I know you guys might not care where the DOW is going, but I thought I would ask anyhow...
When things first went to hell in 2008 I thought the DOW wouldn't see 10k again in a very long time.
Lo and behold, the DOW just hit 11k, and it seems that a bid for 12k could happen in the next year.
What do you think will happen?
Over 13000 and stay there for 0-500 days. Then it'll drop to under 10000 faster than most people can say "sell".
why do you believe in the double dip theory jacob?
It's not a double dip theory. It's just that stocks are already fundamentally overvalued, yet on a historical basis they have shown the drive to become more so (based on their present valuation). Such overvaluations have never lasted more than a couple of years. Hence, ...
I must admit, my knowledge of investing is really sub par. But I'd love to start learning. Suggestions on where to start?
@gibberade - Totally depends on what you want to invest in, obviously ;-)
Man, Economy, State by Rothbard is a good place to start. It's not really an investment book. Rather it's an economics book which will teach you more about economics than most economics books.
Possibly due to my background I think bottom-up/a priori is the best way to go. In other words, I believe that macroeconomcs can be understood through an understanding of microeconomics with appropriate structures.
As with everything else ... get the fundamentals correct (for stocks, that financial statement analysis). Then realize that the structures could be almost anything.
A popular method is comparing P/E and drawing conclusions based on that by discount the number into the future and adding a growth rate. It's almost completely arbitrary.
For example.
Assume E=$1. Assume earnings growth is 10%. Also assume your discount rate (the return you want per year is 12% ... say 6% plus 6% risk). Also assume that you figure (for whatever reason) that the market will pay a P/E=20 for it... why? No reason other than this is popular for growth stocks. Also let's assume you'll hold it for 5 years. What is the stock worth?
20*$1*1.1^5/1.12^5=$18.27
Suppose it's currently trading at $16. Should you buy it? Well, maybe you want a 50% fudge factor... you'll only buy at 18.27/2 .. under $10.
It really can be this simple. Now to some this looks very clever, but if you start playing around with the numbers, you'll see how much the numbers depend on the input.
This just shows the valuation as a growth stock. You can also evaluate it using discounted cash flow or enterprise value (including the debt but excluding cash) / top line earnings--- this would be the value if you bought it outright off the market as a private equity person.
Whenever analyst companies give predictions about what a stock should trade at next year, they're not doing anything much more complicated than that. The art is in inputting the right numbers in the very simple equations.
The hardest part about of investing is probably realizing that there's nothing more to it than that. You'd expect some kind of super equation, but it isn't there. Everything in the equity market is similar in complication to this right up to the CAPM model which you can handle with high school math.
(The heavy math is found in the derivatives markets.)
Hence the technical part is really quite trivial. Basic algebra. The hard part is in relating those numbers to the real world. This is why the best investors seem to read a ton.
In reality the market is then a combination of different players using different models because they have different goals. As you probably know, some market players make no use of any models whatsoever.
I believe that the DOW will over the next few years be falling to roughly one-third where it is today in inflation-adjusted terms. The reason is that stocks have throughout history always followed a pattern of dropping to one-half fair value in the years following a time when they went to two times fair value. A bull market creates trillions in Funny Money. When the Funny Money disappears from consumers' portfolios (as it must if the market is to continue to function), people become afraid to spend and we see an economic collapse. A drop to one-half of fair value translates into a price drop of about 60 percent.
Rob
This question. And the utter inability to say with precision what the answer should be. Are why the Permanent Portfolio (check that part of this forum) is attractive to me.
But my one concern is how to harvest an income in retirement. As I understand it, the virtue of the PP is that you are selling high and buying low. But if you use the sales proceeds for current income then you are not replacing the undervalued aspects of the portfolio.
So, I continue to buy the solid Dow stocks that seem poised to deliver >3% dividends YoY. I don't care whether Dow is 15K or 5K as long as KO, PG, T, KFT, MCD, etc. do not cut their dividends. And it can happen. BAC is the classic example of the pitfalls. And I keep a healthy "emergency fund" in cash, even though I am almost certain the yield is not beating inflation YoY.
I don't worry where the Dow will go. Instead, I worry about my individual shares.
Has the share price gone too high for supporting data?
* is the yield spiking without increased profits?
* is the share price going up due to stock buybacks or is there real growth in total revenue?
* where is the yield compared to historical data?
Is there a danger of a dividend cut?
* is the payout ratio too high and rising?
* do they have too much debt?
* remember that REITs and MLPs are different
Are they managing their risks properly?
* does the company rely too much on a single customer?
* did they have a disaster (mine collapse, oil rig sink)?
Are they struggling with technology changes?
* do they rely on printed media?
* do they rely on film?
* do they rely on wired networks?
* is the product they sell widely consumed (whale oil or wagon wheels)?
I measure the performance of my portfolio against the major indices. If I'm not matching or outperforming most of the time, then it's time to change strategies.
The big picture is that we're in trouble.
Even with soon to be 14+ trillion dollars in debt, federal gov't is going to pass Bush era tax cut extension which will add another 1 trillion dollars to the debt.
The rates are beginning to rise which will increase interest payments on the federal debt. This will affect the federal budget just as higher credit card payment means less to live on.
The value of the dollar is continuously sinking.
The real estate market will probably head lower due to higher rates.
Europe is in financial chaos (with bloody riots) - and US is in just as bad shape.
The US corporations are hoarding cash to the tune of 1.8 trillion dollars and are not spending them.
Bond bubble is about to burst - again the savers who sought safety and yield in bonds will get robbed due to rates that have been artificially held at zero by the Federal Reserve.
Bankers will then come in and buy up the bonds that have been destroyed for a fraction of a dollar.
There are no new real jobs that can sustain the middle class - unless one considers delivering pizza on weekends to be such a job?
No jobs mean no real estate recovery because people who don't have jobs don't buy houses either.
The picture is so grim that there is no place for the market to go but to head south - which means, Dow will probably go up or go sideways since market is not predictable. And just as people believe that market will edge higher and create a bubble, it will then burst.
Since Dow has gained about 80% from the last dip and the bond market appears just as ripe, they both will probably pop.
We have a centrally planned economy via the Federal Reserve. Nobody knows what they are going to do.
JoeNCA:
1) "The value of the dollar is continuously sinking."
2) "The US corporations are hoarding cash to the tune of 1.8 trillion dollars and are not spending them."
Hopefully inflation will induce them to spend some of that cash before it's worthless.
Don't know, don't care.
If the markets blow up, everybody has no money and prices drop due to the invisible hand. If markets return 5000%, everybody has too much money and prices shoot through the roof.
All that it matters is you outsave everybody else you're competing with for future resources.
I predict the invisible hand will give us all the middle finger sometime soon.
Mossy: Considering the disparity in wealth distribution in the US, I don't think that is really true (at least not to the degree you are suggesting).
Let's say you are ERE with a 300k portfolio invested in the DOW, allowing a 4% SWR of 1k/mo. If this doubles, you now get 2k/mo. An extra 1k/mo.
The average stock portfolio in the US is around 85k, yielding a SWR of $280. If the market doubles, the average person gets an extra $280/mo. So lets say the cost of basic necessities inflate by an average of $280/mo. You are coming out $720 ahead of inflation. (Maybe I'm doing some economics hand-waving here... feel free to tear me a apart).
By the way, the the mean portfolio is more like 12k. If the DOW doubles, this portfolio will yield an extra SWR of $40/mo. Yippie.
Sure, the top 1% will do even better than you. And the cost of luxury yachts may become even farther out of reach. But so what? You are ultimately in an even better/safer position with respect to the basic needs, which is what this site is about, right?
(all numbers massaged from http://www.mybudget360.com/the-debt-end-game-top-10-percent-of-families-own-an-average-of-700000-in-stocks/ -- different numbers may change the results slightly, but I doubt enough to change the premise)
I believe that we will see another crash within four years or so.
The reason is that every time in history when valuations have gone to double fair value, they have fallen to one-half fair value in the following years. Bull markets cause so much economic destruction (by first leading people to believe they are richer than they are and then taking the pretend money away) that they cause investors to become depressed and price stocks at insanely low levels.
Rob
@dragoncar
Use division, not subtraction.
1000/280 = 3.57
2000/560 = 3.57
Same ratio of dollars used to bid up/down prices.
Think about it -- you say you're $720 ahead of inflation. What's the base inflation amount then? $100? $1000? $10000? $100000?
imo long bonds are beginning to look good around 4% here, stay nimble would be my advice.
Time for a thread revival. I still think we may see a significant drop if we dip back into deflation, but with the Fed always ready to print I am never sure. I know the company I work for is doing so well it is pie in the sky. Another reason I think things will need to be adjusted for reality.
Would enjoy everyone's thoughts.
I think it's B.S. stimulus propping up much of the market. I think it's a house of cards and it will head downward. It's just a matter of "when". The B.S. funny-money tactics are slowly being exposed in Europe right now.
Lending will probably tighten, which should further depress the stock market in general. That's my opinion.
Under 10k I said a year ago ... and I was wrong. And this is why I don't go short but only go defensive ... because I was right about the first part.
I think my take away from these older posts is just how prevalent certain ideas (memes) are in the markets. They are talked about by everyone and then they simply pass away with no real effect. The future of markets is always unknown.
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