A Critical Reassessment Of Risk And Return For Small Investors [View article]
Having spent my career in a related industry - legal analysis for the production of information used by lawyers - gives me a healthy skepticism of financial and investment analysis and analysts.
Believe me, when a human is analyzing data like financial data, market data, or legal data, the skills and talents vary markedly and the "information" output is anything but uniform. It's not even always correct factually, let alone when the injection of an opinion (like buy, sell or hold) is involved.
Buffett says he'd rather be approximately correct than precisely wrong. A lot of financial analysis falls into the latter category. Calculations may be carried out to 3 decimal places, but if they are based on faulty premises about what is really going on, they are worthless. They are precise, but they may also be wrong.
That's what makes me optimisticabout an individual's ability to monitor a company or industry well enough to make competent investment decisions, even when he is not backed up by an army of analysts. Understanding the overall business model is often more important than calculating ROE to 5 siginificant digits. The appearance of precision often masks a misunderstanding of basic business behavior, market share, competitive advantages, moats, and the like.
Why Passive Index Investing Is Merely An Illusion [View article]
AAM, You are right on the money. I've had several debates with Larry Swedroe about this. He refuses to accept the words "pick" or "select" to describe how stocks get into indexes. The fact of the matter is, no index occurs by itself. Every index is a man-made creation. That holds true even for the "passive" indexes that are constructed by rigid rule sets. Who made up the rules? People did. It applies to indexes constructed by algoriothms. Who created the algorithms? People did. This seems like such an obvious point, but it is either missed or denied by many seemingly educated investment advisors...who will then go on and on about the dangers of stock picking. Dave
Why Passive Index Investing Is Merely An Illusion [View article]
AAM, I think your observation is accurate and a function of valuation. In the late 1990s, stocks were generally overvalued, meaning that the SP500 was generally overvalued. As a group, valuations have declined since then, so of course the returns of an index like SP500 would have declined (relatively) too. It's a recurring lesson: The stock market is only a loose reflection of corporate fortunes. It is a direct reflection of investors' collective sentiments about those fortunes (present and future). Sometimes collectively investors have it overvalued and others times undervalued. The market reflects trades in stocks, not the companies themselves. Dave
Is It Worth Holding Cash And Being Patient? [View article]
Robert, I'll just say intrinsic value, if that's OK. That's the established term. It is whatever benchmark value you are referring to when you've written that a stock is undervalued or overvalued.
A Critical Reassessment Of Risk And Return For Small Investors [View article]
>>"I also agree that "risk" is hard to quantify; it's in the eye of the beholder. The challenge becomes not only one of risk tolerance, but placing probabilities on future risk."<<
Ray,
I agree with your observation that risk of "default" on dividend payments for a stock like AFL may be higher than Treasuries, but still quite small. The fact that there is risk at all is the reason one monitors their portfolio.
Beyond that, your article helps illustrate that it is important to specify what risk you are talking about. "Risk" is all too commonly used without clarification, and usually when that happens, the risk referred to is price risk only, measured by standard deviation. Risks such as to the dividend, or especially the risk posed by inflation, are often ignored.
Why Passive Index Investing Is Merely An Illusion [View article]
Tim,
Good article, totally factual.
In my studies of ETFs, I noted that the ETF may be judged (at least somewhat) on its ability to track its underlying index, making the ETF "passive." But the underlying index may be quite active. That extends to practically all indexes, not just the Dow and SP500.
The word "passive" in investing must be judged in context. At the investor level, it can be said that the investor is passive in sticking with an index, although even there the choice of indexes (ETFs or funds) is "active." At the fund level, its components can be said to be passive if all it tries to do is track its underlying index.
It is almost always misleading to say that an index itself is passive. Essentially all indexes are active in the sense that decisions have been made about how to construct the index, what stocks to keep in or toss out, how often the index is rebalanced or reconstituted, etc.
Finally, in recent years, the cart/horse relationship between indexes and funds has been flipped. The original Dow was truly an attempt to track "the market." It was decades before a fund was invented that allowed one to invest in the Dow. These days, though, most indexes are invented for the specific purpose of becoming the underlying index for a fund that has been deemed to be marketable.
Dividend Growth Investors - Prepare For The Correction [View article]
southgent, Good analysis. It's unfortunate that you included this sentence: "When that happens, and this is sacrilege to dividend growth investors, I will first eliminate my dividend reinvestment. " There are lots of dividend growth investors for whom dividend reinvestment does not mean dripping or automatic reinvestment in th same stocks that issued the dividends. I am one of them. I reinvest selectively, for the kinds of reasons stated in your comment. I try to make all investments at attractive valuations. Dave
Dividend Growth Investors - Prepare For The Correction [View article]
Agree that is not correct. It presumes that selling is necessary simply because the market is pulling back. Selling is not necessary, it is a choice. Any such decisions should be based on well understood goals and strategies, not mere emotional reactions to the fact that the market is pulling back. Dave
A Critical Reassessment Of Risk And Return For Small Investors [View article]
Well deserved Editors Pick. It is great to see someone question conventional notions of "safety," to provide an alternative viewpoint. Your overall thesis reminds me of Buffett's "Risk comes from not knowing what you are doing." You are suggesting that individual stock analysis can alter the generalized risk/reward curve that is so often accepted not only as general gospel but also as universally applicable to every individual security (and to every individual investor). Graham demonstrated that rewards can be increased by REDUCING risk, through the sort of research you demonstrated here. Such research and analysis can lead to a margin of safety that is not accounted for in conventional risk analysis. Dave
Is It Worth Holding Cash And Being Patient? [View article]
No, the "market value" is the price itself...the black line. The subject here is different, the orange line. Chuck calls it the "earnings justified" price, and he uses several formulas that originated with Ben Graham to calculate it. It's different from price, although the two do occasionally coincide. Dave
A Simplified Approach To Retiring With A Decent Dividend Income [View article]
CDB,
Good article. I think you will find that having a defined process helps you achieve good results.
On looking in the rear view mirror, any investor who uses data is looking in the rear view mirror, since by definition data pertains to events that have already happened and measurements that have already been made. All future estimates are based on past data combined with reasoned speculation about the future. Using data beats whatever is the alternative, IMHO.
Like Richjoy above, I take some different factors into account, but I wish you the best of luck in your quest. You're off to a great start.
Is It Worth Holding Cash And Being Patient? [View article]
Robert, I used to try to steer clear of the phrase "intrinsic value" for the very reasons you state. Here is what I wrote about it in my first book: -- Valuation refers to the assigning of a "proper" value, or price, to a stock. We put the quote marks around "proper" to draw attention to the fact the while the word implies that there is a single correct answer, in fact a stock's "proper" price is a theoretical notion, not a physical property of the stock.
You will see many terms for a stock's "proper" price: --Intrinsic value --Real value --True value --Correct value --Fair value
...Of course, the market determines the actual price of a stock at any time. Whether that price is "proper" or not is, as stated earlier, a theoretical construct. A multitude of mathematical models have been invented over the years to estimate "proper" values....
Beyond [those], ...we [earler] met the Efficient Market Hypothesists, who believe that the current actual market price is always the "correct" price. If that hypothesis were correct, there would be no need to be discussing valuation. We rejected the hypothesis.
...[J]ust remember that ultimately any valuation method amounts to an appraisal, an educated calculation--an opinion--of what a stock "ought" to be worth. -- Dave
Is It Worth Holding Cash And Being Patient? [View article]
Inz, I am curious about your comment on volume dropping off. Assuming it's not a thinly-traded stock, it is said that 70% or so of market volume comes from HFT (high frequency trading) algorithms. If that is true, what difference does it make if volume rises or drops? It's reacting to algorithms, not actual living, thinking investors. For that matter, what does a drop in volume mean anyway? I'm not being critical, just curious as to what significance you place on volume. (As you can tell, I pay zero attention to volume on the kinds of stocks we are talking about.) Thanks, Dave
Is It Worth Holding Cash And Being Patient? [View article]
Robert, You and I agree on most things, but I am going to push back a little here.
"Intrinsic value" can have a variety of meanings. I tend to think of it as the value near which most investors would coalesce, if they had perfect information, decent analytical skills, no emotions, and we all had an efficient market.
Also, remembering Buffett's quote, "Price is what you pay, value is what you get," I think your last sentence conflates price with with "worth" or value. At any given time, price can be far off from what the intrinsic value of the company is, meaning the price to which it would move if we had the conditions stated above.
And value itself can be interpreted differently. Some of us prefer steady-eddie dividend stocks that help us sleep well at night. Others prefer the excitement of great-new-thing stocks, hoping to catch a shooting star. You can't look such things up online, while the price of any stock can be found instantly.
Value is the orange line on a FASTGraph, price is the black line. They only touch each other once in a while.
So my bottom line is, there is value (pun intended) in thinking about the value of a stock as distinguished from its price.
A Critical Reassessment Of Risk And Return For Small Investors [View article]
Believe me, when a human is analyzing data like financial data, market data, or legal data, the skills and talents vary markedly and the "information" output is anything but uniform. It's not even always correct factually, let alone when the injection of an opinion (like buy, sell or hold) is involved.
Buffett says he'd rather be approximately correct than precisely wrong. A lot of financial analysis falls into the latter category. Calculations may be carried out to 3 decimal places, but if they are based on faulty premises about what is really going on, they are worthless. They are precise, but they may also be wrong.
That's what makes me optimisticabout an individual's ability to monitor a company or industry well enough to make competent investment decisions, even when he is not backed up by an army of analysts. Understanding the overall business model is often more important than calculating ROE to 5 siginificant digits. The appearance of precision often masks a misunderstanding of basic business behavior, market share, competitive advantages, moats, and the like.
Dave
Why Passive Index Investing Is Merely An Illusion [View article]
Dave
Why Passive Index Investing Is Merely An Illusion [View article]
Dave
Is It Worth Holding Cash And Being Patient? [View article]
Ha. :-)
Dave
A Critical Reassessment Of Risk And Return For Small Investors [View article]
Ray,
I agree with your observation that risk of "default" on dividend payments for a stock like AFL may be higher than Treasuries, but still quite small. The fact that there is risk at all is the reason one monitors their portfolio.
Beyond that, your article helps illustrate that it is important to specify what risk you are talking about. "Risk" is all too commonly used without clarification, and usually when that happens, the risk referred to is price risk only, measured by standard deviation. Risks such as to the dividend, or especially the risk posed by inflation, are often ignored.
Dave
Why Passive Index Investing Is Merely An Illusion [View article]
Dave
Why Passive Index Investing Is Merely An Illusion [View article]
Good article, totally factual.
In my studies of ETFs, I noted that the ETF may be judged (at least somewhat) on its ability to track its underlying index, making the ETF "passive." But the underlying index may be quite active. That extends to practically all indexes, not just the Dow and SP500.
The word "passive" in investing must be judged in context. At the investor level, it can be said that the investor is passive in sticking with an index, although even there the choice of indexes (ETFs or funds) is "active." At the fund level, its components can be said to be passive if all it tries to do is track its underlying index.
It is almost always misleading to say that an index itself is passive. Essentially all indexes are active in the sense that decisions have been made about how to construct the index, what stocks to keep in or toss out, how often the index is rebalanced or reconstituted, etc.
Finally, in recent years, the cart/horse relationship between indexes and funds has been flipped. The original Dow was truly an attempt to track "the market." It was decades before a fund was invented that allowed one to invest in the Dow. These days, though, most indexes are invented for the specific purpose of becoming the underlying index for a fund that has been deemed to be marketable.
Dave
Dividend Growth Investors - Prepare For The Correction [View article]
Dave
Dividend Growth Investors - Prepare For The Correction [View article]
Dave
A Critical Reassessment Of Risk And Return For Small Investors [View article]
Dave
Is It Worth Holding Cash And Being Patient? [View article]
Dave
A Simplified Approach To Retiring With A Decent Dividend Income [View article]
Good article. I think you will find that having a defined process helps you achieve good results.
On looking in the rear view mirror, any investor who uses data is looking in the rear view mirror, since by definition data pertains to events that have already happened and measurements that have already been made. All future estimates are based on past data combined with reasoned speculation about the future. Using data beats whatever is the alternative, IMHO.
Like Richjoy above, I take some different factors into account, but I wish you the best of luck in your quest. You're off to a great start.
Dave
Is It Worth Holding Cash And Being Patient? [View article]
--
Valuation refers to the assigning of a "proper" value, or price, to a stock. We put the quote marks around "proper" to draw attention to the fact the while the word implies that there is a single correct answer, in fact a stock's "proper" price is a theoretical notion, not a physical property of the stock.
You will see many terms for a stock's "proper" price:
--Intrinsic value
--Real value
--True value
--Correct value
--Fair value
...Of course, the market determines the actual price of a stock at any time. Whether that price is "proper" or not is, as stated earlier, a theoretical construct. A multitude of mathematical models have been invented over the years to estimate "proper" values....
Beyond [those], ...we [earler] met the Efficient Market Hypothesists, who believe that the current actual market price is always the "correct" price. If that hypothesis were correct, there would be no need to be discussing valuation. We rejected the hypothesis.
...[J]ust remember that ultimately any valuation method amounts to an appraisal, an educated calculation--an opinion--of what a stock "ought" to be worth.
--
Dave
Is It Worth Holding Cash And Being Patient? [View article]
Thanks,
Dave
Is It Worth Holding Cash And Being Patient? [View article]
"Intrinsic value" can have a variety of meanings. I tend to think of it as the value near which most investors would coalesce, if they had perfect information, decent analytical skills, no emotions, and we all had an efficient market.
Also, remembering Buffett's quote, "Price is what you pay, value is what you get," I think your last sentence conflates price with with "worth" or value. At any given time, price can be far off from what the intrinsic value of the company is, meaning the price to which it would move if we had the conditions stated above.
And value itself can be interpreted differently. Some of us prefer steady-eddie dividend stocks that help us sleep well at night. Others prefer the excitement of great-new-thing stocks, hoping to catch a shooting star. You can't look such things up online, while the price of any stock can be found instantly.
Value is the orange line on a FASTGraph, price is the black line. They only touch each other once in a while.
So my bottom line is, there is value (pun intended) in thinking about the value of a stock as distinguished from its price.
Dave