More on this book
Kindle Notes & Highlights
Read between
January 19 - February 8, 2019
Finance academicians make a parlor game of asking if equities get more or less risky over time. The "correct" answer is, of course they do: while annualized returns converge with longer time periods, total returns diverge. Further, stock and index put premiums rise, not fall, over time.
Eugene Fama has said, "life has a fat tail."
John Kenneth Galbraith, Wall Street keeps reinventing the wheel, and in new and slightly more unstable form.
the last of Tetlock’s lessons: extreme forecasters ("doomsters and boomsters") tend to be the poorest.
Finally, a truly depressing dynamic is taking hold in an ever richer world. Without getting too deeply into the macroeconomic weeds, as societies become wealthier, the amount of available investment capital grows faster than the amount of investing opportunities, and so the expected rate of return falls. In the beginning of human finance, ancient societies existed on the edge of subsistence, and so had little capital to spare. This drove interest rates as high as 30 percent.
tenets of this book: keep costs down, keep an eye on the investment policy ball, and stay the course, come hell or high water.
The S&P 500, in turn, performed better than 75% of professional money managers over the same period.
In other words, asset allocation policy was 10 times as important as stock picking and market timing combined.
The SD for large company common stocks is 20.26%. (This is the number behind Uncle Fred’s coin toss—its SD is also 20%.) You can lose more than 40% in a bad year, and during the four calendar years 1929–1932 the inflation-adjusted (“real”) value of this investment class decreased by almost two-thirds!
there is not a single 30-year period with a return of less than 8%! The message is clear: stocks are to be held for the long term.
In any given year, the risk of stocks underperforming T-bills is 36%. For a 5-year period, this risk is 22%; for 10 years, 13%; for 20 years, 6%; for 30 years, 3%; and for 40 years, it is only 1%. The message is the same: the longer one’s time horizon, the less likely the risk of loss.
Estimating the value of a stock or stock market by this method is a very complicated calculation, but can be simplified as follows: Return = dividend yield + dividend growth rate + multiple change Since 1926, stocks actually yielded an average of about 4.5%. Earnings and dividends have grown at about a 5% rate. The term multiple change refers to the increase or decrease in the overall dividend rate. In this case, it refers to the fact that stocks which sold for 22 times dividends (a 4.5% rate) in 1926 now sell for 77 times dividends (a 1.3% rate). This calculates out to an annualized
...more
The famous financial analyst Benjamin Graham once said that in the short run the stock market is a voting machine, but that in the long run it is a weighing machine. What it weighs are earnings.
The reasons for this are several. First and foremost, rebalancing increases long-term portfolio return while reducing risk. Second, failure to rebalance a portfolio of stocks and bonds eventually leads to an almost all-stock portfolio, because of the higher long-term returns of stock, resetting your return-risk combination to a higher level. Last, and most important, the habit of rebalancing instills in the investor the discipline necessary to buy low and sell high.
it is difficult to find two assets that are uncorrelated, and it is practically impossible to find three. It is absolutely impossible to find more than three mutually uncorrelated assets. The reason for this is simple. A portfolio of two assets has only one correlation. Three assets have three correlations, and four assets have six correlations. (This is the same reason why big offices have messier politics than small ones. A three-person office has three interpersonal relationships; a 10-person office has 45 relationships.)
recency, the single biggest mistake that even the most experienced investors make. This refers to our tendency to extrapolate recent trends indefinitely into the future.
Something that everyone knows isn’t worth knowing.
It cannot be repeated often enough. Identify the era’s conventional wisdom and then ignore it.
Notice how reasonably well defined the upper left edge is. This is where we want to be—getting either the most return for a given degree of risk or being exposed to the least risk for a given return. This edge of the cloud is called the efficient frontier.
shifting your allocation over time is a recipe for disaster.
if your asset allocation never significantly underperforms the S&P 500 then you are probably doing something wrong.
Asset allocation accounts for most of the difference in performance among money managers.
The Russell 2000 consists of the 2000 smallest stocks in the Russell 3000 Index. Finally, the S&P 600 are 600 small companies selected by Standard & Poor’s as representative of the small-cap universe.
the primary strength of Western culture is its reliance on the scientific method.
Most investors think that the fund’s expense ratio (ER), listed in the prospectus and annual reports, is their true cost of fund ownership. Wrong. There are actually three more layers of expenses beyond the ER, which merely comprises the fund’s advisory fees (what the managers get paid) and administrative expenses. The next layer of fees are the commissions paid on transactions. These are not included in the ER, but since 1996 the SEC has required that they be reported to shareholders. However, they are presented in such an obscure manner that, unless you have an accounting degree, it is
...more
The Four Layers of Mutual Fund Costs Expense ratio Commissions Bid-ask spread Market-impact costs
“When an asset class does relatively well, an index fund in that class does even better.”
small-cap growth stocks have poor long-term returns, and it is probably wise to avoid investing in this area, active or indexed.
Malcolm Forbes’ famous dictum: the only money made in newsletters is through subscriptions, not from taking the advice.
There are three commonly used measures of individual stock or of aggregate stock market value: price/earnings (P/E) ratio, price/book (P/B) ratio, and dividend yield. Ultimately, you are buying a stock in order to own a piece of its earnings. P/E describes how much you are paying for those earnings.
stock with a P/B of less than 1 is said to be cheap; one with a P/B of more than 5 is said to be expensive, at least relative to its book value. The book value of a stock is very stable; corporate accountants usually have no need to fudge this number.
Valuation of foreign stocks is highly problematic because of the differences in accounting standards among nations; nonetheless, the ranges of P/B of most of the EAFE nations seem similar to that of the United States.
Professors Fama and French, published in the Journal of Finance in June 1992. They exhaustively studied stock returns from July 1963 through December 1990 and found that all of the variation in return among stocks could be explained by just two factors: company size (no surprise here) and P/B.
After taking P/B into consideration, P/E had no predictive value.
It has long puzzled academic efficient-market theorists that these popular strategies (low P/E, low P/B, high dividend) have worked so well for so long.
established growth companies are very expensive, often selling at P/Es two or three times that of the market as a whole. A company growing 5% faster than the rest of the market and selling at a P/E twice the market’s will have to continue growing for another 14 years at that rate before the shareholder is fairly compensated.
If you are to come out ahead with growth stocks in the long term, their earnings will obviously have to grow over three times larger than the value stocks.
But there is no getting around the fact that in the long run equity returns are closely approximated by the sum of the dividend rate, now 1.3%, and the earnings growth rate, historically about 5%.
Calibration (receipt of results) of one’s efforts is also a factor. The longer the feedback loop between our actions and their calibration, the greater our overconfidence.
Socrates told us that the unexamined life is not worth living. For the modern investor, failure of self-examination can be as damaging to the pocketbook as to the soul.
