post by steves »

Everybody's in 'sales'.
Now, there's a Blondian aphorism that really makes sense.
Taggart
Veteran Contributor
Veteran Contributor
Posts: 6893
Joined: 05 Dec 2005 07:34

Post by Taggart »

Hi Adrian:

I like your picks for favourite investment books from Saturday's FP.

:)

-------------------------------------------------------------------------------

Now for a reality check. I often check out this site when someone refers to U.S. "nominal" returns. Brings me right back down to earth.

Real Real Returns

http://www.thornburginvestments.com/res ... l_0705.asp

....or if you want a real downer:

"Elroy Dimson, Paul Marsh, and Mike Staunton, Irrational Optimism, Financial Analysts Journal, January/February 2004.

The article is addressed to Pension Plan managers and individual investors. The authors feel that the estimates of long term return they are using are too high. They claim pension plan sponsors are assuming 12.5% nominal, 10% real return on stocks, and that many individual investors assume even higher returns. "In this article, we show that, historically, annualized long-run equity returns have not been as high as 10 percent in real terms anywhere in the world. Over the past 103 years, a more typical figure has been 4-6 percent. Furthermore, a careful analysis of historical returns indicates that future risk premiums are likely to be lower than in the past."

The authors also argue against the idea sometimes seen in popular investment books that "stocks are safe if held for 20 years". That is you can never lose money if you hold onto your investment for 20 years. This idea originated in Siegel's book and has been repeated widely ever since.

The authors feel that the US record is exceptional, that the US has in some sense been a unique country and therefore they prefer to work with a sample of 16 countries, also over the last 103 years. This is the most countries for which they could find data, although they admit that "Our sample [] omits such countries as Russia, China, and Argentina, whose stock and bond markets have performed poorly and have been highly volatile."

For the World Index, composed of 16 countries weighted by GDP, the geometric mean real return was 5.4%, the arithmetic mean 6.8%, the standard deviation 17.2%.

The authors point out that some countries have experienced bad returns over a 20 year interval. For example in Japan 22% of all (overlapping) 20 year intervals have negative real returns. In fact a negative 20 year return exists for 11 of the countries in the sample, contrary to the myth that you can never lose money over 20 years."

http://dailyspeculations.com/scholarly/ ... turns.html
User avatar
dakota
Veteran Contributor
Veteran Contributor
Posts: 3270
Joined: 27 Feb 2005 12:00
Location: Bay of Quinte

Post by dakota »

Shakespeare wrote:
Reading that article gives me the impression that no matter what a person does he is doomed to failure
Au contraire, mon ami. Somebody who sets up a well-diversified, balanced portfolio, and who stays the course, is doomed to success. :wink:
Thank you from the bottom of my heart Shakes....here I was completely demoralized....live in a half million dollar plus home, which has not been monitized so it is of no significance, have a decent portfolio that seems to be making money...but maybe I'm wrong because I must be making all kinds of mistakes. Of course I have not monitezed all my profits so it can not be relied upon. As the guru's say you have not made a profit until you realize the gains! So I guess I should sell my house and my porfolio tomorrow to find out whether or not I live in a dream world or not?

May the heavens be so kind as to give me at least some of the insights that a lot of writers have....amen
A fool and his money are lucky to get togethere in the first place
blonde
Veteran Contributor
Veteran Contributor
Posts: 3250
Joined: 19 Feb 2005 13:43
Location: Calgary area

Post by blonde »

As the guru's say you have not made a profit until you realize the gains! So I guess I should sell my house and my porfolio tomorrow to find out whether or not I live in a dream world or not?


Did you ever have a lemonade stand? Until someone buys it's all a loss.
User avatar
dakota
Veteran Contributor
Veteran Contributor
Posts: 3270
Joined: 27 Feb 2005 12:00
Location: Bay of Quinte

Post by dakota »

Five Bits of Conventional Wisdom to Ignore

I do apologize for not reading the heading of the"ignore" part but maybe I've at least made a case for the people on this board that need encouragement, that regardless what is said you can make a go of it! You can make money, save money, and invest money and come out ahead, if you use DD in what you are investing in. I've started with litterly nothing and I did okay and so can you!
A fool and his money are lucky to get togethere in the first place
Adrian
Contributor
Contributor
Posts: 177
Joined: 18 Nov 2005 16:54
Location: Vancouver
Contact:

Post by Adrian »

Thanks Taggart for your comments.

Charlie Ellis' book on "Winning the Losers Game" is excellent reading for anyone who needs a refresher or is a novice in investment policies and strategies. Just in time for a Xmas gift to oneself.

If one had time to read one book only on investing, this is the one, in my humble opinion.

Another very good read is the 1996 booklet that Warren Buffett sent to Berkshire Hathaway shareholders. It's on their website called "An Owner's Manual". Here is the link:

http://www.berkshirehathaway.com/ownman.pdf

The piece makes several good points on investing.

Adrian
KCM Wealth Management Inc.
www.kcmwealth.com
User avatar
dakota
Veteran Contributor
Veteran Contributor
Posts: 3270
Joined: 27 Feb 2005 12:00
Location: Bay of Quinte

Post by dakota »

Did you ever have a lemonade stand? Until someone buys it's all a loss
Is that your basis for investing? I invest in a more substantial business or not at alll :lol:
A fool and his money are lucky to get togethere in the first place
User avatar
Brix
Veteran Contributor
Veteran Contributor
Posts: 3249
Joined: 22 Feb 2005 12:29
Location: Victoria

Post by Brix »

blonde wrote:Everybody's in 'sales'.
That accounts for a good part of the noise you've got to ignore and avoid.
[size=84]It doesn’t matter if the cat is black or white so long as it's determined to screw everything up.[/size]
Taggart
Veteran Contributor
Veteran Contributor
Posts: 6893
Joined: 05 Dec 2005 07:34

We're Still Too Exuberant

Post by Taggart »

The man who wrote the book on irrational investing says we haven't learned our lesson. I believe him

December 17, 2005: 9:00 AM EST

By Geoffrey Colvin, FORTUNE senior editor-at-large

"NEW YORK (FORTUNE) - One of the most important lessons you can ever learn about markets is also one of the easiest to forget: Just because prices are more reasonable than they were doesn't mean they're reasonable. I'm sorry to report that it's absolutely the lesson to keep in mind now that the Dow has hit 42-year highs and crept back up near 11,000.

The preeminent teacher of that lesson is Robert Shiller, a Yale professor with a strong record of thinking independently and being right. His book "Irrational Exuberance," arguing that stock prices were insanely high, appeared almost precisely at their peak in March 2000. Now he has updated the book to reflect 2005 valuations and concludes that, believe it or not, the market is still irrationally exuberant."

LINK
User avatar
adrian2
Veteran Contributor
Veteran Contributor
Posts: 13333
Joined: 19 Feb 2005 08:42
Location: Greater Toronto Area

We're Still Too Exuberant

Post by adrian2 »

From link above:
Robert Shiller wrote:As he told me the other day, all the competing theories boil down to one easy-to-understand calculation: "The trailing P/E ratio for the S&P composite is still around 25, vs. a long-term average of 15."
In earnings yield terms, it's a comparison between 4% and close to 7%. For a bond investor (or a mortgage borrower), that's a huge difference. Why shouldn't it be the same for a stock investor?
User avatar
parvus
Veteran Contributor
Veteran Contributor
Posts: 10014
Joined: 20 Feb 2005 16:09
Location: Waiting for the real estate meltdown on Rua Açores.

We're Still Too Exuberant

Post by parvus »

Depends what the companies do with the earnings. Do they blow them on acquisitions and strategic alliances in the name of empire-building synergy or convergence (e.g., Universal Studios, Vivendi or BCI, TeleGlobe, CTV), or do they dividend them out at a sustainable rate?

It has been suggested that stock buy-backs are equivalent to dividends. Given the delusionary state of options accounting, where critics have argued that buy-backs essentially only cover the cost of exercised options, I remain dubious about the earnings reciprocal as a yield in any wise comparable to the fiddle-free world of bond coupons. Now free cash flow ... 8)
Wovon man nicht sprechen kann, darüber muß man schweigen — a wit
Imagefiniki, the Canadian financial wiki Your go-to guide for financial basics
Image
George$
Veteran Contributor
Veteran Contributor
Posts: 2612
Joined: 18 Feb 2005 20:46
Location: Toronto

We're Still Too Exuberant

Post by George$ »

Shiller's Price to Earnings data here

and directly

Image
BemusedLurker
Contributor
Contributor
Posts: 170
Joined: 08 Nov 2005 17:57

We're Still Too Exuberant

Post by BemusedLurker »

Why does this mean that the market is too exuberant.

What it means is that there is an active market with a limited number of dollars chasing a limited basket of assets.

... And its not like we havent been warned about this, just that few recognize it for what it is. Imagine what the stock prices would be (from a demand perspective) if a significant number of consumers hadn't leveraged their future for current consumption, but instead had saved the money instead...

The boom is just beginning... (optimistic view)

BL ( and of course, given the wonderful performance of many growth stocks, an aweful lot of money is pouring into dividend/distribution paying investments.)
Taggart
Veteran Contributor
Veteran Contributor
Posts: 6893
Joined: 05 Dec 2005 07:34

Investing success declines with age

Post by Taggart »

By HELEN HUNTLEY, Times Personal Finance Editor

Published December 25, 2005

Here's a tricky question to ponder: Do investors get better or worse with age? Or, as two University of Notre Dame professors put it: "Does investment skill decline due to cognitive aging or improve with experience?"

http://www.sptimes.com/2005/12/25/Colum ... _dec.shtml
N. Vestor
Contributor
Contributor
Posts: 230
Joined: 31 Oct 2005 13:13
Location: West Vancouver, BC

Investing success declines with age

Post by N. Vestor »

This sort of sums up the article as it applies to us seniors who will have reduced short term memory:
"All investors would be better off if they stopped trying to outperform the market and simply accepted market returns by investing in index funds, or other passively managed funds," Swedroe said. "This advice becomes even more important the older the investor."
Now, if I could only remember when to buy the index funds?
steves
Veteran Contributor
Veteran Contributor
Posts: 3200
Joined: 01 Mar 2005 15:02
Location: Hornby Island BC
Contact:

Investing success declines with age

Post by steves »

If I could only remember where I left my car keys!
worthy
Veteran Contributor
Veteran Contributor
Posts: 4117
Joined: 27 Mar 2005 09:58

Investing success declines with age

Post by worthy »

Commenting on the study, financial author Larry Swedroe noted that both older and younger investors underperformed averages and advised that:

"All investors would be better off if they stopped trying to outperform the market and simply accepted market returns by investing in index funds, or other passively managed funds."
"Every decent man is ashamed of the government he lives under." H.L.Mencken
Taggart
Veteran Contributor
Veteran Contributor
Posts: 6893
Joined: 05 Dec 2005 07:34

Investors look high (risk), low for return

Post by Taggart »

Posted 12/27/2005 11:54 PM

Investors look high (risk), low for return

By John Waggoner, USA TODAY

"The great tech bubble of the '90s taught us that red-hot markets will burn you. But ice-cold ones can hurt, too.

Long periods of low returns are to the financial system what the warm waters of the Gulf of Mexico are to tropical storms. They breed catastrophes.

Low returns turn up the heat on investors to earn better returns. Pension funds fear they won't meet their obligations. Retirees fret they'll run out of money. Insurers worry they won't be able to meet future claims.

Some of them start to toy with more sophisticated investments: hedge funds, emerging markets, derivatives. As managers stray further afield to score higher returns, risk rises."

http://www.usatoday.com/money/markets/2 ... over_x.htm
Post Reply