Search Results for “dollar weighted returns” – Page 4

One Dozen Reasons Why the Average Person Underperforms In Investing, Part 1

Posted on 13 February 2015 by David Merkel

Brian Lund recently put up a post called 5 Reasons You Deserve to Lose Every Penny in the Stock Market. ?Though I don’t endorse everything in his article, I think it is worth a read. ?I’m going to tackle the same question from a broader perspective, and write a different article. ?As we often say, “It takes two to make a market,” so feel free to compare our views.

I have one?dozen reasons, many of which are related. ?I do them separately, because I think it reveals more than grouping them into fewer categories. ?Here we go:

1) Arrive at the wrong time

When does the average person show up to invest? ?Is it when assets are cheap or expensive?

The average person shows up when there has been a lot of news about how well an asset class has been doing. ?It could be stocks, housing, or any well-known asset. ?Typically the media trumpets the wisdom of those that previously invested, and suggests that there is more money to be made.

It can get as ridiculous as articles that suggest that everyone could be rich if they just bought the favored asset. ?Think for a moment. ?If holding the favored asset conferred wealth, why should anyone sell it to you? ?Homebuilders would hang onto their inventories. Companies would not go public — they would hang onto their own stock and not sell it to you.

I am reminded of some of my cousins who decided to plow money into dot-com stocks in late 1999. ?Did they get to the party early? ?No, late. ?Very late. ?And so it is with most people who think there is easy money to be made in markets — they get to the party after stock prices have been bid up. ?They put in the top.

2)?Leave at the wrong time

This is the flip side of point 1. ?If I had a dollar for every time someone said to me in 1987, 2002 or 2009 “I am never touching stocks ever again,” I could buy a very nice dinner for my wife and me. ?Average people sell in disappointment thinking that they are?protecting the value of their assets. ?In reality, they lock in a large loss.

There’s a saying that the right trade is the one that hurts the most. ?Giving into greed or fear is emotionally satisfying. ?Resisting trends and losing some?money in the short run is more difficult to do, even if the trade ultimately ends up being profitable. ?Maintaining exposure to stocks at all times means you ride a roller coaster, but it also means that you earn the long-term returns that accrue to stocks, which market timers rarely do.

You can read some of my older pieces on how investors earn less on average than buy-and-hold investors do. ?Here’s one on how investors in the S&P 500 ETF [SPY], trail buy-and-hold returns by 7%/year. ?Ouch! ?That comes from buying and selling at the wrong times. ?ETFs may lower expenses, but they also make it easy for people to trade at the wrong times.

3) Chase the hot sector/industry

The lure of easy money brings out the worst in people. ?Whether it is tech stocks in 1987, dot-coms in 1999, or housing-related assets in 2007, there will always be people who think that the current industry fad will be a one-way ticket to riches. ?There is psychological satisfaction to be had by buying what is popular. ?Everyone wants to be one of the “cool kids.” ?It’s a pity that that is not a good way to make money. ?That brings up point 4:

4)?Ignore Valuations

The returns you get are a product of the difference in the entry and exit valuations, and the change in the value of the factor used to measure valuation, whether that is earnings, cash flow from operations, EBITDA, free cash flow, sales, book, etc. ?Buying cheap aids overall returns if you have the?correct estimate of future value.

This is more than a stock market idea — it applies to private equity, and the?purchase of capital assets in a business. ?The cheaper you can source an asset, the better the ultimate return.

Ignoring valuations is most common with hot sectors or industries, and with growth stocks. ?The more you pay for the future, the harder it is to earn a strong return as the stock hopefully grows into the valuation.

5) Not think like a businessman, or treat it like a business

Investing should involve asking questions about whether the economic decisions are being made largely right by those that manage the company or debts in question. ?This is not knowledge?that everyone has immediately, but it develops with experience. ?Thus you start by analyzing business situations that you do understand, while expanding your knowledge of new areas near your existing knowledge.

There is always more to learn, and a good investor is typically a lifelong learner. ?You’d be surprised how concepts in one industry or market get mirrored in other industries, but with different names. ?One from my experience:?Asset managers, actuaries and bankers often do the same things, or close to the same things, but the terminology differs. ?Or, there are different ways of enhancing credit quality in different industries. ?Understanding different perspectives enriches your understanding of business. ?The end goal is to be able to think like an intelligent business manager who understands investing, so that you can say along with Buffett:

I am a better investor because I am a businessman, and a better businessman because I am an?investor.

(Note: this often gets misquoted because Forbes got mixed up at some point, where they think it is:?I am a better investor because I am a businessman, and a better businessman because I am no investor.) ?Good investment knowledge feeds on itself. ?Little of it is difficult, but learn and learn until you can ask competent questions about investing.

After all, you are investing money. ?Should that be easy and require no learning? ?If so, any fool could do it, but my experience is that those who don’t learn in advance of investing tend to get fleeced.

6)?Not diversify enough

The main objective here is that you need to only invest what you can afford to lose. ?The main reason for this is that you have to be calm and rational in all the decisions you make. ?If you need the money for another purpose aside from investing, you won’t be capable of making those decisions well if in a bear market you find yourself forced to sell in order to protect what you have.

But this applies to risky assets as well. ?Diversification is inverse to knowledge. ?The more you genuinely know about an investment, the larger your positions can be. ?That said I make mistakes, as other people do. ?How much of a loss can you take on an individual investment before you feel crippled, and lose confidence in your abilities.

In the 25+ years I have been investing, I have taken significant losses about ten times. ?I felt really stupid after each one. ?But if you take my ten best investments over that same period, they pay for all of the losses I have ever had, leaving the smaller gains as my total gains. ?As a result, my losses never inhibited me from continuing in investing; they were just a part of the price of getting the gains.

Temporary Conclusion

I have six more to go, and since this article is already too long, they will have to go in part 2. ?For now, remember the main points are to structure your investing affairs so that you can think rationally and analyze business opportunities without panic or greed interfering.

The Victors Write the History Books, Even in Finance

Posted on 21 August 2014 by David Merkel

?It ain?t what you don?t know that hurts you, it?s what you know that ain?t so.?

(Attributed to Mark Twain, Will Rogers,?Satchel Paige, Charles Farrar Browne,?Josh Billings,?and a number of others)

A lot of what passes for investment knowledge is history-dependent, and may not serve us well in the future. ?Further, a certain amount of it is misinterpreted, or, those writing about it, even really bright people, don’t understand the hidden assumptions that they are making. ?I’m going to clarify this by commenting on three graphs that I have seen recently — two that I think deceive, and one that I think is accurate. ?Let’s start with one of the two, which come from this article at AAII, interviewing Jeremy Siegel:

Leaving aside the difficulties with the data from 1802-1871, there is an implicit assumption of buying and holding that undergirds these statistics. ?Though the lines look really smooth now in hindsight, for those investing at the time they were often scared to death in bear markets, selling out at the worst possible time, and in bull markets, getting greedy at the worst possible time.

Now one might say to me, “But David, forget what happened to individuals. ?As a group, people must made returns like this, because every buyer has a seller — even if some panicked or got greedy, someone had to take the other side of the trade and benefit.” ?True enough, though I am suggesting that average people can’t live with that much volatility. ?Even if you cut 1929-32 in half by being 50/50 Stocks/Treasury Notes, how many people could live with a 40% downdraft without selling out?

But there is another problem: when does cash enter and exit the stock market? ?Hint: it doesn’t happen via secondary trading.

Cash Enters the Stock Market

An Initial Public Offering [IPO], secondary IPO, or rights offering leads people to give money to a corporation in exchange for new shares.
Employees forgo pay to receive company stock.
Shares get issued to suppliers in lieu of cash (common with scammy promoted stocks)
Warrants get exercised, and new shares are issued for the price of cash plus warrants.

Cash Exits the Stock Market

Cash dividends get paid, and not reinvested in new shares
Stock gets bought back for cash
Companies get bought out either entirely or partially for cash.

I’m sure there are other ways that cash enters and exits the stock market, but you get the idea. ?It means that cash is exchanged with the company for shares, and vice versa, not the trading that goes on every day. ?Now, here’s the critical question: when do these things happen? ?Is it random?

Well, no. ?Like any other thing in investing, n one is out to do you a favor. ?New stock tends to be offered at a time when valuations are high, and companies tend to be taken private when valuations are low. ?Thus back in the tech bubble, 1998-2000, a lot of cash got soaked up into companies with dubious valuations and business models. ?With a few exceptions, most lost over 90%+. ?Now consider October 2002. ?How many companies IPO’ed then? ?Very few, but?I remember one, Safety Insurance, that came public at the worst possible moment because it had?no other choice. ?Why else would the IPO price be below liquidation value? ?Great opportunity for those who had liquidity at a bad time.

The upshot is that because stock is issued at times that do not favor new investors, and stock is retired at times that do not favor existing investors, the dollar-weighted?returns for stocks in the above graph are overestimated by 1-2%/year. ?Stocks still beat bonds, but not by as much as one would think.

But here’s a counterexample, taken from Alhambra Investment Partners’ blog:

Note that buybacks don’t follow that pattern. ?Corporate managements often exist to justify themselves, and so a great number of them do not behave like value investors when they buy back stock. ?Part of this is that capital seems cheap during the boom phase of the market, and so they lever the company up, issuing debt to buy back stock at high prices. ?It increases earnings in the short-run, but when the bear market comes, the debt hangs ?around, and intensifies the fall in the stock price.

This is why I favor companies that shut off their buybacks at a certain valuation level. ?If they have to dispose of excess cash to avoid takeovers, pay out special dividends… leave the reinvestment issues to shareholders. ?If they buy back stock at levels that are too high, it does not increase the intrinsic value of the firm, though it might keep the price higher for a little while.

Here’s the other graph??from?this article at AAII, interviewing Jeremy Siegel:

What this graph is trying to say is that if you just buy and hold on long enough, results get really, really certain, and investing a lot in stocks reduces your risks, it does not raise your risks.

I’m here to tell you that is an amplification of the past, and maybe not even the best amplification of the past. ?This is where the victors write the history books. ?Your nation is blessed if:

You haven’t had war on your home soil.
There are no plagues or famines
Socialism is kept in check; expropriation is not a risk (note the many countries grabbing pension assets today)
Hyperinflation is avoided (we can handle the ordinary inflation)

Any of those, if bad enough, can really dent a portfolio. ?We can have fancy statistics, and draw smooth curves, but that only says that the future?will be like the past, only more so. 😉 ?I try to avoid the idea that?mankind will avoid the worst outcomes out of self-interest. ?There have been enough cases in history where that has not proven true, and envy and revenge dominate over shared prosperity.

I’ve already made the comment on how many can’t bear with short-run volatility. ?There is another factor: when you look at the above graph, it represents the average valuation level, yield curve shape, etc. ?If you are applying this model to today, where credit spreads are low, cash earns nothing, the yield curve is wide, equity valuations are medium-high, you would have to adjust the expected returns to reflect what the likely outcomes are, and the graph would not look as favorable. ?Volatility looks low today, but realized volatility is likely to be higher, and will not likely follow a normal distribution.

Closing

My main point here is to beware of history sneaking in and telling you that stocks are magic. ?Don’t get me wrong, they are very good, but:

they?rely on a healthy nation standing behind them
their past results are overstated on a dollar-weighted basis, and
their past results come from a prosperous time which may not repeat to the same degree in the future
you may not have the internal fortitude to buy and hold during hard times.

The Value That Investment Advisers Deliver

Posted on 14 June 201415 June 2014 by David Merkel

I got cold-called this last week while I was away on business. ?I googled the phone number, and found that it came from Melitello Capital. ?I went through their site, and read most of their articles.

It’s an interesting firm, though I have no interest in working with them. ?The article I would like to comment on tonight is “HOW DOES AN RIA JUSTIFY ITS 1% FEE?”

I will explain why a 1% fee?can be justified. ?Now, I am an old school RIA [Registered Investment Adviser]. ?I only manage assets. ?I don’t allocate across asset classes. ?I don’t manage taxes in entire (though I help). ?I don’t structure the means to escape estate taxes. I don’t set up insurance schemes to minimize taxes; I could do it, but it would be boring. ?I could make a lot more money than I do, but I make enough, and I really like the challenge of outperforming the market.

RIAs offer value to clients in a large number of ways:

Reducing income taxes
Holding the hands of clients during the manic and panic periods of the market. ?Discourage them from taking more risk when the market is hot, and encourage them to take more risk, or at least, don’t leave when the market is panicking.
Hedging risks, whether it is a collar on a large single stock position, or a macro hedge.
Aiding in covering insurance needs.
Setting up financial plans.
Structuring estates, such that everything goes where the client wants, and estate taxes are minimized.
Asset allocation, including regular rebalancing.
And more… free advice on other issues, entertainment, bragging rights, etc.
Putting everything together in one neat package.
Oh, and in a few cases, alpha. ?(that’s my game)

Now, is that worth 1% on assets? ?Point 2 alone is worth more than 1%, so yes. ?Those who have read me for years know that people get greedy and panic. ?If you can avoid that, you are doing well, very well.

Look, it’s easy to trash talk your competition. ?Some registered investment advisers are worth their ~1% fee, and some not. ?It depends on the package of services that they deliver — alpha, taxes, insurance, legal help, asset allocation (tsst… be wary of the efficient frontier. ?It does not exist.).

In general, if the investment advisers themselves do not give in to panic and greed, they are worth a 1%/year fee. ?So seek out advisers that do not give in to market pressure.

Note: this is unpopular, because that means hanging onto advisers that underperform during hot markets. ?In the long run you will do better following advice like this– after all, they dissed Buffett in 1999, and my Mom told me I was a fuddy-duddy. ?(Note: when a parent tells you that you are behind the times, it stings. ?It does not mean that you are wrong.)

I am not telling you to invest with me; that is not what my blog is about. ?I am saying that there is value in separate accounts with RIAs. ?And, be choosy. ?Lower fees are better, subject to the same levels of competence.

One More Post on SEC Filings

Posted on 27 May 2014 by David Merkel

My readers are the best. ?Here is another example:

undertherockstocks

26 May 2014 at 7:44 am??(Edit)

David ?

You may also like?http://www.SECLive.com?for reading filings. It?s a nice user interface and hopefully it will support additional filing search functions in the future.

There are a a lot of things to commend SECLive — setting up lists to track companies, etc., but the best feature is the ability to download tables to Excel for free. ?I’m planning on doing a post on insurance reserving as a result, and you may see other articles on dollar-weighted returns as a result. ?Can’t tell you how much time I have spent reformatting HTML pasted into Excel.

It is amazing what is out there for free. ?Count your blessings, and if you are a fundamental investor, use some of these tools.

Sorted Weekly Tweets

Posted on 24 May 2014 by David Merkel

Market Impact?

Giving Yourself an Investing Makeover?http://t.co/u1MmwlWiKP?@jasonzweigwsj describes Guy Spier & his efforts 2b a more rational investor $$?May 24, 2014
The Bearish Signs Junk Buyers Reject in Stoking ?14 Rally?http://t.co/xsYEJeKTnU?BBs beat CCCs amid a falling Russell 2000 index $$ #odd?May 23, 2014
Penny Stocks Like Latteno Foods Rally, Fueling Big-Dollar Dreams?http://t.co/IiqCWeAyOW?Fascinating 2c this amid a pullback in small caps $$?May 23, 2014
Buffett Too Rich for Buffett Is Sign Bargains Are Gone?http://t.co/cbjQ0MDmSR?I’m still finding some cheap stocks but they r unusual $$ $SPY?May 23, 2014
For Sale: 20% Stake in Hedge Fund. Terms: Complicated.?http://t.co/kDoik1H4LT??You don?t want to be wearing someone else?s underwear.? $$?May 23, 2014
Boomers Cash In as Bull Market Aids Exodus From Workforce?http://t.co/uKRIfO4qMQ?Asset illusions delude Boomers who think they r rich $$?May 23, 2014
Wall Street Finds New Subprime With 125% Business Loans?http://t.co/USvBIvP5Vj?The businesses would get better rates on Prosper $$ #dumb?May 23, 2014
Debt Rises in Leveraged Buyouts Despite Warnings?http://t.co/6T8TIpdxWc?Debt makes financial systems less flexible; depend on fixed pmts $$?May 21, 2014
Chasing Yield, Investors Plow Into Junk Bonds?http://t.co/lWFufDu7Hy?Yields have never been lower 4 CCC-rated debts $$?May 21, 2014

Rest of the World

What China Property Crash? Economists See Growth Bump?http://t.co/kcXGitJH1l?Economists c new empty buildings & mark up GDP $$ $FXI #FTL?May 23, 2014
Putin?s Singapore Dream Costs Crimea Banks and Burgers?http://t.co/OmmtpYDB7G?Singapore is not so much created by laws but by ppl culture $$?May 23, 2014
Russia, China Sign $400B Gas Deal After Decade of Talks?http://t.co/4k8PSE5NrM?The infrastructure must b created 2 make this work; not ez $$?May 23, 2014
Brazil World Cup Win Risks Stock Drop in Boon to Rousseff?http://t.co/dPb8GVbtSZ?Brazil wins, Rousseff win odds rise, stocks will fall $$?May 23, 2014
BlackRock Has Cut Portugal Bond Holdings Over Past Couple of Weeks?http://t.co/U3CuYpUu81?Some Emerging-Market Debt > Euro-Zone Bonds $$?May 23, 2014
Norway Loses Reputation as Stable Investment as Firms Recoil?http://t.co/fqQkiM2H3k?Tax 2 highly & businesses run away $$?May 21, 2014
It’s a Good Time to Globalize Your Stock Portfolio?http://t.co/8pqTAwFbqj?Many foreign companies r trade cheaper than US stocks $$ $SPY $EFA?May 21, 2014
UK House Prices Rise to Record High in April?http://t.co/vo6gYZNlAQ?B sure 2add wealthy foreigners buying in London as investment/hedge $$?May 19, 2014
Bank of England’s Mark Carney Highlights Housing Market’s Threat to UK Economy?http://t.co/5XOwH0cIsJ?100% of all UK mtges r short-dated $$?May 19, 2014
Good Time To Be A Farmer In China??http://t.co/04V9YEmSQm?China aggressively pushing crop insurance, & larger scale agriculture $$ $FXI $SPY?May 19, 2014

Energy

Without Keystone XL?http://t.co/qpDcgET7J3?Economic & public health costs of forgoing a new oil pipeline $$ {Sound of oil train derailing}?May 24, 2014
Secrecy of Oil-by-Train Shipments Causes Concern Across the US?http://t.co/knapJHOx1k?Butane, propane & ethane should be removed b4 shpng $$?May 23, 2014
Oil Nations Put Out Welcome Mat for Western Companies?http://t.co/cvarvyMDCt?If u make the cost of drilling2high, fewer bbls get produced $$?May 19, 2014

US Politics & Policy

How Timothy Geithner failed his stress test?http://t.co/qSu9V6oZvX?When @rortybomb & I agree on something, that is notable $$ #housingbubble?May 23, 2014
Meet Jessica Rosenworcel, the FCC Swing Vote?http://t.co/VtIzieSnqI?Marches to her own drummer, willing to cut deals 4 the greater good $$?May 23, 2014
How to Turn Homes Back Into Piggy Banks?http://t.co/fB9PTlBwxZ?Housing Personal Savings Acct & Equity Principal Tax Credit; elim mtge ded $$?May 23, 2014
NJ Gov. Christie under fire for cutting pension payments to state workers?http://t.co/rGwAKla3aT?Definite mistake; cashflows compound $$?May 23, 2014
BlackRock?s Fink Says Housing Structure More Unsound Now?http://t.co/xeMYQmjYGG?GSEs took too much default risk pre-crisis, returning $$?May 21, 2014
GOP’s Business Wing Sends Tea Party a Chilling Message?http://t.co/W5QCHBrJrW?Business fights small government GOP candidates $$?May 19, 2014
Why Republicans Should Take Rick Santorum Seriously?http://t.co/wN7tUmnhbV?Represents the middle class populist part of the GOP $$?May 19, 2014
California’s Drinking Problem?http://t.co/GZnmdInHGY?California does not have enough water for Ag, Industry, People, w/o right incentives $$?May 19, 2014

US Monetary Policy

New Faces Behind Fed Dots Seen Roiling Markets as Forecasts Move?http://t.co/M2AcqPEQTX?Y publish estimates if u don’t want us 2read them $$?May 23, 2014
Bubble States Underemployment Rates Haunt Yellen?http://t.co/fRzLYozafe?Monetary policy is impotent w/debt defation; Fed on wrong track $$?May 23, 2014
New Faces Behind Fed Dots Seen Roiling Markets as Forecasts Move?http://t.co/M2AcqPEQTX?Y publish estimates if u don’t want us 2read them $$?May 23, 2014
Yellen Adds Disadvantaged to Full-Employment Definition?http://t.co/10PSrxYI9c?Alas, monetary policy is weak when dealing e/employment $$?May 21, 2014
Fed’s Rate-Change System Up for Revamp?http://t.co/srqZoDDMhK?The Fed is lost. The Fed is lost. The Fed is lost. The Fed is lost… $$ $TLT?May 19, 2014

Companies & Industries

Google Developing Tablet With Advanced Vision Capabilities?http://t.co/ABO9NObY1h?Will b interesting 2c what new apps get developed $$ $GOOG?May 23, 2014
Planting Corn at Warp Speed Using High-Tech Tools?http://t.co/tDF9EaJoy6?Astounding application of technology transforms planting seed $$?May 23, 2014
Golf Market Stuck in Bunker as Thousands Leave the Sport?http://t.co/ju7aFEx2lp?Costs 2 much $$ takes up 2 much time, but growing in Asia?May 23, 2014
Family Dining Offers Barometer of Middle Income?http://t.co/5IzzOFfS3j?Ugly valuations means stocks will fall if sales don’t rise 4%/yr+ $$?May 23, 2014
Silicon Valley’s Laundry-App Race?http://t.co/GyvIWxd5ux?Long article on the efforts to turn laundry into a scalable attractive business $$?May 23, 2014

Personal Finance

Dueling Strategies for 401(k)s, IRAs and Your Other Retirement Funds?http://t.co/DGzSDVhDZ6?Do what maxes long-term purchasing power $$ $SPY?May 23, 2014
40 Financial Things You Should Know by 40?http://t.co/8qqFlp1TUB?2013 article, but I thought it covered the personal financial basics $$?May 19, 2014

Other

New Study: Is No Degree Better Than A Liberal Arts Degree??http://t.co/MOYUZTngoD?Depends. It helps in getting some jobs, but not all $$?May 21, 2014
BBC News – ‘Biggest dinosaur ever’ discovered?http://t.co/Yg2qTuS27T?Interesting b/c it probably was once much warmer in Patagonia $$?May 19, 2014
Haverford Speaker Bowen Criticizes Students Over Protests?http://t.co/QXkWoAh0iE?Former Princeton President calls them “immature.” Bingo! $$?May 19, 2014

Wrong

Overrated: Russia, China sign deal to bypass USD?http://t.co/YNgu6bwK7H?What matters is where u invest the proceeds from goods exported $$?May 23, 2014
Wrong: Investing: The herd isn’t always dumb?http://t.co/dt0xuXKNCJ?Then explain y dollar-weighted returns underperform buy & hold $$ #panic?May 23, 2014
Wrong: Cutting Off Emergency Unemployment Benefits Hasn?t Pushed People Back to Work?http://t.co/3GwlHcvq70?We run unsustainable deficits $$?May 23, 2014
Wrong: Ikea Economics Lure Central Bankers Seeking New Tools?http://t.co/peVUXrPpKs?Don’t try negative interest rates; will b a disaster $$?May 23, 2014
Wrong: The Retirement Apocalypse That Isn’t Coming?http://t.co/ILYSCOzKTm?I might buy this if we weren’t running large deficits $$ $TLT $SPY?May 21, 2014

Retweets, Replies & Comments

‘ @DGenchev I am analyzing the investors as a group, thus what % of the mkt cap is relevant. I go to EDGAR and copy XML files into Excel?May 24, 2014
If I were doing your project, I would not have chosen any of your “governance experts.” I would have chosen a group?http://t.co/XWlYm8HaVD?May 22, 2014

Why it is Hard to Win in Investing

Posted on 26 April 201412 June 2014 by David Merkel

Before I start this evening, I want to say something about many investment books that I have been reading of late. ?In terms of information toward the stated goal of the book, there is often a lot of build up, some of it necessary, some not, some of it interesting, some not, occasionally some unique insights, but most of the time not. ?Much of it is filler that could be eliminated. ?And, if you eliminated the filler, and boiled down the part of the book that attempts to prove the stated goal, you would have something the size of a long-form blog post. ?That’s why there is the filler — you would have a hard time selling a single chapter book, even though that contains the real value of the book, and would save your reader the time of wading through filler material.

Also, when I review books, I read them in entire. ?If I don’t read them in entire, I state that plainly at the beginning of the review, along with why I thought I could review the book without reading it. ?But after some of the books I have read lately, editing to condense the volume and stick to the topic at hand would be a help.

Finally, if the author doesn’t prove his case in an ironclad way, maybe the book shouldn’t be written. ?I often get to the end of a book disappointed, because the author promised a significant result, and did not deliver.

Onto tonight’s topic:

When is the best time to invest? ?When everyone else is scared to death of investing. ?It’s when friends come up to you and say, “I’m never investing in stocks ever again.” ?When the magazine covers proclaim “The Death of Equities,” it is time to invest.

Guess what? ?Very few people do invest then. ?It’s too painful to contemplate throwing away your money when nothing is going right, and losses are cascading. ?Remember, we are not rational, we are mimics.

When do people like to invest? ?When it’s popular to do so. When prices have been rising for a while, and the lure of “free money” is in the air. ?Books on easy money flipping homes proliferate, and there is a brisk business in seminars teaching an easy road to riches. ?It’s that time when people say, “Let the market pay your employees.”

I’ve talked about the fear/greed cycle many times before. ?I’ve also talked about time-weighted vs dollar-weighted returns before. I’ve talked about vintage years in lending before, and about absolute return investors before. ?I’ve talked about industry rotation before, as well as long-term mean reversion. ?These are all manifestations of the same phenomenon in investing — it is best to invest in any given area when few are doing so, and worst to invest when almost all are doing so.

Let me give a bunch of parallel examples to make this clear.

Why do great mutual fund managers cease to be great? ?When they are great, they have less money to manage than their ideas could bear managing. ?But money follows performance because we are not rational, we mimic. ?Eventually enough money comes in ?such that the talented investor no longer has good places to put incremental money, and can’t just leave some of the money in cash, or an index fund… from a business angle, it would not fly.

Lest you think that this does not happen to passive investing, money follows performance there also. ?It also happens in open-ended index funds, ETPs, and closed-end funds of any sort (expressed through the premium or discount).

This also applies to quantitative investment strategies — even those with broad themes like momentum and valuation. ?Let me illustrate this with a slide from a presentation I have done before a large CFA Society:

And this applies to lending whether securitized or direct. ?When money is being thrown at a sub-asset class, like subprime RMBS in 2006-7, or manufactured housing ABS in 2000-1, the results are bad. ?The best results occur when few are lending, and only the best deals are getting done. ?But that means that few get those high returns. ?That is the nature of the markets.

The same applies to corporate bonds. ?It is wise to avoid the area of the market where issuance is well above average. ?When I was a corporate bond manager, I sold out my auto bonds, and my questionable telecom bonds, amidst much issuance. ?I had many brokers puzzle over why I would not buy their deals, even though they were cheap relative to their ratings.

The same applies to private equity. ?When a lot of money is being applied there, it is a time to avoid it. ?As it is now, private equity is throwing money at promising companies, many of which hold onto the money for safety purposes, because they don’t have place to invest it. ?That doesn’t sound promising for future returns.

Finally, we have a few absolute return investors like?Klarman, Grantham, and Buffett. ?They are reducing allocations to risk assets, at least in relative terms. ?Opportunities are not as great, and so they wait.

Summary

The intelligent investor estimates likely returns, and invests if the returns are worth the risk. ?I am reducing my risk positions, slowly, as I see best for my clients and me.

Most profitable investing takes an uncomfortable view versus the consensus, and buys when the market offers good deals. ?If there are no good deals, profitable investing sits on cash, and waits for a better day.

Why are Pensions so Messed Up

Posted on 18 February 2014 by David Merkel

A few days ago, I was reading Felix Salmon’s piece Pension politics.? (Nice title, the type that Tadas likes — the shorter the better.)? I wrote a short response in the comments, largely agreeing with Felix.? Here it is:

Here are the facts:

1) DB pension funding accounting rules are more liberal than life insurance accounting rules.

2) Pension actuaries have long assumed investment earnings rates well in excess of what can be achieved.

3) Longevity has long been increasing for those that buy annuities, and take pensions.

4) Average people are lousy investment managers, they panic and get greedy at the wrong times. Pension asset managers aren?t great, but they largely avoid panic & greed.

5) The PBGC is horribly underfunded, as are most municipal pension plans.

6) Overseas, things can be bad, like Poland, Argentina, India, etc. In those cases being on your own is better. Our custodial systems here are pretty good. (Please ignore MF Global.)

7) Fees are generally too high in asset management, and most people should go for passive management, or a few clever value investors.

8 ) Hedge funds, commodities, and private equity are not the answer. Analyze the returns on an dollar-weighted [IRR] basis and they will be much lower than the illustrated buy & hold returns.

9) Highly paid workers lose out in bankruptcy. Multi-employer trusts are prone to a run on the pension plan if a major employer goes BK.

10) the average person is at best a budgeter, and not an investor. That said, buying inflation insurance is very expensive, if you can achieve it at all.

Summary: in general, you are right, Felix, but it is a question of cost to the corporations funding the DB plans. I think the cost is worth it, but maybe it needs to be shared with workers, taking pre-tax dollars to buy more future DB plan payments. How many people would do that? Sadly, not many.

Pensions have always been a bit of a compromise.? In order to get employers to create Defined Benefit [DB] pensions, the government allowed for funding methods that were liberal — a plan sponsor wouldn’t have to put in as much at the beginning; it can catch up over time.? More than that, the assumptions that DB pensions could use were far more liberal than what life insurers could use for similar contingencies.? Life insurers had to use best estimates and then add risk margins.? Pensions could dream of returns, with no risk margins.

The 401(k) was an accident.? It was tossed into a much larger bill, and no one noticed.? After passage, some benefits consultants, notably Ted Benna, found ways to use it, creating the boom in Defined Contribution [DC] plans.

Corporations initially added DC plans to their DB plans, but as the 90s ended, and equity performance sank, many terminated their DB plans.? Part of it was the asset markets, but another part of it was aging workforces, because the funding rules were weak (unlike life insurance).? Sponsors realized that they would have to spend a lot more on DB plans in the future than they would otherwise want to.? Now stingy corporations cut back on their DC matches, or accept kickbacks out of investment manager fees.

There are two great virtues in defined benefit plans: 1) Investing is handled by professionals.? 2) Level payments are made.? Most people can budget.? Few can invest.? Yes, there is the problem of inflation, should it occur, but pensioners should have assets outside of their pension to deal with inflation.? They need longevity insurance, so that they avoid outliving their assets.

Though it might be hard managing a fixed income versus uncertain inflation over an uncertain lifespan, it is much harder to manage a lump sum over a full retirement.? When finances are tight, it is much harder to make the right decisions.? Hope biases average investors in favor of taking chances, whether the market favors taking chances or not.

Add in the troubles with defaults of DB plan sponsors, and significant benefits can be lost, particularly if you have been highly paid.

I would want to tell most asset allocators that there is little to no magic in alternative investments.? The alternatives face the same risk factors as ordinary investments, and they are not underinvested by pension investors.

Closing Notes

Sorry, I forgot to blame the IRS for limiting overfunding for tax reasons, when the overfunding was really funding, and would have been useful today.

Even without the introduction of the 401(k), corporations would have cut back on DB pensions because of costs.? A lot of that was due to bad funding methods, but without those bad funding methods, many DB plans would never have been done.

Just be grateful you don’t live in other parts of the world, where governments are more graspy, and pension assets are a target to plug holes in the government deficit.

This May Be Gold, But It Is Not Golden

Posted on 16 February 2014 by David Merkel

I’ve done a number of articles on dollar-weighted returns in mutual funds.? There are rare cases where the shareholder base is smart, usually in value funds, where the shareholders add more money on declines, and lighten up when things are going too well.

Tonight’s target is the Gold ETF SPDR Gold Shares [GLD].? As with most volatile mutual funds, people tend to get greedy or panic.? They chase performance.? Consider this list of inflows and outflows from GLD. Cash flows are assumed to occur at mid-period.

Date	Cash Flow
9/30/2004	???????????? 13,081
3/31/2005	?????? 2,902,381
3/31/2006	?????? 3,152,826
3/31/2007	?????? 4,129,118
3/31/2008	?????? 5,163,301
3/31/2009	??? 10,326,761
3/31/2010	?????? 8,197,457
3/31/2011	??? (3,046,769)
3/31/2012	?????? 5,499,978
3/31/2013	? (18,958,700)
11/15/2013	??? (4,320,084)
12/31/2013	? (30,887,920)

Dollar-weighted	8.20%
Time-weighted	11.13%

Difference	-2.92%

Versus a buy-and-hold investor, the average holder gives up almost 3% of returns via market mistiming.? Technicians may talk down buy and hold, but buy and hold usually outperforms the average trader.? This is similar to what my friend Josh Brown talks about in his article Flows Don?t Follow Value, They Follow Performance.? Very few investors are rational businessmen, estimating likely returns over their funding horizon.? Rather they chase past success, and flee past failures.

Such has been true of the SPDR Gold Shares ETF.? Say what you will about the cheapness of large ETFs, people will still misuse them.? They will buy late in a bull phase, and sell late in a bear phase.

And so I say to all: Guard your emotions.? Be forward-looking.? Analyze likely value five years out.? Don’t make snap decisions out of regret.? Think about risk control before you buy shares, bonds, whatever.

Now, as a personal aside, it took me around eight years to learn to control my emotions.? Over the last 20 years, I have made at most a handful of errors reacting to bad market events.? I learned to analyze rather than panic back in the 90s.? It doesn’t mean that I am always right, but it does mean that I act.? I almost never react.

As for GLD, be wary about paper gold.? Is it really fully collateralized by audited gold in a warehouse?? There are lots of promises of gold being traded, but how much physical gold could you have delivered to you, should you want it?

That’s all for now.? Be careful in all of your investing; it is easy to err.

Sorted Weekly Tweets

Posted on 8 February 2014 by David Merkel

?Note: this is the 100th weekly edition of sorted weekly tweets.

Market Impact

Standing Out from the Crowd: Measuring Crowding in Quantitative Strategies http://t.co/MRjZ8d8GGL Overinvestment in strategy precedes losses Feb 08, 2014
Does Fair Value Accounting Contribute to Market Price Volatility? An Experimental Approach http://t.co/YQqQPrwMwr Short answer: no $$ $XLF Feb 08, 2014
The Deeper Causes of the Financial Crisis: Mortgages Alone Cannot Explain It http://t.co/0P7fMrQWKn But they were the leading cause $$ $XLF Feb 08, 2014
Contagion Rejected as Biggest Bond Buyers Double Down on Junk http://t.co/5wm1k4Ghlw Makes me think the correction will b another crisis $$ Feb 08, 2014
Hedge Funds Preparing for $1T Property Bill http://t.co/RRQN992uat Key Q: Will they limit their risks prior to the next commercl RE bust? $$ Feb 08, 2014
Apollo Credit Twice Size of LBOs Shows Private-Equity Shift http://t.co/J69eh3TPTn Not a good sign, nonstandard lenders r fragile $$ $APO Feb 07, 2014
Five Pointers on Floating-Rate Funds http://t.co/sV6JtizBlN Don’t chase performance, rates may not rise, nor yields, adds credit risk $$ Feb 05, 2014
Inverse VIX Fund Gets Record Cash on Calm Market Bet http://t.co/YSHGpON0DE Be careful to not hold it long $$ $VXX http://t.co/qGCycKbPsX Feb 05, 2014
World’s cheapest stock markets: Where are shares cheap? http://t.co/3Uvq1HZfSF Gives u a rough idea as 2 where values may b found $$ $SPY Feb 04, 2014
Gundlach Shows Why Betting Against Treasuries Is a Fool?s Game http://t.co/R0s4wQLcbu Interesting that he is in long Tsys $$ FD: + $TLT Feb 03, 2014
Monday?s Selloff, by the Numbers http://t.co/LseNtCUEXz That’s 2 large >2% down days in less than 2 weeks $$ $SPY Feb 03, 2014

Companies & Industries

Big Pizza Chains Use Web to Slice Out Bigger Market Share http://t.co/C6xQeSWmlr Easier 4 large chains 2 implement online ordering $$ $PZZA Feb 08, 2014
SodaStream?s New Mainstream Rivals: Coke and Green Mountain http://t.co/zOkwpBpOiK All the more reason 4 $PEP 2 buy $SODA $$ Feb 07, 2014
Why Discount Airlines Draw Fewer Complaints (Hint: It’s Not Better Service) http://t.co/a8rzqrf0DU Friendlier attitudes r better service $$ Feb 07, 2014
Satyajit Das: The Truth About Bank Earnings http://t.co/9FzkPbbyIm Bank earnings r lower quality; getting harder to increase them $$ $XLF Feb 05, 2014
Experts testify on true cost of Target breach http://t.co/FGVRFBvc6K Magnetic stripes will go away, & chips &/or PINs will appear $$ $TGT Feb 05, 2014
Apple Quietly Builds New Networks http://t.co/bncx84P4RW $AAPL certainly has spare $$ to throw at it, enhancing service quality $NFLX $GOOG Feb 04, 2014
H-P Finds Accounting Errors at Autonomy Unit http://t.co/9cQFBamwpI We knew it was a dumb deal at the time, now $HPQ shows just how dumb $$ Feb 04, 2014
Prophet of No Profit: How Jeff Bezos won the faith of Wall Street. http://t.co/eaZmKgfnir Moats, operating leverage, pricing power $$ $AMZN Feb 01, 2014
Ask Buffett what he would be willing 2pay 4 $AMZN — after all, it has significant moats. I think he would put it in the “too hard” pile $$ Feb 01, 2014

Rest of the World

China, the Death Star of Emerging Markets http://t.co/zFmo0RkXva @williampesek points at financial bubble in China; what will make it pop $$ Feb 08, 2014
Scandal Tests Chinese President’s Standing With Military http://t.co/cHGvLtROFE Corruption is a major issue 4 China, between Party & Army $$ Feb 08, 2014
Saudi Twitter Debate as Citizens Criticize Government http://t.co/quwkxpkHDX Social media allows criticism tht would not b done in public $$ Feb 05, 2014
China Savers? Penchant for Property Magnifies Bust Danger http://t.co/yrfDYQK5KH Anytime a single investment strategy dominates -> worry $$ Feb 05, 2014
Pimco?s Bill Gross Says He Avoids China ?Mystery Meat? http://t.co/My6P5x1jE0 Great phrase as we do not know much about indebted China $$ Feb 05, 2014
Sao Paulo Biggest Water-Supply System May Run Dry Within 45 Days http://t.co/fEcioInfjX Many water systems r near their limits globally $$ Feb 05, 2014
Emerging Stocks Drop to 5-Month Low Led by China as Ruble Gains http://t.co/aWgDSdVBUt Not all emerging mkts r equal, some financed wrong $$ Feb 04, 2014
Japan Sees Worst Developed-Stock Rout as Nikkei 225 Drops http://t.co/UQDhX1a3XL Current mkt reveals weak underlying fundamentals $$ $FXY Feb 04, 2014
Dad Can?t Buy Daughter Shoes as Argentine Currency Falls http://t.co/WTnUn1Okf0 ?Do you know how I feel buying my daughter used shoes?? $$ Feb 04, 2014
Argentina Scrambles To Raise $10B, Avoid Reserve Collapse; BONARs Bidless http://t.co/Xx4t0dFqCk Only hold hard assets in Silverland $$ Feb 04, 2014
EM rout? Or Intervention Sunday? http://t.co/d54Qjj4X2S Difficult to tell what Developed Mkt policymakers will do, they r strapped @ home $$ Feb 04, 2014
Argentina Bust Lures Investors After 200 Years of Defaults http://t.co/YoWjotidcp Invest in the hard stuff, land does not depreciate $$ $IRS Feb 04, 2014
Emerging-Market Rout Seen Enduring on Low Real Rates http://t.co/RTxP6GjMVw Funding structures of some emerging markets fall, $$ goes 2 $TLT Feb 04, 2014
Canadian Oil Rises as California Ships in Record Amount by Rail http://t.co/CKvu4BEqJl Retweet after me: Pipelines r cleaner & safer $$ Feb 04, 2014
Analysis: Emerging markets outlook not rosy, but valuations tempt http://t.co/hADIRvUK5g This may b a time 2nibble, not a time 2gulp $$ $EEM Feb 04, 2014

US Politics & Policy

AOL is leading the way to make 401(k)s worse for everyone http://t.co/AnlQ1Ud6Ds Meh; new employers will compensate workers that lose $$ Feb 08, 2014
‘Six Californias’ plan difficult but doable, assessment shows http://t.co/nuw3S6rLVl Ideas like this come & go in a fragmented California $$ Feb 08, 2014
No, CBO did not say Obamacare will kill 2M jobs http://t.co/RHsSai7rwv Rather, will discourage 2M from working full-time; big deal $$ Feb 08, 2014
Ex-NSA Chief Details Snowden’s Hiring at Agency, Booz Allen http://t.co/EWRuqlViXW Snowden set back US intelligence by 20+ yrs. Good. $$ Feb 06, 2014
The Tyranny and Lethargy of the Times Editorial Page http://t.co/hbW20h6Vjn Inside baseball, picture sums up story http://t.co/USlMTh4Bm0 $$ Feb 05, 2014
Puerto Rico Has Credit Rating Cut One Step 2Junk by S&P http://t.co/4Av3ftwL8q also http://t.co/QkwCnXQdcy Well-deserved, default coming $$ Feb 05, 2014
Going on 30, Living With Mom and Dad http://t.co/Wo4YB74mKo Part is being slow 2 marry, then education, poor career choices, motivation $$ Feb 04, 2014
Crop Insurers Win as Congress is Poised to Pass Farm Law http://t.co/rFNrEDhYkZ If we can’t reduce ag subsidies when ag is healthy… $$ Feb 04, 2014
Obamacare Wonks Flunk Data Analysis http://t.co/Ss2Tc3q2e9 You can show lots of savings if u show your winners & hide your losers $$ $SPY Feb 04, 2014
CBO: Obamacare Will Lead To 2M Fewer Workers In Labor Force By 2017 http://t.co/OsCrQOUORb Unintended consequences; fix this, break that $$ Feb 04, 2014
Fed Presidents Say Stock Decline Unlikely to Derail QE Taper http://t.co/pdoloENc9L In the short-run true, but if the decline persists… $$ Feb 05, 2014
Investment Manager Explains Why 99.5% Of Americans Can Never Win http://t.co/MqngZy7zZW Tax code is cockeyed, wealthy can avoid taxation $$ Feb 04, 2014
How Feds? Double Standard Enables Bad Bankers http://t.co/AGok7eeqdU Simple: little bankers get prosecuted; big banks get fined $$ $BNK $XLF Feb 04, 2014
Early Drive for Hillary Clinton Unsettles Democrats http://t.co/Hb3lJnpnr6 Some Worry It Will Siphon $$ from Candidates in Midterm Elections Feb 04, 2014
You Can Thank or Blame Richard Stanger for Writing 401(k) http://t.co/wX38lGA4m4 Many important laws r accidental; killed DB pensions $$ Feb 04, 2014
ISM Miss Is Ugly All Around http://t.co/Px97nGSccl I’ve been arguing that the economy is weaker than it looks 4 a while; here’s a clue $$ Feb 04, 2014
US Banks Ease Loan Standards in Fed Survey as Demand Rises http://t.co/etkDJPLLhN Can inflation b far behind if this persists? $$ $TLT $TIP Feb 04, 2014
California Dries Up as Brown Pushes $15B Tunnel http://t.co/r4boO9Tzzo If u don’t allocate water economically, becomes a political fight $$ Feb 04, 2014

Other

Financial Blogging: How to Write Powerful Posts That Attract Clients http://t.co/fxmxkLJKbS My longer review: http://t.co/lOqexXT7RO $$ Feb 08, 2014
Why I Did Not Go To Jail http://t.co/4EtyFFyTyg @bhorowitz good read on the importance of proper company, legal, & incentives structure $$ Feb 08, 2014
Daniel Suarez Sees Into the Future http://t.co/kkLkxcmvnv ‘Influx’ may propel sci-fi writer in2 void left by Tom Clancy &Michael Crichton $$ Feb 08, 2014
Why Melted Cheese Does the Trick http://t.co/ZACj1EaWKB Creaminess enhances the textures and flavors of other foods $$ $KFT $DF Feb 06, 2014
Deadly New Bird Flu Strain Spawned by Virus Behind H5N1 http://t.co/b0fLG89fkg This is overblown. People die from the flu each year $$ $SPY Feb 05, 2014
Young Bankers Seek ?Good Yield? With Their Own Nonprofits http://t.co/gJZVwJ5lse Wealthy & powerful like 2b thought benefactors $$ Lk 22:25 Feb 04, 2014
How the Seattle Seahawks solved Peyton Manning http://t.co/0P0kiHnddI Even if u r not into football, interesting 4 understanding strategy $$ Feb 04, 2014
Super Bowl Safety Is Blow for Broncos and Las Vegas Sportsbooks http://t.co/2vXpm4IRbl The odds r interesting to read 4 unusual bets $$ $SPY Feb 04, 2014
Microsoft Adds Momentum to ?Open Science? |http://t.co/Ar6WCDKNug Understand that scientists r not neutral observers; they have 2 publish $$ Feb 04, 2014
Carney leaving CNBC for WSJ?s ?Heard on the Street? |http://t.co/dRNtplkOQB @carney gets a significant promotion! Congrats! $$ $SPY $TLT $GE Feb 01, 2014

Other Economics

Free Checking Is Disappearing Perk http://t.co/pZwsA0u3sl Smaller banks often offer better deals than big banks on checking $$ $XLF $SPY Feb 08, 2014
More Men in Prime Working Ages Don’t Have Jobs http://t.co/YmAjNcQrc5 1 of the qualitative factors that show how punk the economy is $$ $SPY Feb 08, 2014
An International Gold Standard Beats The Rule Of The Governing Elite http://t.co/GoTHUVusXK Old, makes point gold standard was better $$ Feb 05, 2014

Wrong

Wrong: High unemployment putting the ECB in isolation http://t.co/wlBQOP7JqM Loose monetary policy doesn’t lower L-T unemployment $$ #global Feb 08, 2014
Wrong: America The Startup http://t.co/C0Rax7KPJP Worth a read, but the writer does not really understand the Pilgrims or the Puritans $$ Feb 04, 2014

Retweets, Replies, & Comments

@HistoryInPix Cemented the creation of the graphical user interface, buggy in prior versions, aside from pricey Macintosh ghetto Feb 06, 2014
‘ @catofwallstreet the credit cards will have chips, not us- already have these in Europe. Also, consider amillenialism or postmillenialism. Feb 05, 2014
RT @PUMPSandDUMPS: This fan says it all http://t.co/MryfT9l04a #pennystocks Feb 05, 2014
Ice falling, branches too, west of Baltimore — kind of pretty $$ #weather Feb 05, 2014
@DavidSchawel The difference between dollar-weighted & Time-weighted returns is crucial but few get that. Good tweet on $DBLTX $$ Feb 05, 2014
RT @DavidSchawel: Retail psychology: chasing performance, then puking the bottom & missing the bounce-DBLTX Fund assets vs adjusted NAV htt? Feb 05, 2014
RT @cate_long: Cheers! “@carney: Thanks everyone! Very excited to be joining the @wsjheard team! Some details here http://t.co/sjLSyTMIEH Feb 01, 2014
@dpinsen not all, but a majority Feb 01, 2014

With Jeremy Siegel at CFA Institute Baltimore

Posted on 5 October 2013 by David Merkel

At the CFA Institute at Baltimore, we had the pleasure of having Jeremy Siegel come speak to us this past Thursday.? He was lively, engaging, and utterly convinced of his theses.? Thanks to Wisdom Tree for helping fund the endeavor.

He openly asked us to poke holes in his theories.? This article is an effort to do that.

1) Stock tends to get bought in when it is undervalued, and sold via IPOs when it is overvalued.? Thus the time-weighted rate of return exceeds the dollar-weighted rates of return by a few percent.? This dents the main premise of ?Stocks for the Long Run.?? Buying and holding is not possible, because valuable stocks are lost at the troughs, giving us cash, and we are forced to buy more near peaks, of overvalued stocks.

Dollar-weighted returns are what we eat, and they don?t vary much versus time-weighted returns when considering bonds or cash.

Also, in the present day, private equity plays a larger role, and they exacerbate the degree to which stocks get IPOed dear, and acquired cheap.

2) He spent a lot of time defending the concept of the CAPE Ratio, but not its execution.? He began a long argument about how accounting rules for financials were behind the drop in earnings for the S&P 500, and that AIG, Bank of America, and Citi were to blame for all of it.

Sadly, he seems not to know financial accounting so well.? What was liberal in the early and mid-2000s was corrected 2007-2009.? In aggregate the accounting was fair across the decade.? Remember that accounting exists to try to measure change in value of net worth across short periods, and net worth at points in time.

Really, if we were trying to be exact, when a writedown occurs, we would spread it over prior periods, because prior accounting was too liberal ? the incidence of the loss occurred over many years prior to the writedown.

Thus I find his argument regarding specialness of financial company accounting to be bogus ? he is just searching for a way to justify valuations off of current earnings, rather than off of longer term measures.

3) The longer?term measures agree with CAPE:

Q-Ratio
Market Cap/ GDP
Price-to-Resources
Financial Stress indexes
Eddy-Elfenbein?s Stock Market if valued like a bond measure

All of these point to an overvalued market.? But markets can be overvalued for a while.? Why might that be in this case?

4) Because profit margins may remain high for some time.? In an era where the prices for labor and resources are cheap, should it be surprising that profit margins are high?? Those conditions will eventually change, but not soon.

With that, I would simply say that:

Stocks do outperform bonds and cash over the long run, but not by as much as Dr. Siegel thinks.
Stocks are overvalued by long-term balance sheet-oriented measures at present.
But stocks may stay high because profit margins are likely to stay high ? there will be regression to the mean, but not now.

Finally I would note that he was one of the most graceful and generous speakers to come speak to us in some time, took a long Q&A, staying longer than he needed to, and happily signing the books he had written.? I showed him my First Edition version of his book, signed by him after speaking to the Philadelphia AAII chapter in 1995, and said, ?We were much younger then.?? He smiled and said, ?Yes, we were.?

I may disagree with him on some points, but he is one very bright and personable guy.